Post on 13-Apr-2022
The Latest Research on Bitcoin and Blockchain
HASKAYNE SCHOOL OF BUSINESS
Alfred Lehar
Agenda
Ethereum and smart contracts Decentralized finance 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 smart contract— 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, DAI – stablecoins— Value corresponds to 1 USD
Token as ownership of a piece of art
Filecoin: allowsusers 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
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Uniswap issues and future
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— Binance 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 cryptocurrencies 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 ledger 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