BA491_Final_Exam_Wks_8-10a - 40q

DApps & DAOs Mini Lesson

• The lesson will cover blockchain layer 2 topics.
• The lesson will address dApps, oracles and dApps, DAOs and Dapps: How to

DApps (Decentralized Applications)

• Web applications are built on top of open, decentralized, peer-to-peer infrastructure services.
• A dApp combines a smart contract and a frontend user interface.
• “App” in a decentralized network describes a DApp.
• The user interface of a DApp works with a smart contract.
• DApps are accessible, transparent, and act like open APIs.
• They can also include a smart contract written by someone else.

Ethereum and dApps

• DApps are decentralized, whereas regular apps are centralized.
• Ethereum is the foundation for over 250 decentralized applications.
• Over 50% of the cryptocurrency market is on Ethereum.
• Ethereum also enables customized software networks for major companies.
• 78% of dApps are on Ethereum.

DApp Characteristics

• Decentralized - dApps operate on Ethereum, which is an open public decentralized platform.
• Deterministic - dApps perform the same function irrespective of the environment in which they get executed.
• Turing complete - dapps can perform any action if given the required resources.
• Isolated - dApps execute in a virtual environment, known as Ethereum Virtual Machine IEVM, so a bug in the smart contract will not affect the normal function of the blockchain network.

DApp Benefits

• DApps have no owners.
• Once deployed to Ethereum, dapp code cannot be taken down, and anyone can use the dapp’s features.
• Even if the team behind the dapp disbands, the dApp can still be in use.
• DApps are free from censorship.
• DApps have built-in payments, one anonymous login, and are backed by cryptography.
• DApps have no downtime and are plug and play.
• DApps offer zero downtime, privacy, and resistance to censorship.
• DApps offer complete data integrity and trustless computation/verifiable behavior.

Oracles and DApps

• Oracles are an important bridge between blockchain networks and external data sources.
• Blockchain oracles are entities that connect blockchains to external systems.
• Oracles enable smart contracts to execute based on inputs and outputs from the real world.
• Oracles connect smart contracts within dApps to off-chain data sources, and are crucial for financial and sensitive operations.
• Oracles offer advanced functionality by creating hybrid smart contracts that combine on-chain and off-chain infrastructure, reacting to real-world events by interacting with regular systems.
• Oracles do all of this without compromising blockchain’s security and decentralization.
• Alice bets $20 on team A and Bob bets $20 on team B for an amount of $40 total held in escrow by smart contract.
• An oracle mechanism captures accurate game results off-chain and delivers them to the blockchain to decide whether to release funds.

DAOs (Decentralized Autonomous Organizations)

• DAOs are community-led digital organizations with no central authorities.
• Members can put forward proposals that other members can vote to accept or reject.
• DAOs run autonomously using smart contracts.
• DAOs have stakeholders for governance and are like investment clubs.

DAOs and Entrepreneurs: Advantages

• DAOs have minimal start-up and operations costs, as there is no need for HR, physical location, managers, etc.
• DAOs are managed by smart contracts, but governance, determining, and creating of smart contracts requires human involvement.
• DAOs have a global reach, and sell tokens to investors.
• There is an ability to raise capital through venture capitalists, investment banks, or angel investors.
• Wyoming is the first state to recognize DAOs as real businesses, affording the same legal protection as Limited Liability Corporations.
• All Blockchain features found in DAOs are immutable, transparent, and publicly verifiable.
• DAOs focus on bringing every type of value to their members and are not owned by shareholders with no profit-at-all-costs maxims.
• The Puget Sound Consumer Co-op can be used an example.

DAO Risks

• "TheDao" was hacked for $60 million, with $8 million recovered.
• Intellectual property and trade secrets can be difficult to protect.
• Some degree of centralization can occur.
• Hard fork was the solution to rollback the blockchain to before the attack on on "TheDao."
• The Ethereum Classic was created.
• The loss was reduced to $8.6 million.
• Cybersecurity firms began specializing in DAOs since 2016.

Example DAOs

• Noise: an alternative to Spotify (music).
• BANK: earns coins for writing articles (podcast).
• RedDAO: for fashion.
• Dream: philanthropy.
• Friends with Benefits (FWB): exclusive social club, pay to enter.
• MetaCartel Venture DAO invests in early-stage decentralized applications.

dApps: How to

• Set up a Web3 wallet from Metamask.
• Connect to the dApp with the wallet.
• Initiate a transaction through the user interface of the dApp.
• Approve the transaction in the wallet.
• Wait for the blockchain to approve and process the transaction.
• Monitor activity.

