1

Project

On

Decentralised Finance: a deeper look into Smart Contracts and

understanding the future of Finance

Submitted towards the completion of the Course Project 1 Semester IV

Of

Bachelors of Business Administration

Of

Symbiosis Centre for Management Studies

Batch: 2021-24

Under the supervision of

Dr, Sharmiladevi J.C.

Submitted by

Samay Sharma

PRN 21020621336
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Acknowledgement

I would like to express my sincerest gratitude to my Faculty Supervisor for the Project 2
Research Paper Component for Semester 5, Dr. Sharmiladevi J.C. Without her guidance and
support throughout the course of the component, starting with proposal of a research topic to
final submission, this research paper would not have been successfully completed and
submitted.

I want to thank Director, SCMS Pune – Dr Adya Sharma for her initiative to inculcate
research ability in students by including this compulsory research paper component in the
course. This component has not only enhanced my expertise in writing a research paper but it
has also helped me obtain in-depth information about the research topic.

Lastly, I would like to extend my gratitude to all the authors and facilitators of the sources
from which I drew inspiration for my research paper. Without the treasure trove of
information provided by these sources; my research paper would not have been successful.

Samay Sharma
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Executive Summary

The lucrative technologies develop everyday and promises to be the next breakthrough

in the world. However, most of them turn out to be a fad and often create an economic bubble

and bursts when the technology doesn’t deliver. This research paper aims to break-down the

myths that people have about DeFi and its implications, the paper aims to drive deeper into the

subject of Smart contracts and the various protocols that the smart contract ETH works on.

Furthermore, the paper aims to find new markets for smart contract, taking old markets as

building blocks and finding innovative solutions over how the smart contract and ‘Blockchain’

in general can solve the day-to-day problems of these markets.

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TABLE OF CONTENTS

Sr. no Content Pg. no,

1. Introduction 7

2. Literature Review 8

3. Research Methodology 15

2. Chapter 1; debunking myths regarding DeFi 16

3. Chapter 2: Smart Contracts 18

4. Chapter 3: Tokens 19

5. Chapter 4: Custody or functions of smart contracts 20

6. Chapter 5: Smart Contract usages and incentives 25

7. References 28

8. Plagiarism report 30
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Introduction

The world of DeFi promises to be a lucrative space for further expansion of humanity.

However, with the concept of blockchains being as old as early 2014s, the technology looks

suspicious after low returns on the heavy investments.

This led to a debate; as blockchain was seen as something as revolutionary as the

internet, even after 12 years of its implementation, the technology is yet to make a mark on the

logistics sector, and is yet to fulfil the expectations and dreams that novice engineers claimed

to build the hype. The underlying problems always remained the same behind all the false

pretence of young non-seasoned engineers, claiming blockchain as a dreamy one-for all

solution. This research paper aims to provide a realistic view of the current blockchain

technology and pour light about the Smart contracts and their usage in finance.
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Literature Review

Author Title Source Findings

Vitalik The road not taken Published on The paper aims to find out the

Buterin Vitalik.eth.limo, problems that the current

one of the most technology has and the steps that

trusted crypto could’ve been taken in the past to

philosophy solve the issues we are facing

paper. today. The problem in eth comes

in choosing between how to

present it, a pure and simple

blockchain that offers safety and

simplicity or something complex

that can be a basis for building

some advanced applications.

Ittay Eyal, Majority is not Communications The research paper deals

Emin Gun enough, bitcoin of the ACM, with the disappointments in the

Sirer mining is Volume 61, continuous mining game plan of

vulnerable Issue 7 bitcoin. I have refered to various

deformities of the system from

this assessment paper. The

Bitcoin modernized cash keeps

 9

its exchanges a public log called

the blockchain. Security lays

basically on the appropriate show

stays mindful of the blockchain,

run by people called excavators.

We present an assault with which

plotting diggers' compensation is

more noteworthy than their

reasonable part. The assault can

have gigantic repercussions for

Bitcoin: Rational diggers will

seize the opportunity to join the

aggressors, and the plotting social

event will increment in size until

it changes into a bigger part.

Right now, the Bitcoin situation

forgets to be a decentralized cash.

But assuming specific questions

are made, bigoted digging might

be possible for any organization

size of plotting excavators.

