HASKAYNE SCHOOL OF BUSINESS The Latest Research on and

Alfred Lehar Agenda

. and smart contracts . . Yield Farming: investing your crypto . Will the Bank of Canada issue a crypto loonie? Ethereum

. Ethereum is a blockchain (different from Bitcoin) . Proposed in late 2013 by Vitalik Buterin . Native currency Ether (ETH) . Goal: to have decentralized computer . Anyone can deploy computer programs on Ethereum – these are smart contracts . Anyone can trigger a contract to do a certain action for them touring complete

. Bitcoin script is very simple on purpose . Ethereum is touring complete. Programs can — Have e.g. for-next loops — Store and change internal state — Can access some info on blockchain . To prevent an adversary from executing an infinite loop, execution time is costly — Pay gas to miners for execution of program — Each step of program costs gas — When a transaction runs out of gas it fails — Users offer gas price (in ETH) and maximum gas amount to miners Type of transactions

. Send ETH from one address to another — Similar to BTC . Interact with a — Call functions of a program that resides at a wallet address — Program dormant until called — Pass on some data to the program . Deploy a smart contract — Send computer code to address 0x0000…000 — Return value is an address where the smart contract resides (indistinguishable from a wallet address) Tokens

. Currency . Asset: piece of real estate, a stock, a USD, a fancy outfit or a ship in a computer game . Access . Equity: ownership in a digital organization (e.g. a smart contract) . Voting: governance token . Collectible . Identity, qualification, marriage certificate . Utility: pay for a service Token practical examples

. USDC, – — Value corresponds to 1 USD . Token as ownership of a piece of art . : allows users pay for/ offer storage Decentralized exchanges: e.g. Uniswap

. Launched Nov 2018 . Allows exchange of ETH and tokens . Smart contract, open source, no owner . Send ETH to smart contract, contract sends tokens back and vice versa . Do not have to give up custody of token . No settlement risk: transactions are atomic . One exchange (i.e. smart contract) per token . Can create new exchanges for any token via Uniswap factory contract Uniswap liquidity pool

. Exchange keeps inventory (called liquidity pool) to fill orders . If somebody wants to buy MKR for 20 Eth — MKR get sent out of the liquidity pool — 20 ETH flow into liquidity pool — Liquidity pool collects a 0.03% fee . Everybody can become a liquidity provider — Provide Eth and token of equal value — Get a liquidity token in return — Liquidity token can increase or decrease in value — Can be redeemed for share of the pool at any time Size of liquidity pool – October 2020 Size of liquidity pool – April 14, 2021 Uniswap pricing

. Pricing according to deterministic formula . If people buy tokens, the price increases . When traders sell tokens the price decreases . The inventory of tokens and ETH before and after the trade are on a ‘bonding curve’ . Uniswap takes 0.03% in fee 100

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. People have listed fake tokens on uniswap — Name similar to existing tokens — Double check address on Etherscan . Other exchanges have cloned the concept (and code) — Sushiswap . Gas fees are high and add to TX fees . Future model of exchanges — Do not give up custody — and others move to this model — Ready for tokenization of other assets, e.g. stocks . Foundational contract on which other will build Crypto Lending

. Users can post collateral and take out loan . Loans are over-collateralized, e.g. 150% . When collateral value falls to e.g. 120% loan can be liquidated — Somebody (typically a bot) else can make a liquidation call — Take collateral, repay the loan — Make a profit . Compound USD 11.4 billion . Maker USD 9.12 billion . Aave USD 6.36 billion Yield farming

. Invest you crypto to earn returns . Become a liquidity provider on e.g. Uniswap . Provide liquidity to a lending platform

. Be careful of cyber security risks . Many new platforms offer great returns and then get hacked or fail . Some platforms artificially inflate returns CBDC

. Central Banks will offer their own . Tied to the value of, e.g., Canadian dollar . Not truly decentralized – Bank of Canada as trusted party — Good when some mistake was made or a private key lost . Change the nature of money — Faster, cheaper payments — Add programmability to money UofC proposal

. Smart contracts as source of value creation — Standardize many contracts: profit sharing, bond issue, line of credit — Innovation: eliminate payday loans, automate a real estate transaction . Anonymity — Total anonymity for smaller amounts — Anonymity unless revoked by court for larger transactions . Accessibility: works (limited) without internet Counterpoints

. Governments print money like crazy and bitcoin is a safe haven — So far we do not see inflation — Deflation is very bad for any economy — The gold standard failed — Monetary policy is important: too much money and too little limits economic growth . All banks will go away — Judging creditworthiness requires expertise — Custodian services will remain important Outlook

My subjective, personal opinion Defi

. Defi will stay . Capacity will increase with sidechains . More complicated and user friendly contracts will be built on existing infrastructure . Central banks will deploy CBDC . Smart contracts will run on CBDC . Few genuinely new applications will arise that we have never seen before . Huge gains in settlement and contracting . Better access to finance for smaller entities . More micropayments/pay per use . Tokenization of more assets