Connecting to Web3

• Web3 houses decentralized apps, also known as dApps.
• There are decentralized versions of finance tools, games, social media etc., which requires a crypto wallet for access.
• Brave have wallets that are integrated.
• A web3 browser has crypto wallet capabilities with the ability to connects to Web3.

DeFi Protocols

• DeFi protocols are specialized autonomous programs designed to address issues in traditional finance by leveraging blockchain technology.
• These protocols enable various financial services such as trading, lending, borrowing, and yield farming without the need for intermediaries like banks or exchanges.

Protocols Key Components

• DeFi relies heavily on blockchain networks like Ethereum and Solana.
• These blockchains provide a decentralized and immutable ledger for recording transactions and smart contract data.
• Smart Contracts are self-executing programs that automate financial processes based on predefined rules, eliminating the need for intermediaries.
• Decentralized Applications (dApps) interact with blockchains to provide financial services.
• Users can access these services through web interfaces or mobile apps without needing centralized intermediaries.
• Many DeFi protocols are governed by communities using governance tokens for democratic decision-making and updates to the protocols.

Protocols: Examples

• Uniswap: a decentralized exchange (DEX) that facilitates token swaps using automated market-making algorithms.
• Automatic Market Making (AMM) algorithms are sophisticated mathematical models used in decentralized finance (DeFi) to facilitate trading without traditional order books.
• These algorithms enable the creation of liquidity pools, where users can trade digital assets directly against a pool of funds rather than with other traders.
• Aave: a lending protocol allowing users to borrow cryptocurrencies with variable interest rates.
• Maker: issues the stablecoin DAI, collateralized by other cryptocurrencies like Ethereum.
• Curve Finance: a liquidity aggregator for stablecoins and other pegged assets.
• This is a system or platform that collects and consolidates liquidity from multiple sources to provide users with the best possible trading conditions, used across a variety of financials markets.

DeFi Lending

• DeFi lending platforms offer crypto loans in a trustless manner without intermediaries.
• Users can lend coins on the platform, and borrowers can directly take a loan through the decentralized platform.
• Lenders can earn interest, and DeFi has the highest lending growth rate among all decentralized applications (DApps).

Traditional Loans vs DeFi Lending

• Traditional loans require 2-5 business days for processing, and 7-14 days after the initial request for the money to disperse into an individual's account.
• Traditional loans carry an APR of between 5-20% and may include an origination fee.
• DeFi requires digital assets as collateral for cash or stablecoin loans.
• DeFi loans enable users to lend their crypto and earn interest.
• Crypto loans are a way for traders to receive liquid funds without selling their cryptocurrency.
• Banks have always loaned money deposited in accounts, and with DeFi, anyone can become a lender through lending pools, not just the loan offices of traditional banks.

Lending Pool

• A lending pool is the most common way to generate interest on crypto-assets.
• Users pool their assets and distribute those assets to borrowers using smart contracts.
• A lending pool exists as a smart contract, and allows users to deposit and borrow money in turn.
• This also allows businesses to build applications such as lending protocols, savings accounts, along with others.
• Users act as a central account where users can deposit funds, and there are different methods to distribute interest to investors.
• The depositor gets a particular token that can go up or down in value depending on the interest generated.
• Tokenization is unique to the DeFi lending space.
• A token holds the interest generated on a particular deposit.
• By sending that token to a third party, a depositor can share their interest with whoever they choose, and the holder can hold onto those interest tokens for as long or as little as they like.
• Traditional loans have an outstanding balance of all consumer loans in the US is over $17.5 trillion as of Equifax 11/12/24.
• Total crypto market cap is approximately $3 trillion.
• Three types of loans include secured, unsecured, and lines of credit.
• Traditional collateral works as the car itself functions as the collateral with the bank seizing the vehicle if the user stops paying the loan.

How DeFi Lending Works

• A borrower deposits crypto as collateral and obtains crypto loans
• Borrower then repays the loan with interest to to receive crypto
• Borrower receives collateral back after repayment

DeFi Lending: Benefits

• Offers permissionless access, transparency, immutability, self-custody, interoperability, and programmability.
• The lender holds collateral, and has a smart contract, resulting in transparency.

DeFi Borrowing

• DeFi Borrowing: You can potentially receive access to loans outside US and have protection of proceeds from loans as well as preserve personal privacy.
• Coin hodlers can receive USD for short-term purposes (cover an unexpected expense).
• Hodlers can purchase more crypto with loans, and often will receive a much lower interest rate as opposed to a traditional bank.
• The loan terms can be anywhere from seven days to a year or more utilizing smart contracts to deposit the amount of at least equal value to the loan.
• Loan terms can be as short as seven days, or exceed a year.
• Collateral is available in a wide variety for any crypto to use for exchange.
• Borrow up to 50% of crypto's value with a lender like Binance, or up to 90% with a lender like Youholder.com.
• For every 100 DAI, the maker DAO requires at least 150% loan value, the borrower will need to collateralize the loan with $150 in ETH, and if it reduces under this amount, you will be subjected to liquidation penalty.
• A crypto loan is a way for traders to receive liquid funds without selling their cryptocurrency.