Stuart D. An Introduction to Published in The smart contracts go about as

Levi and Smart Contracts Harvard Loi an excellent diagram of "Amara's

Alex B. and Their Potentiel School Forum on Law," the speculation set out by

Lipton PC specialist Roy Amara of

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and Inherent Corporate Stanford University that says

Limitations Governance people much of the time

misconstrue new development

briefly and underestimate it in a

long time. Splendid arrangements

can alter the award and inspiration

structure that coordinates how

social events contract from this

point forward, in spite of the way

that they ought to make before

they are overall took on for

creation use in tangled business

joint efforts. In view of that, and

remembering that considering

adroit arrangements, it's essential

to think past how current

considerations and legitimate

plans can be moved to this new

development. In light of

everything, absolutely new ideal

models we have not yet imagined

will accomplish the authentic

turmoil in astute arrangements.

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Gilcrest Jack Smart Contracts: Published on Even while smart contracts need

Legal Web of Sciences to mature before they are widely

Considerations adopted for production usage in

complex business interactions,

they have the ability to change the

reward and incentive system that

now governs how parties enter

into contracts. To that reason, it's

important to think beyond how

existing concepts and

organisational structures can be

adapted to this new technology

when considering smart contracts.

The actual revolution in smart

contracts will instead be driven by

brand-new paradigms that we

haven't yet begun to fathom.

Vinny The New Financial Published on oct The article aims to give insights

Lingham Revolution 13, 2017 in over why the dream of bringing a

Medium revolutionized financial system is

way closer than it seems to be,

nobody know that are we in a

bubble or not. Nobody knows!

The early investors earning a lot

from the debut of NFT’s and the

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craze of dApps and in general the

high rewards that DeFi gives. It

dives in deep over investing in

such exchanges and mempools

and the direct effect on economies

over the world.

Vigilotti What Do We Mean Web of Sciences The majority of our professional

M.G. by Smart and personal lives are governed by

Contracts? Open contracts, which allow modern

Challenges in society to function. To different

Smart Contracts people, the term "Smart

Contract," which was first used in

1994 by Nick Szabo, signifies

different things. This editorial

viewpoint examines the

definitions of the phrase "smart

contract" and the issues

surrounding its legality. Although

we are accustomed to contracts

that are written in normal

language, the nature of our

connections with smart contracts

is still unclear. The development

and prospects for the

implementation of smart contracts

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appear to have been expedited by

the introduction of blockchain

technology. In order to favourably

impact future development, the

editorial's goal is to establish an

interdisciplinary area where

computer scientists and legal

professionals can engage in a

productive discussion on smart

contracts.

Jimmy Song Why Blockchain is Published on "Blockchain, not Bitcoin" is

not the answer Medium certainly not a groundbreaking

thought. The beyond five years

have created nothing with this

purported "blockchain"

innovation and we're probably not

going to see anything in the

following five. The main thing

that blockchain is by all accounts

great at is promising to fix the

most serious issues while

conveying very little and

consuming enormous capital.

Blockchain is an answer

searching for an issue. Such a

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large number of individuals have

been taken in by "blockchain" and

profess to see garments on a bare

ruler. The nonexistent garments

might seem like ideal answers for

the most serious issues of their

industry. Sadly, living in fantasy

land isn't reality.

Blockchain without Bitcoin is a

major big letdown.

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Research Methodology

The research methodology used for the purpose of this research paper was the amalgam
research methodology that combines both the Quantitative and Qualitative research
methodologies. The type of research methodology is Derivational.

Instruments of research Methodology:

1. Online Research methods: available on the web for the purpose of research. These
have helped in drawing various useful data points and insights into the topic.
2. Seeking guidance from industry experts and professors: I mailed various people for
seeking guidance and insights in the topic, a few professors and professionals guided
me towards datasets which helped me collect information required for this project.
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Chapter 1: Debunking myths regarding DeFi

Many people have high hopes from the data-driven DeFi technology and blockchain networks.
The hype created during the 20115s have given very high hopes to people in the sector of
medicine, logistics and finance. For example, the expectations of logistics sector are to build a
framework that could pin-point every stage of processing the product has been going through
in real-time. However, the underlying problem lies in the number of oracles nd regulators, this
cannot be implemented until there’s a huge capital and a centralized regulator. Moreover, the
analysability of Turing also poses a problem in making this dream technology work. Hence
below listed are the verified problems that DeFi as a system solves:

Problems that DeFi solves:

1. Inefficiency: can do a significant amount of transactions in a relatively short amount of time.

DeFi offers reusable smart contracts, akin to dApps, which have been aimed at carrying out
specific jobs.

