UNDERSTANDING DECENTRALIZED FINANCE : how defi is changing the future of money

Understanding Decentralized Finance demystifies DeFi, locating the integration points between decentralized and centralized finance to help finance professionals unlock valuable opportunities. DeFi - the next evolution of cryptocurrency - has brought a new wave of investors into the world of finance. As fintechs and financial institutions seek to integrate with DeFi, this book explores its history, its present context, and its future. It explains the world of DeFi by comparing it to the traditional finance sector, highlighting points of similarity, difference and integration. Understanding Decentralized Finance explores the technologies underlying the DeFi market and how they differ from those of traditional financial markets. It scrutinizes the difference between centralized and decentralized cryptocurrency exchanges, how NFTs fit into DeFi and how collectibles can be financialized. Readers will also find out how collateralized loans, derivatives, margin trading and liquidity provision work in a world where there is no centralized institution to coordinate these activities - and how regulators in different jurisdictions are ensuring that financial regulations keep up with these innovations. With examples from key actors in the field, including the movement of luxury organizations like Christie's and Sotheby's into the NFT space and the SushiSwap vampire attack, this is an essential read for anyone working in finance, fintech and technology who needs to understand the fast-moving world of DeFi. Cover 1 Contents 8 List of figures and tables 13 Preface 14 Acknowledgements 16 Introduction 18 Too good to be true? 19 What is decentralized finance? 20 How the financial system evolved 22 Cryptocurrency: the foundational building block of DeFi 24 How Bitcoin works 24 Ethereum and smart contracts 27 Why is decentralization important – and is it achievable? 32 How mainstream are cryptocurrencies and DeFi? 35 Legacy banks and institutions move into the space 35 The cryptocurrency bear market 37 Managing risk within the DeFi system 38 References 38 Further reading 39 01 Why DeFi developed and how it works 40 Cultural movements and low returns on investment 41 Developments that enabled the growth of DeFi 44 The NFT boom 49 DeFi: finance without a central authority 50 Key moments in the evolution of DeFi 54 The DeFi summer of 2020 59 Beyond Ethereum: other Layer 1 networks 61 References 63 02 The current face of retail finance 64 Retail customers and their attitude to risk 65 Why this book focuses on DeFi for retail customers 67 Demographics and retail investment 69 The rise of the finfluencer 70 The most-used financial services 71 Riskier investments 71 Banks or technology companies? 72 Fintech × DeFi 75 Wallstreetbets, meme stocks and crypto meme culture 76 Opportunities and challenges 80 References 81 03 Decentralized exchanges: the start of DeFi 83 Centralized crypto exchanges 84 Hacks and fraud 86 The decentralization dream 88 Automated market makers and liquidity pools 90 ‘Pump and dump’ tokens 95 Forked codebases and vampire attacks 96 Non-Ethereum DEXs 98 NFT exchanges 99 What is a wallet? 100 Wrapped Bitcoin 101 What else can you do with DeFi? 102 References 103 04 Beyond DEXs: other DeFi protocols 104 Staking 105 Loans 109 Decentralized lending protocols 110 Composability 112 Gamified savings projects 114 Borrowing 116 Democratizing finance 116 More complex loans 117 Derivatives 119 Perpetuals 119 Options 120 Insurance 121 Creating your own financial instruments 122 Institution-focused initiatives 122 Evaluating risk 123 Further reading 124 05 Risks and challenges 125 Blockchain-specific challenges 126 Governance risks 128 Insufficient decentralization 129 Maximal extractable value and front-running 130 Open-source code and its liabilities 133 Audits do not offer guarantees 134 Hacks, heists and other disasters 135 Knowledge and education challenges 137 Risks around technology and integration 138 Product challenges 139 Systemic risk 140 The future of DeFi as an integral part of the financial system 141 Insurance, bug bounties and audits 142 Conclusion 143 References 144 Further reading 145 06 DAOs: decentralized autonomous organizations 146 What is a DAO and how does it differ from traditional company models? 147 The history of DAOs 148 Collaboration in pursuit of a common goal 149 The 2016 DAO hack and its impact 150 DAOs for different purposes 153 DeFi DAOs: Uniswap and Compound 157 Legal liability and legal standing 158 Working for a DAO 159 Negatives of decentralization 160 What is progressive decentralization? 161 Voting mechanisms 162 Mainstream finance interaction with DAOs 164 Tools and software for DAOs 164 Conclusion 165 References 165 Further reading 166 07 NFTs within the DeFi system 167 Why should anyone working in finance care about NFTs? 167 What is an NFT? 169 How are NFTs used in DeFi? 170 GameFi 173 The metaverse: why it’s bigger than gaming 177 The financialization of everything 180 NFTs and ownership: a legal perspective 180 NFTs: the backlash 181 NFTs, the metaverse and GameFi: the future 182 References 183 Further reading 184 08 Regulating DeFi 185 The fallacy of crypto anonymity 186 Types of illicit transaction 186 The role of regulators 187 Regulatory arbitrage 195 Identity and privacy 197 Opportunities for regulators 199 Challenges for regulators 200 Specific regulatory pain points 201 How regulation will shape the future of DeFi 202 References 203 Further reading 203 09 Imagining the future of DeFi 204 The legacy of globalized systems 204 Generations Z and Alpha: true digital natives 206 DeFi will become more institution-focused 207 Integrating identity systems into DeFi 210 Towards a multi-chain future 211 DeFi and Bitcoin 212 DeFi on Layer 2 networks 213 Improving the user experience for DeFi investors 214 Integration points with central-bank digital currencies 216 The financialization of everything 218 The future of DeFi regulation 218 Improbable tales will no longer be told 219 Lessons from the past inform the future 220 References 222 Further reading 223 Glossary 224 Index 227 "Understanding Decentralized Finance demystifies DeFi, locating the integration points between decentralised and centralized finance to help finance professionals unlock valuable opportunities.DeFi - the next evolution of cryptocurrency - has brought a new wave of investors into the world of finance. As fintechs and financial institutions seek to integrate with DeFi, this book explores its history, its present context, and its future. It explains the world of DeFi by comparing it to the traditional finance sector, highlighting points of similarity, difference and integration.Understanding Decentralized Finance explores the technologies underlying the DeFi market and how they differ from those of traditional financial markets. It scrutinizes the difference between centralized and decentralized cryptocurrency exchanges, how NFTs fit into DeFi and how collectibles can be financialized. Readers will also find out how collateralized loans, derivatives, margin trading and liquidity provision work in a world where there is no centralized institution to coordinate these activities - and how regulators in different jurisdictions are ensuring that financial regulations keep up with these innovations.With examples from key actors in the field, including the movement of luxury organizations like Christie's and Sotheby's into the NFT space and the SushiSwap vampire attack, this is an essential read for anyone working in finance, fintech and technology who needs to understand the fast-moving world of DeFi"-- Provided by publisher