1.
The Future of Money
Decentralized Finance
Matteo Binfarè
November 10, 2021
University of Missouri

2.
Table of Contents
1. Centralized Finance (CeFi)
2. The Origins of DeFi
3. Decentralized Finance (DeFi)
4. A Deep Dive Into DeFi
5. Risks of DeFi and The Future of DeFi
2

3.
Centralized Finance (CeFi)

4.
The Financial System As We Know It
1 Centralized Ñ Banks as intermediaries
4

5.
The Financial System As We Know It
1 Centralized Ñ Banks as intermediaries
2 Fiat currency Ñ  has legal tender
✓ Accepted as mean of debt/tax repayment
✓ Issued by a central authority (e.g. Federal Reserve)
✓ Intrinsic value “ 0 Ñ Trust
4

6.
The Financial System As We Know It
1 Centralized Ñ Banks as intermediaries
2 Fiat currency Ñ  has legal tender
✓ Accepted as mean of debt/tax repayment
✓ Issued by a central authority (e.g. Federal Reserve)
✓ Intrinsic value “ 0 Ñ Trust
3 Infrastructure
✓ Liquidity
✓ Allocate funds
✓ Facilitate payments
4

7.
Problems with CeFi: Centralized Control
30
35
40
45
50
1995 2000 2005 2010 2015
5−Banks Concentration (%)
7 Control interest rates
7 High switching costs and fees
7 „ in digital ads. (Amazon, Facebook, Google,...) 5

8.
Problems with CeFi: Limited Access
6

9.
Problems with CeFi: Limited Access
7

10.
Problems with CeFi: Costs and Inefficiency
12
13
14
15
16
1995 2000 2005 2010 2015 2020
Interest Rates on Credit Cards (%)
7 Hard to finance projects even if NPV ą 0
7 Economic growth Ó
8

11.
Problems with CeFi: Costs and Inefficiency
.5
1
1.5
2
2.5
2005 2010 2015 2020
Mastercard/Visa
Diner’s Club
Amex
Credit Card Fees (%)
7 Up to 3 percent for (some) merchants
7 High remittance fees
9

12.
The Origins of DeFi

13.
Blockchain 1.0: Bitcoin 
11

14.
Blockchain 1.0: Bitcoin 
1 Peer-to-peer
11

15.
Blockchain 1.0: Bitcoin 
1 Peer-to-peer
2 Without a financial
institution
11

16.
Blockchain 1.0: Bitcoin 
1 Peer-to-peer
2 Without a financial
institution
3 Hashing + digital signature
Ñ No double spending
11

17.
Blockchain 1.0: Bitcoin 
1 Peer-to-peer
2 Without a financial
institution
3 Hashing + digital signature
Ñ No double spending
4 Proof-of-work
11

18.
Blockchain 1.0: Bitcoin 
1 Peer-to-peer
2 Without a financial
institution
3 Hashing + digital signature
Ñ No double spending
4 Proof-of-work
5 Block + Chain = Blockchain
Ñ append only
11

19.
Blockchain 1.0: Bitcoin 
1 Peer-to-peer
2 Without a financial
institution
3 Hashing + digital signature
Ñ No double spending
4 Proof-of-work
5 Block + Chain = Blockchain
Ñ append only
6 Distributed (nodes)
11

20.
Blockchain 1.0: Bitcoin 
1 Peer-to-peer
2 Without a financial
institution
3 Hashing + digital signature
Ñ No double spending
4 Proof-of-work
5 Block + Chain = Blockchain
Ñ append only
6 Distributed (nodes)
11

21.
Blockchain 1.0: Bitcoin 
12

22.
Blockchain 1.0: Bitcoin 
✓ The Block rewards, known as the Coinbase, sent to this address
✓ Block was mined on January 08, 2009 at 8:54 PM CST by Unknown
✓ The miner(s) of this block earned a total reward of 50.000 BTC
13

23.
Blockchain 1.0: Bitcoin 
14

24.
Cryptography 101
Question: Matteo and Scott want to communicate without being
understood by other people
15

25.
Cryptography 101
Question: Matteo and Scott want to communicate without being
understood by other people
Problem: They cannot use English or any other language
15

26.
Cryptography 101
Question: Matteo and Scott want to communicate without being
understood by other people
Problem: They cannot use English or any other language
Solution: Cryptography
15

27.
Cryptography 101
Question: Matteo and Scott want to communicate without being
understood by other people
Problem: They cannot use English or any other language
Solution: Cryptography
1 Matteo sends Scott instructions:
Plain A B C ... H I ... M N O ... S ... T ...
Cipher Y Z A ... F G ... K L M ... Q ... R ...
15

28.
Cryptography 101
Question: Matteo and Scott want to communicate without being
understood by other people
Problem: They cannot use English or any other language
Solution: Cryptography
1 Matteo sends Scott instructions:
Plain A B C ... H I ... M N O ... S ... T ...
Cipher Y Z A ... F G ... K L M ... Q ... R ...
2 Matteo cipher message to Scott: “FG QAMRR”
15