Everyone who wishes to accomplish that job has access to dApps.

The issue of high gas prices arises because it's difficult with the state of technology to provide
such services at a very low or negligible cost.

2. No organization overhead: a user can primarily self-serve himself, it's open for everybody,
no need for go-betweens, long time to process payments, etc. once a contract is there, it exists
indefinitely in the blockchain.

3. Limited access: DeFi and financial democracy. It allows people who are underbanked or
unbanked to use financial services.
In DeFi, it doesn't matter who you are. Everyone is a peer, and every transaction is treated
identically. The rate of borrowing is so high in the centralized financial system, and it is because
of the fixed cost related to the centralized space. Defi gets rid of the static cost problem; hence
it becomes possible to increase the saving rate and decrease the borrowing rates.
Anyone can pour money into LIQUIDITY Pool and earn interest from it, which is very high
than the rates any bank offers.
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4. Opacity: Traditional finance is not usually that transparent, only the regulator and some
individuals know exactly what is happening. So, we need to trust that regulator is providing
accurate information, and the regulator has to assume that companies are providing accurate
information.

Smart contracts hold balance and they are transparent. Anybody can check the balance;
anybody can see how much someone has. It's also possible to read the agreement as it is present
universally. There's no fine print, it is in algorithm and very clear what provides what.
In centralized finance, small players face legal misfortunes when some big player decides to.
The contracts are very big and very complicated. This new space is much different.

5. Centralized control: In almost all traditional finance, a central bank at the highest level exerts
control over the money supply and virtually holds a monopoly over nearly everything,
including the best investment opportunities.

In DeFi, control is exercised using immutable and transparent protocols. Inflation and deflation
are controlled by the community's stakeholders or even predefined algorithms.

Any user can simply develop a less centralised version by copying the code if a dApp includes
any special privileges for the administrator.

In other words, if there is a good idea out there that isn't already decentralised, it can be taken,
forked, and made decentralised.

6. Lack of interoperability: It’s hard to integrate banks in the TradFi.

DeFi has the ability to use asset tokenization to increase liquidity in typically illiquid assets.
This concept can be expanded upon to grant partial ownership to sparse assets like intriguing
craftsmanship.The tokens can be utilized as an insurance for some other defi administration
like influence or subsidiaries.

There come some problems with tokenization of physical assets. Such as gold. If gold is to be
tokenized, it has to be stored in a vault and has to be regularly audited. And there is a cost
related to storage and maintenance, security etc.
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Chapter 2: Smart Contracts

In essence, smart contracts are blockchain-based programmes that execute when specific
criteria are met. They are extensively applied to automate the execution of an agreement so that
all parties may instantly be certain of the result, without the involvement of delegates or loss
of time.
There are two types of accounts in blockchain:

1. Externally owned account (EOA): Its very straightforward to send one token on the
Ethereum blockchain to one address.
2. Smart Contract code account; it is a smart contract that lives on every node on the
blockchain. It is an algorithm.
There are a few properties of a smart contract, that one should keep in mind:

1. Smart contracts are forkable: You can copy the code of a smart contract, improve it,
and publish it as your own. We don't need to start from the bottom up; we can take our
idea and implement it on the pre-existing dApps.
2. Vampirism: Anyone can copy the technology in the DeFi space, and the users get the
best deal.
3. Atomicity: The contracts are atomic.
i.) Transactions are atomic because smart contract clauses have the power to
invalidate a transaction and undo all of its prior stages.
ii.) Atomicity is a key component of transactions because it enables money to flow
between several contracts (i.e., "change hands") well with assurance that if one of the
conditions is not satisfied, the terms of the contract will be reset as if the money had
never left the basic framework.

How does smart contract function?

An end user creates an externally owned account (EOA) at the beginning of a single transaction,
but before it is complete, it engages with many dApps (or any ethereum smart contract).

