1.
Decentralized Finance
Introduction to
Nikola Markovic
Market research & DeFi specialist
DSC - Cryptica22, November 17, 2022.

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.
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.
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.
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.
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.
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.
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.
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.
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.
DeFi Lending - Example (MakerDAO)

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.
DeFi Lending - Example (Compound)

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.
Q&A
Decentralized Finance
twitter.com/definikola

16.
We improve the world with decentralized solutions.
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