Fintech & DeFi

> Shaping the Future of Finance

DESSMI IFI - 1st Semester 2023/24

Course designed by Benoît Courtois

 Introduction
“With a good perspective on
history, we can have a better
understanding of the past and
present, and thus a clear vision of
the future.”

- Carlos Slim

Course designed by Benoît Courtois

 Course Modules
01 Intro & Fintech 04 Blockchain & DeFi

02 Blockchain Basics 05 Crypto AM

03 Blockchain Apps 06 Risks & Regulations

Teaching Style:
Face to face
Online
Online Async
Course designed by Benoît Courtois
 Course Modules
07 Crypto Valuation 10 Future of Finance

08 Fintech & DeFi

09 Blockchain in A&A*
Teaching Style:
Face to face
(*): This module may vary based on the instructor's expertise. Online
Online Async
Course designed by Benoît Courtois
 Learning Culture
Rules:
● There are no stupid questions. Ask your questions.
● Dare to take risks. “No risk no return”.
● Respect is key. We are all playing in the same team.
● No one will be left behind. We are all supportive.
● Please be careful about plagiarism and deadlines.
“A person who never made a mistake never tried anything new.”
- Albert Einstein

“Only those who dare to fail greatly can ever achieve greatly.”
- Robert F. Kennedy

Course designed by Benoît Courtois

 04
Blockchain
& DeFi
> By Benoît Courtois

IFI – Fintech & DeFi – Week 4

Course designed by Benoît Courtois

 What’s DeFi?
Investopedia: “Decentralized Finance is an emerging
financial technology based on secure distributed
ledgers similar to those used by cryptocurrencies.”

Based on the course readings, work individually to

answer the following questions:

● What are the 3 characteristics of DeFi?

● What are the main DeFi protocols and related
services/products?
● What is the TVL? And what is it used for?

You have 15 minutes.

Course designed by Benoît Courtois
 Decentralized Finance
Decentralized Finance (DeFi) aims to recreate and
improve traditional financial systems using blockchain-
based protocols and smart contracts. Let’s discuss the
following:

Its main features include:

● Decentralization
● Open access
● Transparency
● Programmability
● Trustlessness
● Interoperability
● Immutability
Course designed by Benoît Courtois
Source: Appinventiv
 Traditional Finance
Traditional Finance (TradFi) refers to the
financial system that’s been in place for
decades, such as banks, governments and other
financial institutions. Let’s discuss the following:

Main features include:

● Centralized institutions
● Regulation
● Intermediaries
● Access limitations
● Physical/Tangible infrastructure
● Cost structure

Course designed by Benoît Courtois

Source: Stably
 DeFi vs TradFi
Criteria DeFi TradFi

Custody Self-Custody Third party custodian

Execution Self execution via Executed by

smart contracts intermediaries
Cross service Interoperability Limited, between apps
interaction across chains and intermediaries

Collateral Over-collateralization No or low collateral

requirements due to volatility/risks
Clearing & Validated by the Service provider or
Settlements blockchain clearing house

Governance Ruled by developers Specific rules

and holders implemented

Course designed by Benoît Courtois

 Pros and Cons?
Work in teams to answer the following questions:

● What are the pros and cons of TradFi?

● What are the pros and cons of DeFi?
● Bonus question: What’s CeFi?

You have 10 minutes.

Course designed by Benoît Courtois

 TradFi: Summary
Pros:
● Established infrastructure/products
● Widely accepted/Easy to use
● Existing legal framework
● Deposit insurance
● Professional advice/support
Cons:
● High fees
● Transactions speed
● No full control (custody)
● Documentation to provide

Course designed by Benoît Courtois

 DeFi: Summary
Pros:
● Accessible to all
● Low fees
● Full control (self-custody)
● High interests rates (but high risks too)
Cons:
● Quite complex to use/understand
● Your own responsibility
● No client support
● Not fully regulated (yet)
● Risks (hacks, smart contracts, etc.)

Course designed by Benoît Courtois

 Centralized Finance
Blockchain Council: “Centralized finance (CeFi) is a
financial activity in which individuals can earn interest
and obtain loans on their cryptocurrency via centralized
exchanges.”