29.
Cryptography 101
Question: Matteo and Scott want to communicate without being
understood by other people
Problem: They cannot use English or any other language
Solution: Cryptography
1 Matteo sends Scott instructions:
Plain A B C ... H I ... M N O ... S ... T ...
Cipher Y Z A ... F G ... K L M ... Q ... R ...
2 Matteo cipher message to Scott: “FG QAMRR”
3 Scott can now decipher Matteo’s message in plain alphabet
15

30.
Cryptography 101
Question: Matteo and Scott want to communicate without being
understood by other people
Problem: They cannot use English or any other language
Solution: Cryptography
1 Matteo sends Scott instructions:
Plain A B C ... H I ... M N O ... S ... T ...
Cipher Y Z A ... F G ... K L M ... Q ... R ...
2 Matteo cipher message to Scott: “FG QAMRR”
3 Scott can now decipher Matteo’s message in plain alphabet
4 “HI SCOTT”
15

31.
Cryptography 101
Question: Matteo and Scott want to communicate without being
understood by other people
Problem: They cannot use English or any other language
Solution: Cryptography
1 Matteo sends Scott instructions:
Plain A B C ... H I ... M N O ... S ... T ...
Cipher Y Z A ... F G ... K L M ... Q ... R ...
2 Matteo cipher message to Scott: “FG QAMRR”
3 Scott can now decipher Matteo’s message in plain alphabet
4 “HI SCOTT”
Problem: Trust! Matteo can share the “private key” with bad actors
15

32.
Cryptography 101
Question: Matteo and Scott want to communicate without being
understood by other people
Problem: They cannot use English or any other language
Solution: Cryptography
1 Matteo sends Scott instructions:
Plain A B C ... H I ... M N O ... S ... T ...
Cipher Y Z A ... F G ... K L M ... Q ... R ...
2 Matteo cipher message to Scott: “FG QAMRR”
3 Scott can now decipher Matteo’s message in plain alphabet
4 “HI SCOTT”
Problem: Trust! Matteo can share the “private key” with bad actors
15

33.
Cryptography 101
Solution: Cryptographic Hash and Digital Signatures
1 Hash Function (SHA-256):
16

34.
Cryptography 101
Solution: Cryptographic Hash and Digital Signatures
1 Hash Function (SHA-256):
17

35.
Blockchain (Cont’d)
18

36.
Blockchain (Cont’d)
Nonce of 72608 added to the data and hashed Ñ four (4) leading 0s
19

37.
Blockchain (Cont’d)
Tampering with the blockchain is (almost) impossible!
20

38.
Blockchain 2.0: Ethereum
Ethereum is a censoriship resistant, decentralized, world computer.
1 ETH is the native token
2 Not only payment data Ñ smart contracts invoked with ETH
Bitcoin Ethereum
Founder Satoshi Nakamoto Vitalik Buterin
Protocol Primitive scripting language Ethereum Virtual Machine and smart contracts
Supply 21 million Unlimited
Transactions Pay BTC fees Add ETH fees but different transcation have different price - gas
Blockchain Proof of Work Proof of Work
Block time „10 minutes „14 seconds
Block size <1MB „15-20kb and based on computational complexity
Scalable No Yes
Usage Digital currency Digital currency, smart contracts
Off-chain Orphanes Uncles
Accounts Store of BTC Store of BTC; Smart contracts
Issuance Genesis block + mining Pre-mine, block rewards, uncle rewards
21

39.
Decentralized Finance (DeFi)

40.
What is DeFi?
Definition
DeFi is an ecosystem of blockchain-based financial instruments
designed in a decentralized way without legacy institutions
‹ Running on smart contracts Ñ (automated) piece of code 
23

41.
Infrastructure
24

42.
Services it Provides
25

43.
Total Value Locked (TVL)
0
20
40
60
80
2017 2018 2019 2020 2021
Total Value Locked ($ Billions)
26

44.
A Deep Dive Into DeFi

45.
MakerDAO
28

46.
MakerDAO
Definition
2-tokens protocol that creates a cryptocollateralized stablecoin,
soft-pegged to the US dollar that runs on the Ethereum blockchain
29

47.
MakerDAO
Definition
2-tokens protocol that creates a cryptocollateralized stablecoin,
soft-pegged to the US dollar that runs on the Ethereum blockchain
✓ Resistant to hyperinflation due to its low volatility
✓ Decentralized, unbiased
✓ 1 Dai = 1 USD 
✓ „ collateralized mortgage loan
29

48.
MakerDAO
Definition
2-tokens protocol that creates a cryptocollateralized stablecoin,
soft-pegged to the US dollar that runs on the Ethereum blockchain
✓ Resistant to hyperinflation due to its low volatility
✓ Decentralized, unbiased
✓ 1 Dai = 1 USD 
✓ „ collateralized mortgage loan
Steps:
1 Create and Collateralize (ą 150%) a Vault  (e.g. deposit ETH)
29

49.
MakerDAO
Definition
2-tokens protocol that creates a cryptocollateralized stablecoin,
soft-pegged to the US dollar that runs on the Ethereum blockchain
✓ Resistant to hyperinflation due to its low volatility
✓ Decentralized, unbiased
✓ 1 Dai = 1 USD 
✓ „ collateralized mortgage loan
Steps:
1 Create and Collateralize (ą 150%) a Vault  (e.g. deposit ETH)
2 Generate Dai from the Collateralized Vault
29

