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# **DeFi intro**

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* General flow of (crypto)assets and risks associated
* Decentralized Finance instruments
* Cautionary tales

Outside the scope risks related to: subcontractors and partners, HR, IP, regulations and other legal

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## Common risks of blockchain transactions (1)
Currency risk: The crypto-asset market is notably volatile
Regulatory risk: Regulators’ views about and reactions to crypto are evolving, with little guidance on the space so far.
Blockchain risk: Blockchains are evolving software products which can have techinical and "political" issues.

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## Common risks of blockchain transactions (2)

Hacking risk
Unreliable partners/services risks
Whale risks: Any moves by the big players (whales) have a noticeable and often catastrophic impact.
Global economy risks

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## General asset flow
Stage 1. Start
Stage 2. NFT stage.
Stage 3. Transition from NFT to a fungible cryptocurrency.
Stage 4. Investment stage

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## Stage 1.

* Client's assets: Fiat currency/Crypto currency
* Our assets: None
* Risks: None

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## Stage 2. NFT stage. Process

Process: Client uses his fiat currency to purchase physical gold. He receives an NFT in return.
Risks: Common risks of crypto transactions

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## Stage 2. NFT stage. Result

* Client's assets: Gold bar NFT
* Our assets: Fiat currency
* Client's Risks:
1. Common risks
2. Without us the NFT has no value
3. Gold price risks

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## Stage 3. Transition from NFT to a fungible cryptocurrency. Process

* Client exchanges his bullion for an equivalent amount of paper gold
* Client sends paper gold to us and (optionally) receives blockchain tokens signifying the rights to withdraw
* We convert paper gold to cryptocurrency/stablecoins

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## Stage 3. Result

* Client's assets: Derivative tokens signifying the right to withdraw funds equal to the value of paper gold stored with us.
* Our assets: Cryptocurrency equal in value to the paper gold stored
* Our Risks:
1. Common risks
2. Stablecoin risks

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## Stage 4. Investment stage

Funds: our funds and clients' funds. We can have several separate strategies with different levels of exposure.
Investment options:
1. Stablecoin arbitrage
2. Stablecoin based DeFi

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## Stablecoin arbitrage

Make money by arbitraging stable coin prices between different exchanges (centralized and decentralized)
Risks:
1. Unknown ROI
2. Needs a strong presence on a number of exchanges
3. Highly competitve field allegedly controlled by exchanges

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## DeFi

Decentralized finance (DeFi) is a major sector in blockchain that offers peer-to-peer (P2P) financial services and technologies. DeFi loans, investments, trades and swaps are typically transparent, permissionless, trustless, and interoperable. Platform composability in DeFi has resulted in unlocking value through interoperability with innovations like decentralized exchanges (DEXs), yield farming, liquidity tokens, and more.

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## DeFi pyramid


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## DeFi pyramid
The settlement layer - blockchain
The asset layer - cryptocurrencies, tokens and stablecoins
The protocol layer - smart contracts for DEXs and Lending/Borrowing
The application layer - the frontend which end users interact with
The aggregation layer - aggregation of financial building blocks in DeFi, allowing assets and products to be used and combined without explicit agreement or permission.

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## DeFi types

1. DEXs
2. Lending platforms

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**Yield farming** is the practice of staking or locking up cryptocurrencies within a blockchain protocol to generate tokenized rewards. Many decentralized finance (DeFi) projects rely on yield farming to incentivize users to contribute to the network's liquidity and stability, since these projects do not rely on a centralized market facilitator.

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On DEXs we can **farm** by being a liquidity provider

Liquidity provider: Users deposit two coins to a DEX to provide trading liquidity. Exchanges charge a small fee to swap the two tokens which is paid to liquidity providers.

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On Lending platforms we can **farm** by providing the assets for others to borrow

Typically for Decentralized lending all loans are *overcollateralized* and relatively safe

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## DeFi Lending


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## DeFi Risks

* Security contract risk: There have been several notable hacks in the DeFi space, with estimated losses in the billions.

* Governance risk: DeFi platforms may change overtime.

* Oracle risk: Oracle are responsible for supplying offchain information (like gold price) to the smartcontracts.

* Cooperative risk: risk of improper collateral valuation and liquidation.

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| Name | Blockchain | Type | TVL |
| ------------- |:-----------:| -----:| ------:|
| Maker | Ethereum | Lending | $7.90B |
| Uniswap | Ethereum |DEXes|$7.04B|
|Curve|Ethereum|DEXes| $4.90B|
|Aave| Multichain|Lending|$4.52B|
|Compound |Ethereum| Lending| $2.70B|
|Balancer| Ethereum| DEXes | $2.19B|
|yearn.finance|Ethereum| Assets|$599.6M|
|dYdX |Ethereum|Derivatives|$553.6M|
|TrueFi|Ethereum | Lending|$410.5M|

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## Maker

MakerDAO is a decentralized credit platform on Ethereum that supports Dai, a stablecoin whose value is pegged to USD.
Blockchain: Ethereum
Year: 2017

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## Uniswap

Uniswap is a decentralized exchange (DEX) that uses liquidity pools (LPs) to make markets without the need for order books or central facilitators.
Blockchains: Ethereum, Polygon, Arbitrum, Optimism,Celo
Year: 2018

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## Aave

Aave is a decentralized lending and borrowing platform on Ethereum. Aave users can take out loans by providing collateral in the form of crypto assets.
Blockchains: Ethereum, Polygon, Avalanche
Year: 2020

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## Types of Stablecoins
* Fiat-backed (USDT,USDC)
* Crypto-backed (Dai)
* Commodity-backed (PAXG)
* Algorithmic

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## Stablecoin regulation
* Ensure users will be able to convert their claims at par into other liquid forms of money

* Stablecoin arrangements should have clear and direct lines of responsibility and accountability

* Human intervention to oversee the workings of the stablecoin should always be possible

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# Cautionary tales

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## UST and Luna

* Algorighmic stablecoin which proved to be "built to fail"
* Tried to guarantee demand by creating an ecosystem of DeFi projects. Anchor (lending project) promised interest rates as high as 20% for UST deposits
* Ultimately proved to be a Ponzi scheme and in a troubled market a single sell by a whale triggered a selloff destroying the whole project (think unintentional, decentralized Soros attack)

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## Celcius

Celcius was a combination of CeFi (centralized) and DeFi

Celsius had more than $8 billion lent out to clients and $12 billion in assets under management by May

Celsius has been using a multitude of DeFi protocols including Terra’s Anchor and Ethereum Lido and Curve in order to leverage client funds to pay out 17% APY in yields

Majority of Celcius liquid reserves where tied to stETH (syntetic asset dependant on Ethereum 2.0 upgrade) which lost its peg

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## Three Arrows Capital

Tokens listed as investments on the 3AC site include ether (ETH), solana (SOL), and luna (LUNA). Prices of these are down 77%, 90% and 99.7%, respectively, since lifetime highs, as per CoinGecko data

3AC was earning yields on Anchor, and had also invested $200 million in Luna in February

3AC was also investing in stETH and $200 million in stEth

Filed for bankruptcy

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## Risks and tools

To analyze DeFi projects and specific pools we need tools that will allow us to calculate

* TVL (total value locked)
* Number of transactions
* Transaction volume
* Number of unique accounts involved
* Asset inflow and outflow
* Yield

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(https://defillama.com/yields?chain=Ethereum)