Traditional finance refers to the conventional financial

system, while CeFi refers to centralized crypto-related
services.

However, outside the cypto context, TradFi and CeFi

often refer to the same concept, as traditional finance
is centralized.

Course designed by Benoît Courtois

 What are CBDCs?
… But first things first, what’s a central bank?

ECB: “A central bank (CB) is a public institution that

manages the currency of a country or group of
countries and controls the money supply – literally, the
amount of money in circulation.”

Work in teams to answer the following question:

● How does the CB control the money supply?

You have 5 minutes.

Course designed by Benoît Courtois

 How Do CBs Work?
Main mechanisms used by central banks:
1. Interest rates: Rate at which commercial banks can borrow
money (“its cost”) to influence lending/borrowing activities.
2. Currency intervention: Buying or selling its own currency in
foreign exchange markets to influence its rate.
3. Open market operation: Buying or selling government
bonds to increase/decrease the quantity of money.
4. Money printing: Issuing coins and banknotes.

Ultimate goals >> controlling inflation, managing employment

levels and addressing financial crises.

Course designed by Benoît Courtois

 DeFi Services
DeFi platforms offer a myriad of services, such as:

● Lending and borrowing

● Automated market makers (AMM)
● Staking
● Yield farming
● Decentralized exchange
● Aggregator
● Derivative trading
● Synthetic assets
● Insurance, etc.

Course designed by Benoît Courtois

 DeFi: The Big Picture

Course designed by Benoît Courtois

Source: tokeny.com/defi-ecosystem/
 Lending & Borrowing
Investopedia: “Crypto lending is the process of
depositing cryptocurrency that is lent out to borrowers
in return for regular interest payments. Payments are
made in the form of the cryptocurrency that is
deposited typically and compounded on a daily,
weekly, or monthly basis.”

Work in teams to answer the following question:

● What are APY and APR?
● What are the risks of lending and borrowing crypto?
You have 5 minutes.

Course designed by Benoît Courtois

 Crypto Loan Workflow

Course designed by Benoît Courtois

Source: Yield.app
 Lending & Borrowing Risks
For the lender:
● Borrower default risks
● Collateral volatility
● Liquidity risks
● Platform risks
● Interest rates risks
For the borrower:
● Over-collateralization
● Collateral liquidation
● Interest rate increases
● Platform risks
● Rollover risks
Course designed by Benoît Courtois
Source: Journalducoin
 Decentralized Exchanges
Chainlink: “A decentralized exchange (DEX) is a
peer-to-peer marketplace where users can trade
cryptocurrencies in a non-custodial manner
without the need for an intermediary to facilitate
the transfer and custody of funds.”

Work in teams to answer the following question:

● How does a DEX work?
● What are the incentives for users to participate?
You have 10 minutes.

Course designed by Benoît Courtois

 DEX Workflow

Course designed by Benoît Courtois

Source: Semanticscholar.org
 Automated Market Makers
Automated Market Makers (AMMs) are decentralized
exchanges that use algorithms ”robots - automated
trading” to provide liquidity and price assets.

Role: To make sure the ratio of assets (trading pairs) in

liquidity pools remains as balanced as possible and to
eliminate discrepancies in the pricing of pooled assets.

Slippage (Investopedia): Refers to the difference between

the expected price of a trade and the price at which the
trade is executed. It is mainly caused by price volatility
and low liquidity.

Course designed by Benoît Courtois

 DEX Business Models
Most DEXs fall under the following model:

● Trading fee on swaps are accrued toward

liquidity providers (LPs), stakers of the protocol
token and the protocol/governance. This
creates incentives to provide liquidity and to
hold the token (buying pressure) but also some
selling pressure.

Yield farming: LPs deposit two coins (a pair) to a

DEX to provide trading liquidity.

Course designed by Benoît Courtois

 Impermanent Loss
Ledger: “It refers to a situation in which the profit you
gain from staking a token in a liquidity pool is less
than what you would have earned just holding the
asset.” The loss is permanent.

