Topic 1: Emerging Topics Flashcards
What is a stable coin and what is its key purpose in the DeFi system?
Stablecoin is an asset whose value is pegged to traditional currency. Its key purpose is to fulfil financial contracts which require low volatility assets.
Define NFT
- blockchain-based tokens that each represent a unique asset
- irrevocable digital certificate of ownership and authenticity for a given asset, whether digital or physical
Define walled garden and its implication for liquidity and arbitrage trading
Early decentralized exchanges were implemented as “walled gardens” with no interactions between the different exchanges and no shared liquidity.
This resulted in low transaction volumes, large bid/ask spreads, high network fees, and slow movement of funds between exchanges, which created barriers to arbitrage trading.
Define flash loan
Unsecured loans available on decentralised loan platforms
Loans must be repaid atomically; ie borrower receives and repays within the same blockchain transaction. if not, then the whole transaction is invalid.
Peer to peer protocol
- query on network for counterparts who wants to trade a specific pair of crypto assets, negotiating the exchange rate bilaterally before execution
Define Constant function market maker (CFFM)
smart contract liquidity pool that holds at least two cryptoassets in reserve and allows users to trade between two cryptoassets, with the exchange rate determined by a constant product model
In a CFFM, what is the relationship between two tokens
Model of two token reserves is constantI
In CFFM, what is the token reserve curve
Convex
In CFFM, what’s the relationship between price of token and supply
Low supply = expensive token
What is the 0x crypto ecosystem?
- open sourced
- decentralised exchange infra
- low friction peer to peer exchange of tokenised assets on multiple ETH block chains
The three steps of trading process of the 0x ecosystem
- Makers submit pre-signed orders to relayer to be included in the relayers’ off chain order book
- Potential takers query the order book and select one of the orders
- Takers sign and submit to the smart contract, triggering atomic exchange
In collateralised debt market, difference between P2P matching and pooled loans
- Pooled: Variable interest rates determined by supply and demand
- In P2P matching, parties agree on fixed rate and time period for loan repayment
Advantages and disadvantages of a centralised exchange
ADV: efficiency
DISADV:
- exposed to potential cyber attack
- loss due to dishonest operator
What is the DeFi stack?
Settlement - block chain and native asset protocol which ensures network stores ownership info securely
Asset
Protocol
App
Aggregation
Advantages of smart contracts
- secure
- run of DeFi blockchain (no need for intermediary)
- executed automatically based on a set of criteria
What is a price oracle
- mechanism that provides asset prices to a blockchain
- blockchains are isolated ecosystems, no direct way of querying external data
- API to fetch asset prices from centralised exchanges
key risks of DeFi ecosystem
- operational security
- dependencies
- external data
- illicit activity / bad actors
- scalability / use of energy
- smart contract execution
What is a collateralised debt position and the key steps involved to creating a CDP and how a CDP is closed
- cryptocurrency asset is leveraged to create stable coin (e.g. DAI in MakerDAO)
- issues new token without the need for a counterparty
- to create the tokens, user deposits crypto assets in mart contract as collateral (at min. ratio)
Advantages and Disadvantages of “on-chain” collateral
ADV: transparency
DISADV: depend on the state of the blockchain for validity, e.g. Maker DAI and can be volatile
e.g. algo stablecoins are not fully backed by collateral but using reserves in on-chain assets and issues/redeems stable coins to match demand
How does MakerDAO address the issue of high volatility of ETH
DAI requires overcollateralisation of ETH upon issuance
If the value of ETH falls below min. threshold 150% of DAI, smart contract will auction off ETH to cancel the debt in DAI
What is the role of price relayers
Maintain order book that providers taker information needed to find orders they want to match
Benefits of decentralised exchanges compared to centralised exchanges
Decentralised exchanges mitigate CP risk by allowing users to remain in control of assets until transaction is executed
Trades exec atomically via smart contract; indivisible transaction
What is an inverse token
- inverse of the performance of reference asset
- used to obtain short exposure
opportunities in DeFi
- Composability: apps and protocols being combined to create new services, flexibility for financial engineering
- Accessibility
- Transparency
- Efficiency
Difference between asset based and event based derivatives tokens
Asset based: references performance of an asset
Event based: depends on any observable variable
What is the blockchain trilemma
Scalability
Security
Decentralisation
Describe operational security risk in DeFi
Protocols and applications use admin keys which permit a pre-defined group of individuals to upgrade contracts and perform emergency shutdowns
If they are malicious / pursue own financial interests, then place user assets at risk of loss
Three backing models used for promise-based tokens
- no collateral
- off-chain collateral
- on-chain collateral
name a protocol for a decentralised exchange that uses off-chain order books
0x
Difference between collateralised debt position (CDP) and collateralised debt markets
CDP: create new token
Market: using existing token to borrow crypto form another party
Drawbacks of Bitcoin DeFi
- only simple currency-based transactions can be carried out
- expensive/slow
- not interoperable between blockchains