This course aims to introduce students to decentralized finance (DeFi), with emphasis
on quantitive models for assessing automated market makers (AMMs) used in liquidity
pools. It starts by providing technical and historical background to the rise of Bitcoin as
a blockchain technology and cryptocurrency, leading to Ethereum (blockchain, network
and virtual machine) which, in turn, is redefining established financial systems from the
ground up. Whilst adoption of DeFi in mainstream finance might be slow, its technical
foundations and product innovation frenzy are being absorbed by traditional centralized
exchanges. Key characteristics of financial primitives within DeFi (lending, swapping
and investing), alongside their inefficiencies and risks are examined. Examples of main
markets and contracts will be explored in Python using extracted on-chain data.
Contrast with traditional centralized limit order books and their models is drawn. The
course will then bring students to more cutting-edge and underdeveloped markets such
as on-chain uncollateralized lending and options. Finally, it will explore risks across the
digital assets centralized exchanges (crypto exchanges) and the DeFi ecosystem.
- Lecturer: Katia Babbar
Syllabus:
1. Blockchains, Distributed Ledgers, Cryptography and the rise of Bitcoin
2. Smart Contracts and the Ethereum Network:
a. creation of financial primitives (lending, swapping, investing on chain) and
their collaterization mechanism
b. accessing smart contract data via Etherscan and the Graph
c. new risks: smart contract risks
3. Models for stable coins and CBDCs
a. Different stable coin models and liquidation risks: fiat-collateralized
(USDT/USDC), cyrpto-collateralized (DAI), more risky non-collateralized
algorithmic sablecoins (AMPL)
b. A stochastic model for stablecoins (Key findings Minca paper)
4. Automated Market Makers (AMMs) / Constant Function Market Makers
(CFMMs) dynamics:
a. Spot/Futures/Perpetuals - swapping digital assets: Liquidity pools in
Decentralized Exchange (DEX) such as Uniswap and Balancer
b. Lending digital assets: Compound and Aave as DEX for lending
5. Quantitative Models for CFMMs and key market statistical characteristics
6. Hybrid model of AMMs and Central Limit Order Books
a. AMMs as discrete order books
b. Off-chain/ on-chain combinations
7. More complex products on-chain: Options and tokenized investment strategies
from yield farming
8. Liquidation and systemic risks of DeFi / Digital Assets Ecosystems, including
regulatory risk requirements (*by 2023 there will be some!)