The transaction starts with interacting with a single contract that will specify all of the
intermediate steps in the transaction that are expected within the contractual object.
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Chapter 3: Tokens- the factor that keeps Smart Contracts running

I. Fungible Tokens
These are the tokens functioning on the ERC-20 protocol, hence they are divisible,

identical and hold the same value as their counterpart.

ERC-20 Functionality: The Ethereum Request for Comment. This is a protocol can be

used by anybody to launch a token. Every single token is identical in value in this. The

token created can interact with any smart contract easily. ERC 20 interface has a basic

functionality like:

• totalSupply()- used to understand how many tokens are in exchange.

• TransferFrom(from address, to address, amount)- used to interchange amounts

• BalanceOf(address)- used to read balances

• approve(owner, spender ERC-, amount)- gives permission to spend the money

they have in the wallet.

The following comes under fungible token category:

1. Equity token: An equity token displays the ownership stake or equity in a pool
of underlying assets. The token's value might grow in the future. Actually,
there are a lot more mechanics that can be included in the asset pool a contract
that holds a multi-asset pool and has a complex fee structure, a variable
interest rate algorithm, or a standard interface for creating equity
cryptocurrencies with either static or dynamic holdings (set protocol).

2. Utility Tokens: This token is necessary in order to use a specific contract. The
usefulness of the smart contract hence determines the value of this coin. For
instance, one might act as collateral, reflect one's reputation or stake, maintain
constant value in relation to the underlying (like Dai or Synthetix. synth), or
pay application-specific costs.

3. Governance token: They resemble equity tokens in certain ways; however

ownership of governance tokens pertains to voting rights rather than asset
ownership. Many embedded provisions in smart contracts specify how the
system may evolve. For instance, permitted changes can involve modifying
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parameters, including new components, or even changing how current

components work. A governance token can be launched using a static supply,
an inflationary supply, or even a deflationary supply.

II. Non-Fungible tokens

Similar to ERC 20, they are produced using ERC 721. Every unit has a distinct ID of its own.
Deed, which is their other term, suggests that their use case represents distinct ownership of
unitary assets. NFTs can also signify a lottery ticket or a collectible.
A loan agreement is similar to a deed.
By demonstrating ownership using the ERC 721 protocol, NFTs have revitalised the art.

ERC 1155- For ERC 20 and ERC 721, they call for the adoption of a unique contract and
address on the blockchain. By implementing a multi token paradigm in which the contract
keeps balances for a variable number of tokens, some of which may or may not be fungible,
ERC 1155 reduces the complexity. If you have a lot of tokens, this can be a nuisance.

Chapter 4: Custody; the functions of Smart Contracts

All the smart contracts (assumed to be working on ETH), has

1. Escrow: Most critical thing in a smart contract is the ability to escrow. A smart

contract can embed an escrow or custody funds in itself.

Escrow calls for a lot of new ideas:

i.) Carrying out incentives and collecting fees

ii.) A better use for token swamps

iii.) Carrying out various bids and auctions

iv.) Help facilitating collateralized loans

v.) Market making of a bonding curve

vi.) Insurance

Escrow runs the danger of leaving money unreleased if the contract has no embedded

method to do so for the amounts related to that particular token.

2. Supply adjustments:
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i.) Burn

Burning means removing it from circulation. It is possible to do so in two ways:

a) Send a token manually to an unowned eth address.

b) More efficient way is to create a closed smart contract.

ii.) Burn mistakes: sometimes ETH and ERC-20 coins get burned by mistake.

iii.) Checksums are a technique for avoiding accidental burned.

These are cryptographic primitives used to verify data integrity.

•In the context of Ethereum addresses, EIP-55 propose a specific checksum

encoding of addresses to stop incorrect addresses' receiving token

transfers.

•If an address used for a token transfer does not include the correct

checksum metadata, the contract assumes the address was mistyped and

the transaction would fail.

Why burn?

i.) Represent existing of a pool and redemption of underlying

ii.) Increase scarcity to increase the price

iii.) Penalize bad acting.

3. Minting (increasing supply):

i.) The mechanism of the smart contract must be directly coded through any

minting mechanics.

ii.) Minting has diverse applications since it may encourage a variety of user

behaviours.
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4. Bonding curve: A bonding curve is the relationship in price between the

quantity of tokens and the price of an asset used to buy tokens.

