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[Cryptica 22] Introduction to Decentralized Finance - Nikola Markovic

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[Cryptica 22] Introduction to Decentralized Finance - Nikola Markovic

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The aim of the talk is to introduce decentralized finance and its core concepts: Decentralized exchanges AKA Automated Market Makers (AMMs), lending protocols, and stablecoins. The talk will cover the similarities between traditional finance and DeFi with the accent on the innovative mechanisms DeFi & blockchain as underlying technology bring.

The aim of the talk is to introduce decentralized finance and its core concepts: Decentralized exchanges AKA Automated Market Makers (AMMs), lending protocols, and stablecoins. The talk will cover the similarities between traditional finance and DeFi with the accent on the innovative mechanisms DeFi & blockchain as underlying technology bring.

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[Cryptica 22] Introduction to Decentralized Finance - Nikola Markovic

  1. 1. Decentralized Finance Introduction to Nikola Markovic Market research & DeFi specialist DSC - Cryptica22, November 17, 2022.
  2. 2. Agenda 1. Blockchain & Smart Contracts 2. Stablecoins 3. DeFi - Decentralized Finance 4. Decentralized Exchanges (DEXs) aka Automated Market Makers (AMMs) 5. DeFi Lending Protocols
  3. 3. Blockchain and Smart Contracts - Blockchain - decentralized database whose state is validated by the network of nodes using a consensus mechanism. - Ethereum - a general purpose programmable blockchain. - Types of accounts on Ethereum: EOAs & Smart Contracts. - Smart Contracts - decentralized programs run by the large number of network nodes/computers (not an app on a server).
  4. 4. Stablecoins Stablecoins provide the very basic use of crypto - the easy and fast transfer of stable value between any two entities (wallets). - USDC, USDT - fiat-backed stablecoins. ($1) - DAI - over-collateralized crypto-backed stablecoin. ($1) - LUSD - over-collateralized ETH backed, fully decentralized algorithmic stablecoin. ($1) - RAI - over-collateralized ETH backed, fully decentralized, non-pegged stable asset. ($2.9) What are the mechanisms for keeping the 'peg' (target price)? - If market price > $1, mint at fixed redemption price ($1) and sell. - If market price < $1, buy and redeem at fixed redemption price ($1).
  5. 5. DeFi - Decentralized Finance - DeFi - term for a group of decentralized financial tools built on a blockchain. - DeFi protocol is a decentralized application (dApp) that runs on blockchain. - A dApp is a logical set of smart contracts interacting with each other. - DeFi - refers to the group of DeFi protocols enabling: 1. Exchange (trading) 2. Lending/borrowing TradFi DeFi Fractional Reserve Over-collateralization
  6. 6. Automated Market Makers (AMMs) - DEX is a DeFi protocol consisting of liquidity pools (smart contracts) for swapping tokens, like Uniswap. - AMM replaces the buy and sell orders in an order book market with a liquidity pool of two assets in 50/50 ratio, both valued relative to each other. - Assets (e.g. ETH/DAI pair) are priced according to an algorithm: x * y = k. Decentralized Exchanges (DEXs)
  7. 7. AMMs - Other - Pools can have 2+ or more tokens, like: ETH/WBTC/DAI pool. - Ratios can be non-50/50: 80/20, 60/40, etc. - Trading fees can be various, 0.01%, 1%, 0.05%, etc. - Algorithms can vary too (not just x*y=k). - Impermanent Loss. - Price Impact/Slippage. - Popular DEXs on Ethereum: Uniswap, Balancer, Curve, etc.
  8. 8. DEXs (AMMs) vs CEXs (orderbooks) - Permissionless, anyone can use it. - No KYC (Know Your Customer). - Decentralized. - Fees go to LPs, not to centralized entity. - Self-custody. - Censorship resistance. - Open source.
  9. 9. DeFi Lending Protocols - DeFi lending protocols can be divided into: 1. Stablecoin protocols - protocols having one debt asset, an over-collateralized stablecoin (e.g. DAI). 2. Money Markets - protocols having supply & borrow sides, hence multiple borrowable assets.
  10. 10. DeFi Lending - Stablecoin protocols (MakerDAO) - DAI stablecoin is minted on every borrow, and burned on every payback of debt. - There is infinite potential liquidity of DAI, due to minting. - Borrowers don't earn yield from their collateral (no suppliers). - Borrowers pay interest to the protocol. - Only one debt asset.
  11. 11. DeFi Lending - Example (MakerDAO)
  12. 12. DeFi Lending - Money Markets (Compound) - No stablecoin minting, just supply and borrow sides. - One lending pool (contract with deposit(), borrow(), withdraw(), payback()... methods) that tracks your total supply balance in USD and your total borrow balance in USD. - Borrowers pay interest to suppliers for the provision of liquidity. - Borrowers must deposit collateral prior to borrowing. - Suppliers can also be borrowers at the same time. - Suppliers earn yield for providing liquidity. - Borrowers earn yield on the collateral, but pay interest to suppliers. - Limited liquidity (can't borrow more than supplied amount of each asset).
  13. 13. DeFi Lending - Example (Compound)
  14. 14. DeFi concepts - out of scope - DAOs, decentralized governance. - Flashloans. - Oracles (Chainlink). - Decentralized (perpetual) futures protocols. - Decentralized options protocols. - Fixed-rate lending protocols. - DeFi lending positions management tools: DeFi Saver. - Much more.
  15. 15. Q&A Decentralized Finance twitter.com/definikola
  16. 16. We improve the world with decentralized solutions. decenter.com/careers

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