How does it happen? Let’s look at a simple example.

It occurs when the market price of the crypto pair is

changing. The pool needs to be rebalanced to
maintain the initial ratio (e.g. 50% USDT/50% ETH).

Course designed by Benoît Courtois

Source: Gemini.com
 Impermanent Loss

We deposit $1,000 of ETH (1 ETH if valued at $1,000) and USDT.

We have deposited 1 ETH and 1,000 USDT within a pool of 10
ETH (a) and 10,000 USDT (b) 50%/50%.

We own 10% of the pool. If ETH goes to 4,000 USDT and

a*b=k=100,000 (constant product).

a= square root (100,000/4,000) = 5 ETH (i.e. 20,000 USDT)

b= square root (100,000*4,000) = 20,000 USDT

10%>> 0,5 ETH and 2,000 USDT

Course designed by Benoît Courtois

 Impermanent Loss

Let’s calculate our impermanent loss*:

USDT ETH ETH price Total

Before $1,000 $1,000 $1,000 $2,000

After $2,000 $2,000 $4,000 $4,000

Buy & $1,000 $4,000 $4,000 $5,000

Hold

Impermanent Loss = $1,000

(*): This does not consider transaction fee

Course designed by Benoît Courtois

 Impermanent Loss

Course designed by Benoît Courtois

Source: Alpaca Finance
 Impermanent Loss

Work in teams to answer the following question:

● What is the impermanent loss if ETH goes to

$500 instead of $4,000?

You have 5 minutes.

Course designed by Benoît Courtois

 Impermanent Loss

We deposit $1,000 of ETH (1 ETH if valued at $1,000) and USDT.

We have deposited 1 ETH and 1,000 USDT within a pool of 10
ETH (a) and 10,000 USDT (b) 50%/50%.

We own 10% of the pool. If the ETH goes to 500 USDT and
a*b=k=100,000 (constant product).

a= square root (100,000/500)=14,14 ETH (i.e. 7,070 USDT)

b= square root (100,000*500)=7,070 USDT

10%>> 1,4 ETH and 707 USDT

Course designed by Benoît Courtois

 Impermanent Loss

Let’s calculate the Impermanent Loss:

USDT ETH ETH price Total

Before $1,000 $1,000 $1,000 $2,000

After $707 $707 $500 $1,414

Buy & $1,000 $500 $500 $1,500

Hold

Impermanent Loss = $86

Course designed by Benoît Courtois

 What’s Staking?
Coinbase: “Staking is a way of earning rewards while
holding onto certain cryptocurrencies.”

The deposited cryptocurrency is used by the

blockchain nodes to validate blocks (PoS consensus
mechanism). A portion of the earned transaction
fee is distributed (cryptocurrency) to “stakers” as a
reward.

Main risks: Market risk, liquidity risk, lockup period,

reward duration, validator risk.

Course designed by Benoît Courtois

 Passive Income: Summary

Course designed by Benoît Courtois

Source: Binance.com
 Market & TVL
Is DeFi still trendy? Let’s take a look at the TVL:

Course designed by Benoît Courtois

Source: Defilama.org
 Access to DeFi
To access DeFi platforms, users typically connect via a Web3
wallet, enabling seamless interaction with decentralized
applications and services.

Main Web3 wallets:

● MetaMask
● Trust Wallet
● Ledger Live (with Ledger hardware wallet)
● Trezor (with Trezor hardware wallet), etc.
Note: Please download MetaMask for Module 5.

Course designed by Benoît Courtois

 Course Opening
The DeFi revolution will radically transform the financial sector:
● Banking
● Asset Management
● Insurance
● Audit and Accounting
● Trading
● Laws and Regulations
● Real Estate, etc.

"Innovation is the ability to see change as an opportunity, not a threat."

- Steve Jobs

Course designed by Benoît Courtois

 Course Wrap Up

● Course summary: Recap of the main concepts covered

● Questions & Answers
● Reflections and feedback
● Mandatory readings to prepare the next module

Time: 10min

Course designed by Benoît Courtois

 Thank you!

Course designed by Benoît Courtois