DeFi and the Future of Finance Quotes

“Inefficiency. A centralized financial system has many inefficiencies. Perhaps the most egregious example is the credit card interchange rate that causes consumers and small businesses to lose up to 3 percent of a transaction's value with every swipe due to the payment network oligopoly's pricing power. Remittance fees are 5–7 percent. Time is also wasted in the two days it takes to “settle” a stock transaction (officially transfer ownership). In the Internet age, this seems utterly implausible. Other inefficiencies include costly (and slow) transfer of funds, direct and indirect brokerage fees, lack of security, and the inability to conduct microtransactions, many of which are not obvious to users. In the current banking system, deposit interest rates remain very low and loan rates high because banks need to cover their brick-and-mortar costs. The insurance industry provides another example.”
― Campbell R. Harvey, DeFi and the Future of Finance

“On a smart contract platform, the possibilities rapidly expand beyond what developers desiring to integrate various applications can easily handle. This leads to the adoption of standard interfaces for different types of functionality. On Ethereum, these standards are called Ethereum Request for Comments (ERC). The best known of these define different types of tokens that have similar behavior. ERC-20 is the standard for fungible tokens and defines an interface for tokens whose units are identical in utility and functionality.2 It includes behavior such as transferring units and approving operators for using a certain portion of a user's balance.”
― Campbell R. Harvey, DeFi and the Future of Finance

“The drawback to non-collateralized stablecoins is that they have a lack of inherent underlying value backing the exchange of their token. In contractions, this can lead to “bank runs,” in which many holders are left with large sums of the token that are no longer worth the peg price. There”
― Campbell R. Harvey, DeFi and the Future of Finance

“With a market capitalization of $5 billion as of writing, the most popular crypto-collateralized stablecoin is DAI, created by MakerDAO9 and and backed by ETH and other crypto assets. It is soft pegged with economic mechanisms that incentivize supply and demand to drive the price to $1.”
― Campbell R. Harvey, DeFi and the Future of Finance

“The largest fiat-collateralized stablecoin is Tether5 (USDT) with a market capitalization of $62 billion, making it the third largest cryptocurrency behind Bitcoin and Ethereum at time of writing. Tether also has the highest trading volume of any cryptocurrency but is not audited.”
― Campbell R. Harvey, DeFi and the Future of Finance

“The mechanism by which the stablecoin maintains its peg varies by implementation. The three primary mechanisms are fiat-collateralized, crypto-collateralized, and non-collateralized stablecoins.”
― Campbell R. Harvey, DeFi and the Future of Finance

“In the context of smart contract platforms, an oracle is any data source for reporting information external to the blockchain. How can we create an oracle that can authoritatively speak about off-chain information in a trust-minimized way? Many applications require an oracle, and the implementations exhibit varying degrees of centralization.”
― Campbell R. Harvey, DeFi and the Future of Finance

“keepers are external participants directly incentivized to provide a service to DeFi protocols, such as monitoring positions to safeguard that they are sufficiently collateralized or triggering state updates for various functions.”
― Campbell R. Harvey, DeFi and the Future of Finance

“staking reward is a positive incentive by which users receive a bonus in their token balance based on the amount of capital they have contributed to the system. Options for customization include applying a minimum threshold to all staked balances on a pro rata basis, either a fixed or pro rata payout, and a token that is the same or different from the staked one.”
― Campbell R. Harvey, DeFi and the Future of Finance

“We will look at two different categories of incentives: (1) staked incentives, which apply to a balance of tokens custodied in a smart contract; and (2) direct incentives, which apply to users within the system who do not have a custodied balance.”
― Campbell R. Harvey, DeFi and the Future of Finance

“The growth rate of the bonding curve is important in determining users' performance. A linear growth rate would generously reward early users if the token grows to a sufficiently large supply.”
― Campbell R. Harvey, DeFi and the Future of Finance

“Adjusting supply up and down contractually defines a bonding curve: the price relationship between the token supply and a corresponding asset used to purchase the tokens. In most implementations, investors sell back to the curve using the same price relationship.”
― Campbell R. Harvey, DeFi and the Future of Finance

“Platforms can bootstrap their networks by issuing a token with an additional value proposition in the network. Users can keep the token and deploy it in the context of the network or sell it for a profit. Either way, employing tokens in a platform usually increases activity.”
― Campbell R. Harvey, DeFi and the Future of Finance

“Rewarding user behavior with increases in supply (inflationary rewards) has become a common practice to encourage actions such as supplying liquidity or using a particular platform. Consequently, many users engage in yield farming, taking actions to seek the highest possible rewards.”
― Campbell R. Harvey, DeFi and the Future of Finance