A mathematical function or an algorithm with distinct clauses is used to describe the

relationship.).

Linear bonding curve:

i.) Let TKN represent fhe cost of an ETH-denominated token, and S for all of its

supply.

ii.) For the simplest bonding curve TKN=1, i.e. TKN=ETH.

iii.) This algorithmically helps to ensure that ETH and TKN are pegged at one to

one.

Next, think of a simple linear bonding curve, where m and b stand for the slope and

intercept of a typical linear function, respectively.

The first TKN would cost 1 ETH, the second would cost 2 ETH, etc. if m=1 and b=0.

Early investors benefit from a bonding curve that increases monotonically because

they can sell back against the curve at a greater price if demand increases above their
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purchase price.

Mechanics of a linear bonding curve

A linear bonding curve can be represented by a single smart contract that offers buy and sell

options for the token it underlies.

The bonding curve escrows incoming cash when traders buy the token in preparation for a

hypothetical future where a trader could wish to sell back against the curve.

Both an unbounded supply with the bonding curve as an authorised minter and a maximum

supply that is escrowed in the bonding curve contract are options for the token to be sold.

There is no broker involved it’s all happening according to a smart contract.

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b.) Super linear bonding curve/ Sigmoid Curve

TKN=S2

Such contracts benefit early investors for finding and investing in the project early on.

The initial benefits are very high and the resell value of the token gets high.
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Chapter 5: Smart contract usages and Incentives

The era of decentralization of finance and further flourishment of technology has

opened new opportunities. With a lot of false rumours about the usages, the following usages

of blockchain and smart contracts are verified:

1. Trading activities: With current technology, simple if, then statements are helpful to

make a simple trade contract which can help trading activities to be carried out quicker.

2. Digital identity: A smart contract can be bound to a personal key and can be used to

store various data regarding an individual, only accessible to the individual. This help

maintain a digital identity if it gets encrypted, and various DAOs have been up and running

for such projects, for example, Decentraland.

3. Cross Border Payments: This is a global use of smart contracts, cross border payments

have always been a hassle for the banks because of exchange rates, forex, etc. The problem

can be easily solved if there is a universal code of conduct that is regulated by code instead

of humans. A smart contract can be easily used to make hassle free cross border payments.

4. Providing loans and mortgages::

5. Managing Supply Chain: A smart contract implemented on the node of a blockchain

can record and verify various actions done in the blockchain. Integrating supply chain with

the blockchain and having a smart contract established is feasible with the current

technology. Blockcahins such as OriginTrails, Skuchain and Syncfab are already being

used for such cases in the west.

Despite being a decentralised way of carrying out deeds, there are still a lot of people

involved who keep the system up and working. They include- miners, keepers, developers,

etc.- they need to be incentivized for their actions.

Incentives go into one of two categories:

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1. Stake incentives: These incentives apply to the total amount of tokens held in a smart

contract.

2. Direct incentive: this one is for system users who don't have a balance that is being kept safe.

STAKING RREWARD: it is when you put money into the pool and get a bonus for it. The

reward may be anything, a token, a diff token, a governance token, a pro rata reward etc.

Slashing is the process of taking away a portion of a recipient's staked balance, generating a

less appealing staked incentive. Slashes might be either complete or partial.

KEEPER: A kind of EOA known as a keeper in the DeFi protocol or other dApps is the

beneficiary who is rewarded for doing a certain task.

Direct rewards and KEEPERS:

1. Direct incentives known as direct rewards include payments or fees related to user

action. All Ethereum interactions start with a transaction, which always starts with an account

that is not held by the user.

2. Whether a human controls an EOA or an off-chain bot , it is always an off chain.

3. Therefore, autonomous market condition monitoring is either prohibitively expensive

or not physically possible.

4. Because of this, no transaction on ETH ever occurs automatically without being

initiated consciously.

Keepers keep the system running. A fee, either flat or as a proportion of the executed action, is

paid to the keeper as compensation.

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To ensure competition and the best price, keeper rewards may also be set up as an auction.

Because practically all of the information accessible in the system is public, keeper auctions

are extremely competitive.

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Plagiarism report

The plagiarism report by Turinitin, states that this research paper has 8% plagiarism, having

most of its plagiarism in references and static definitions.