Introductory description

In this class we discuss the emerging areas of Digital Currencies and Decentralized Finance (or DeFi). By utilizing blockchain and smart contract technologies, DeFi provides a new platform for programmable, automated finance services that remove the reliance on central trust and intermediaries.

In this course we will examine the economics of blockchains, decentralized applications like lending protocols and exchanges, and stablecoins, which are the bridge between decentralized and centralized finance. We will also consider alternative applications like the rise of central bank digital currencies.

Students will examine critically the welfare and associated risks of these applications, and compare them to traditional financial markets. In a group project, students conduct a case study and critically evaluate the design of a DeFi protocol.

Module aims

Outline syllabus

This is an indicative module outline only to give an indication of the sort of topics that may be covered. Actual sessions held may differ.

Economics of blockchains
Cryptocurrency pricing (theory+empirics)
Stablecoins
Decentralized Lending Protocols
Decentralized Exchanges
Miscellaneous DeFi innovations (eg. NFTs)
CBDCs
Other Fintech (AI/Crowdfunding/P2P lending)

Learning outcomes

By the end of the module, students should be able to:

• Demonstrate understanding of key design issues of blockchains and DeFi applications.
• Demonstrate understanding of the economics behind different blockchain systems such as proof of work and proof of stake.
• Apply the framework for analysing DeFi to a new protocol and think critically about the efficiency and risks of a protocol.
• Conduct a critical evaluation of Central Bank Digital Currencies (CBDCs).

Indicative reading list

Teaching resources:

Harvey, Campbell R., Ashwin Ramachandran, and Joey Santoro. DeFi and the Future of Finance. John Wiley & Sons, 2021.

Course notes on DeFi at Berkeley: https://defi-learning.org/f22

Course notes on DeFi at Duke: https://people.duke.edu/~charvey/Teaching/562F_2023/562F_Topics.htm

Research element

Students are expected to research a DeFi protocol in depth for a case study. Students are expected to outline the design of the protocol and quantify the efficiency and risks of the protocol.

Interdisciplinary

This module can be taken by students of other majors in economics, mathematical finance, and students in computer science. While it focuses on the economics and finance of these applications, there will be discussion of programmability of blockchains and DeFi applications and an introduction to programming with smart contracts.

Subject specific skills

Apply empirical financial analysis used in traditional finance markets in DeFi.

Analyse the design and stability features of stablecoins.

Assess the design and efficiency of lending protocols and decentralized exchanges.

Critically evaluate the use cases for Central Bank Digital Currency (CBDC).

Transferable skills

Written communication