DeFi Borrowing Risks (Borrower)

• How collateral is being stored and the vulnerability, by depositing funds to a provider, control of the asset being lost, and responsibility for protecting the crypto.
• A company utilizing cold storage wallets can also have has insurance, and has a history of avoiding hacks.
• A potential margin call could create a liquidated event.
• Borrow an amount that will allow more collateral.

DeFi Staking

• A way to earn financial rewards with a relatively safe investment
• Depositing 32 ETH activates validator software
• Validators store and processes data and transactions as well as add new blocks
• Validators keeps Ethereum secure for everyone and earns new ETH in the process
• This process is known as proof-of-stake (POS)
• Network rewards stakers for allowing their holdings to be used as validators
• ETH miners can make money through the reward of 2 ETH they are paid for mining a block, from gas fees paid for transactions (paying for computer power), and from value miners extract by inserting (or not inserting) transactions at specific points in the block.

DeFi Staking: Benefits

• Less risk than DeFi
• Since the Merge, Ethereum, the No. 2 cryptocurrency, represents a major new opportunity
• Current rewards are between 4% and 5%

How to Stake ETH

• Become a validator by requiring 32 ETH, which will become locked up indefinitely. Requires computer running Linux OS
• Staking as a Service requires 32 ETH to pay for computer service.
• Use an exchange where a CEX facilitates the staking process.
• Pool ETH holders to stake the 32 ETH

More on Staking

• Choose a crypto or coin to stake as well as learn the minimum staking requirements, then download the software wallet for desired coin, and figure out what hardware to use.
• Ethereum has a set standard of 32ETH, and download is available across most sites.
• To stake crypto, users need a constant, uninterrupted internet connection
• Open-source blockchain networks and Cosmos are also common methods.

Popular Crypto Staking Coins

• Etherium (ETH)
• EOS is similar to Ethereum in that it's used to support decentralized programs. EOS tokens are native to the EOS blockchain
• Tezos (XTZ).
• Open-source blockchain network with its own native currency
• Cosmos (ATOM) calls itself the “internet of blockchains." seeks to bring different blockchains together to transact with one another ("interoperability")
• Cardano (ADA) is a smart contract platform much like Ethereum, offers Multi-layered platform, and one layer for the transaction of the ADA coin
• Polkadot (DOT) is similar to Cosmos, hopes to provide interoperability designed to support "parachains,” created August 2020

DeFi: Yield Farming

• This provides liquidity to various DeFi protocols (liquidity mining)
• Involves depositing cryptocurrency assets into liquidity pools or lending protocols to earn rewards
• Rewards include transaction fees, governance tokens, or additional cryptocurrencies
• This process is facilitated by smart contracts and automated market makers (AMMs) like Uniswap or SushiSwap

Yield Farming: Key Components

• Cryptocurrency: The assets used for yield farming, such as Ethereum or stablecoins.
• Liquidity Pools: Smart contracts that hold funds to facilitate token swaps and lending.
• LP Tokens: Tokens received by liquidity providers represent their share of the pool.
• Smart Contracts: Automate the distribution of rewards and management of liquidity pools

Yield Farming: How It Works

• Select a platform such as Choose a DeFi platform like Curve or Compound.
• Provide Liquidity by depositing a pair of tokens into a liquidity pool.
• Receive LP Tokens and get tokens representing your share of the pool.
• Stake LP Tokens to earn additional rewards on other platforms.
• Claim Periodically withdraw or reinvest your earnings.

Yield Farming: Benefits and Risks

• They offer a passive income and potentially high yields compared to traditional investments.
• It includes impermanent loss, smart contract vulnerabilities, and market volatility.

DeFi Lending: Major Hacks and Scams

• Types of scams and hacks include cross-chain bridge, staking pools, exchange hacks, and phishing attacks.
• The use of a decentralized structure also lowers the chance of malicious attacks, as data is spread across a network and is not kept in one central location.

DeFi: Why Cybercriminals Conduct Scams

• Some scams also involve scammers getting in touch with other DeFi users to inform them of a seemingly lucrative investment opportunity.
• Rug pulls start with a new project or token, Developers promoting marketing, until begin to increase in price demand.
• This sees actors sell the tokens, the demand plummets, the price of the token goes with it.
• A honeypot scheme is specifically designed to lure in victims that are particularly effective in DeFi.
• scammer will use a smart contract that appears to be able to make investors a sizable profit.
• It tricks people into thinking they can drain crypto from it with a small initial investment as they are simply handing money to scammers.