50.
MakerDAO
Definition
2-tokens protocol that creates a cryptocollateralized stablecoin,
soft-pegged to the US dollar that runs on the Ethereum blockchain
✓ Resistant to hyperinflation due to its low volatility
✓ Decentralized, unbiased
✓ 1 Dai = 1 USD 
✓ „ collateralized mortgage loan
Steps:
1 Create and Collateralize (ą 150%) a Vault  (e.g. deposit ETH)
2 Generate Dai from the Collateralized Vault
3 Pay Down the Debt and the Stability Fee
29

51.
MakerDAO
Definition
2-tokens protocol that creates a cryptocollateralized stablecoin,
soft-pegged to the US dollar that runs on the Ethereum blockchain
✓ Resistant to hyperinflation due to its low volatility
✓ Decentralized, unbiased
✓ 1 Dai = 1 USD 
✓ „ collateralized mortgage loan
Steps:
1 Create and Collateralize (ą 150%) a Vault  (e.g. deposit ETH)
2 Generate Dai from the Collateralized Vault
3 Pay Down the Debt and the Stability Fee
4 Withdraw Collateral
29

52.
MakerDAO: Maintaining the Peg
It is critical to maintain the 1:1 peg to USD Ñ if not, there is no utility
in using MakerDAO
1 Stability fee (i.e. interest rate)
‹ Paid on your DAI debt
‹ Can be raised or lowered to shift supply of funds
2 DAI Savings Rate (DSR) Ñ r on “deposits”
Stability Fee ě Savings Rate
3 Debt ceiling: adjusted to Ö supply
4 Governance mechanism: MKR token makes decisions
30

53.
DAI-USD Peg
.98
1
1.02
1.04
1.06
2020 2020 2021 2021 2022
DAI−USD
31

54.
Compound
32

55.
Compound
Definition
Protocol on the Ethereum blockchain that establishes money mar-
kets for lending (borrowing) and earn (pay) a variable rate.
✓ Aggregates liquidity (i.e. supply)
✓ Users can borrow from the pool
✓ Rates determined by market forces
✓ Overcollateralized Ñ each ERC-20 has ‰ ratio
‹ Factor ranging from 0 to 90
‹ Ratio “ 100 ˆ pCFq´1
✓ Automatic liquidation if ValueCollateral ă ValueDebt
Why Compound? Unlock value of asset without selling it (taxable!)
33

56.
Compound: Key Features and Terms
1 Borrow Interest Rates are a function of
‹ Utilization Ratio = Total Borrow
Total Supply
‹ Base rate: borrow rate at 0 percent borrow demand
‹ Slope: ∆ in rates
2 Supply Interest Rates = Borrow Rate ˆ Utilization Ratio
3 Reserve Factor: % of borrow payments set aside in reserve pools
(i.e. insurance)
34

57.
Borrowing and Lending on Compound
0
5
10
15
20
25
2019 2020 2020 2021 2021 2022
Lend
Borrow
Interest Rates on Compound (%)
35

58.
Uniswap
36

59.
Uniswap
Definition
Uniswap is an automated liquidity protocol powered by a con-
stant product formula and implemented in a system of smart
contracts on the Ethereum blockchain.
37

60.
Uniswap
Definition
Uniswap is an automated liquidity protocol powered by a con-
stant product formula and implemented in a system of smart
contracts on the Ethereum blockchain.
✓ Automated market maker: liquidity is pooled and Uniswap
stands ready to provide it (i.e. swap tokens) Ñ facilitate trading
37

61.
Uniswap
Definition
Uniswap is an automated liquidity protocol powered by a con-
stant product formula and implemented in a system of smart
contracts on the Ethereum blockchain.
✓ Automated market maker: liquidity is pooled and Uniswap
stands ready to provide it (i.e. swap tokens) Ñ facilitate trading
37

62.
Uniswap (Cont’d)
✓ Accept one token for the other as long as the “constant product”
formula is preserved
x
lo
omo
on
reserve for x
ˆ y
lo
omo
on
reserve for y
“ k
lo
omo
on
Invariant
38

63.
Uniswap (Cont’d)
✓ Trades will change the reserves of the swapped pair resulting in
a new price
p “
y
x
1 Pstart “ 1200
400 “ 3
2 Pend “ 123.03
399 “ 3.015
39

64.
Risks of DeFi and The Future of
DeFi

65.
DeFi Risks
41

66.
SQUID
42

67.
DeFi Risks
DeFi completely eliminates counterparty risk, but many risks still
remain (or are created).
1 Smart contract risk
‹ Logical error ($90 million in Compound)
‹ Economic exploit
2 Governance risk
‹ Undermine democratic voting
3 Regulatory risk
‹ KYC/AML
‹ SEC/IRS
4 Custodial risk
‹ Self (lost or locked keys)
‹ External hack (e.g. Coinbase)
5 Environmental risk
‹ Energy consumption Ñ Migrations to PoS 43

68.
Thank you!
44