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