DeFi and the Future of Finance

During the Global Financial Crisis in 2008, our financial infrastructure failed.

Governments bailed out the very institutions that let the economy down. This episode spurred a serious rethink of our financial system. Does it make any sense that it takes two days to settle a stock transaction? Why do retailers, operating on razor thin margins, have to pay 3% for every customer credit card swipe? Why does it take two days to transfer money from a bank account to a brokerage—or any other company? Why are savings rates miniscule or negative? Why is it so difficult for entrepreneurs to get financing at traditional banks?

In DeFi and the Future of Finance, Campbell R. Harvey, Ashwin Ramachandran and Joey Santoro, introduce the new world of Decentralized Finance. The book argues that the current financial landscape is ripe for disruption and we are seeing, in real time, the reinvention of finance.

The authors provide the reader with a clear assessment of the problems with the current financial system and how DeFi solves many of these problems. The essence of DeFi is that we interact with peers—there is no brick and mortar and all of the associated costs. Savings and lending are reinvented. Trading takes place with algorithms far removed from traditional brokerages.

The book conducts a deep dive on some of the most innovative protocols such as Uniswap and Compound. Many of the companies featured in the book you might not have heard of—however, you will in the future.

As with any new technology, there are a myriad of risks and the authors carefully catalogue these risks and assess which ones can be successfully mitigated.

Ideally suited for people working in any part of the finance industry as well as financial policy makers, DeFi and the Future of Finance gives readers a vision of the future. The world of finance will fundamentally be changed over the coming decade. The book enables you to become part of the disruption – not the target of the disruption.

CAMPBELL R. HARVEY, PHD, is Distinguished Professor of Finance at Duke University and a Research Associate at the National Bureau of Economic Research. Since 2013, he has been a teaching pioneer in the blockchain space winning the UBRI Global Blockchain Educator of the Year in 2020.

ASHWIN RAMACHANDRAN is a General Partner at Dragonfly Capital. He is a graduate of Duke University.

JOEY SANTORO is the founder of Fei Labs. He is a graduate of Duke University.

1 Introduction 4

Five Key Problems of Centralized Financial Systems

Implications

2 The Origins of Modern Decentralized Finance 6

A Brief History of Finance 6

Fintech 6

Bitcoin and Cryptocurrency 7

Ethereum and DeFi 9

3 DeFi Infrastructure 9

Blockchain 10

Cryptocurrency 10

The Smart Contract Platform 11

Oracles 12

Stablecoins 13

Decentralized Applications 14

4 DeFi Primitives 14

Transactions 15

Fungible Tokens 16

Nonfungible Tokens 19

Custody 20

Supply Adjustment 20

Incentives 22

Swap 25

Collateralized Loans 27

Flash (Uncollateralized) Loans) 28

5 Problems DeFi Solves 28

Inefficiency 29

Limited Access 30

Opacity 31

Centralized Control 32

Lack of Inoperability

6 DeFi Deep Dive 34

Credit/Lending 34

Decentralized Exchange 49

Derivatives 55

Tokenization 65

7 Risks 68

Smart Contract Risk 68

Governance Risk 70

Oracle Risk 71

Scaling Risk 72

DEX Risk 73

Custodial Risk 74

Regulatory Risk 75

8 Conclusions: Losers and Winners 76

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The Used, Rental and eBook copies of this book are not guaranteed to include any supplemental materials. Typically, only the book itself is included. This is true even if the title states it includes any access cards, study guides, lab manuals, CDs, etc.