DeFi: Crypto NFT Scams

• Involves selling a buyer a fake NFT, and on the surface, a legitimate and phony NFT look identical. Less experienced buyers can easily spend a large amount on something with no worth.
• Marketplaces such as OpenSea and Rarible, are used by cybercriminals to sell fake NFTs; checking the properties and transaction history determine properties.
• Crypto Phishing can be used to scam DeFi users as malicious actors will message one pretending to be an exchange user asking for details to be resolved and provide a link to a phony login page grabbing account information.
• Read a project's white paper and see if code has been audited, and be alert on large promises that cannot be fulfilled.

DeFi Lending: Protecting Yourself (CoinDesk)

• Verify the team's credibility on other projects by diligently reading through a project's white paper.
• Check to see if the project's code has been audited by a third party, and be alert to potential red flags like overspending on promotions and unrealistic projected returns.

DeFi Safety Measures

• Ensure two factor authentication is enabled across all platforms, and implement hardware wallets to have increased levels of securities.
• Users are recommended to not use online wallets due to security.
• There is a security concern for the funds of users, projects such as DeFi should have active developers to make sure.

Summary

• DeFi: Decentralized Finance is not just a technological trend, but a fundamental reimagining of financial services.
• Decentralization, transparency, and programmability that underpin DeFi have the potential to disrupt traditional financial systems.
• While DeFi offers exciting possibilities, it also comes with significant risks and challenges that must be carefully considered.

DeFi: Core Principles and Benefits

• Decentralization eliminates intermediaries
• Transparency displays transparency and immutability
• Accessibility enables anyone with an internet connection to participate in activities
• Efficiency executes transactions quickly and automatically via smart contracts

DeFi: Emerging Trends

• There is increasing focus on safety and lower-risk yield opportunities.
• There is continued growth in staking and secured lending as primary DeFi activities.
• This requires bridging the gap between DeFi and traditional financial systems to offer hybrid financial products.

Crypto Analytics: Total Value Locked

• Crucial metric in the cryptocurrency and decentralized finance (DeFi) space
• Represents the total amount of assets locked or staked in a particular protocol or platform, typically expressed in US dollars
• Serves as an indicator of the overall health, popularity, and security of a DeFi project.

Decisions Influenced by TVL

• Platform popularity: Higher TVL generally indicates greater user trust and confidence in the platform's security and reliability.
• Liquidity: More TVL often means better liquidity, leading to easier trading with less price slippage.
• Growth potential: Increasing TVL may signal a project's growing adoption and popularity.
• Staking rewards: Higher TVL can lead to more significant staking rewards, which might attract investors.

TVL vs. Market Cap

• TVL measures the value of assets locked within a protocol or platform
• Market Cap represents the total value of a cryptocurrency's circulating supply, calculated by multiplying the current price by the number of coins in circulation
• A project can have a high TVL but a relatively low market cap if its token is undervalued or vice versa
• The market cap to TVL ratio is often used to assess whether a token is potentially overvalued (ratio > 1.0) or undervalued (ratio < 1.0) and is found on CoinMarketCap.

FTX: History

• Avoid cognitive biases and logical fallacies
• When claims are good to be true, evaluate who the principal is
• Consider what independent audit is in place

Cognitive Biases (Troublesome to Financial Health)

• Dunning-Kruger Effect: Overestimating expertise with little knowledge.
• Confirmation Bias: Seeking only supporting information and rejecting contrary arguments.
• Sunk Cost Fallacy: Investing more because of previous investment.
• Backfire Effect: Strengthening beliefs when challenged.
• In-group bias: Favoring investments of a similar group.
• Halo Effect: Assuming expertise transfers across areas.
• Temporal discounting: Prioritizing immediate payoffs.
• Expedience bias: Trusting investments that feel right.
• Experience bias: Relying on personal perceptions.
• FOMO: Fear of missing out.
• Optimism bias: Overconfidence in positive outcomes.
• Personal incredulity: Dismissing objections due to lack of understanding.

Logical Fallacies (Troublesome to Financial Health)

• Anecdotal evidence: Using subjective stories instead of objective evidence.
• Appeal to authority: Believing claims based on "expert" endorsement without qualification.
• Appeal to emotion: Manipulating emotions instead of presenting facts.
• Bandwagon argument: Claiming validity because "everyone is doing it."
• Burden of Proof: Asserting truth because it hasn't been disproven.
• Card stacking: Highlighting supportive arguments while omitting counterarguments. Strawman
• Presenting