“The flip side of burning is minting, which increases the number of tokens in circulation.”
― Campbell R. Harvey, DeFi and the Future of Finance

“More common and useful is the ability to intentionally burn tokens as a part of the smart contract design.”
― Campbell R. Harvey, DeFi and the Future of Finance

“Burning a token means removing it from circulation and can be done in two ways: (1) manually send it to an unowned Ethereum address; or (2) even more efficiently, create a contract that is incapable of spending it. Either approach renders the burned tokens unusable, although the decrease in circulating supply would not be “known” by the token contract.”
― Campbell R. Harvey, DeFi and the Future of Finance

“A critical DeFi primitive is the ability to escrow or custody funds directly in a smart contract. This is distinct from the situation in ERC-20 when operators are approved to transfer a user's balance. In that case, the user still retains custody of their funds and could transfer the balance anytime or revoke the contract's approval. When a smart contract has full custody over funds, it presents the possibility for new capabilities (and additional primitives), including: Retaining fees and disbursing incentives Facilitation of token swaps Market making of a bonding curve Collateralized loans Auctions Insurance funds”
― Campbell R. Harvey, DeFi and the Future of Finance

“Many platforms issue the governance token via an inflation schedule that incentivizes people to use particular features of the platform, ensuring the governance token is distributed directly to them.”
― Campbell R. Harvey, DeFi and the Future of Finance

“A governance token can be implemented in many ways: with a static, an inflationary, or even a deflationary supply.”
― Campbell R. Harvey, DeFi and the Future of Finance

“Any platform with admin-controlled functionality is not truly DeFi because of the admins' centralized control. A contract without the capacity for change is necessarily rigid, however, and has no way to adapt to bugs in the code or changing economic or technical conditions. For this reason, many platforms strive for a decentralized upgrade process, often mediated by a governance token.”
― Campbell R. Harvey, DeFi and the Future of Finance

“An equity token – not to be confused with equities or stocks in the traditional finance sense – represents ownership of an underlying asset or pool of assets.”
― Campbell R. Harvey, DeFi and the Future of Finance

“With approval functionality, contracts (or trusted accounts) can be whitelisted to act as custodians for a user's tokens without directly holding the token balance. This widens the scope of possible applications because users retain full custody before an approved spender executes a transaction.”
― Campbell R. Harvey, DeFi and the Future of Finance

“Fungible tokens are a cornerstone of the value proposition of Ethereum and DeFi. Any Ethereum developer can create a token divisible to a certain decimal granularity and with units that are all identical and interchangeable.”
― Campbell R. Harvey, DeFi and the Future of Finance

“The gas price is determined by the market and effectively creates an auction for inclusion in the next Ethereum block.”
― Campbell R. Harvey, DeFi and the Future of Finance

“Remember that transactions have a gas fee, which varies based on the complexity of the transaction. When, for example, ETH is used to compensate a miner for including and executing a transaction, the gas fee is relatively low. Longer or more data-intensive transactions cost more gas. If a transaction reverts for any reason, or runs out of gas, the sender forfeits all gas used until that point. Forfeiture protects the miners who, without this provision, could fall prey to large volumes of failed transactions for which they would not receive payment.”
― Campbell R. Harvey, DeFi and the Future of Finance

“Clauses in a smart contract can cause a transaction to fail and thereby revert all previous steps of the transaction; as a result, transactions are atomic. Atomicity is a critical feature of transactions because funds can move between many contracts (i.e., exchange hands) with the knowledge and security that if one of the conditions is not met, the contract terms reset as if the money never left the starting point.”
― Campbell R. Harvey, DeFi and the Future of Finance

“In Ethereum, there are two types of addresses: the externally owned account (EOA) and an address of a contract account. Transactions sent to an EOA can only transfer ETH.1 In Bitcoin, all addresses are EOA. In Ethereum, when data is sent to a contract account, the data are used to execute code in that contract. The transaction may or may not have an accompanying ETH payment for use by the contract.”
― Campbell R. Harvey, DeFi and the Future of Finance

“dApps are like traditional software applications except they live on a decentralized smart contract platform. The primary benefit of these applications is their permissionlessness and censorship resistance. Anyone can use them, and no single body controls them. A separate but related concept is a decentralized autonomous organization (DAO), which has its rules of operation encoded in smart contracts that determine who can execute what behavior or upgrade. It is common for a DAO to have some kind of governance token, which gives an owner some percentage of the vote on future outcomes.”
― Campbell R. Harvey, DeFi and the Future of Finance

“The drawback to non-collateralized stablecoins is that they have a lack of inherent underlying value backing the exchange of their token. In contractions, this can lead to “bank runs,” in which many holders are left with large sums of the token that are no longer worth the peg price.”
― Campbell R. Harvey, DeFi and the Future of Finance