Throughout the semester we have been learning about CeFi, the centralized financial system, where the central bank and financial intermediaries play key roles in determining the money supply, interest rate, and inflation. However, the exponential growth of DeFi industry, the decentralized finance industry, from about $700 million in 2020 to about $40 billion in 2021, makes it imperative for us to learn and understand the characteristics and risks associated with the nascent financial system. This research project attempts to provide an opportunity for students to take a deep dive into the DeFi ecosystem from diverse perspectives and arrive at a conclusion as to how to respond to the major disruption to the traditional financial system as a participant in the financial market.

Please do thorough research online and produce a report in a Word file containing answers to all of the following questions. Make sure to provide in-text references not end-text references to your readings. A minimum of 10 online references is required.

1. What is CeFi? What is DeFi? What are the pros and cons of DeFi relative to CeFi ?

2. A growing number of DeFi projects have been developed to offer a full range of financial services. Please conduct thorough research online and describe in detail one DeFi project that is most appealing to you for each of the following services, and elaborate on why the project is the most appealing one for the specific service:

a. Lending and borrowing

b. Stable coins

c. Decentralized exchanges

d. Derivatives

e. Margin trading

f. Insurance

Check out the following youtube video, a helpful resource for this question, https://www.youtube.com/watch?v=k9HYC0EJU6E&list=RDCMUCh1ob28ceGdqohUnR7vBACA&index=1&ab_channel=Finematics

3. Two important metrics to measure DeFi’s performance are the Market Cap / TVL ratio and Fees / TVL ratio. For each of the 6 DeFi projects you described in detail in question (3), calculate its Market cap / TVL and Fee / TVL ratios using the most recent daily 0r 24h data. Please show calculation details in the Word file. (A helpful data source of Mcap/TVL and Fees can be found here https://defillama.com/. )

a. Market cap / Total Value Locked (TVL) ratio is used to measure under/over-valuation relative to user capital allocated. In a particular marketplace, TVL is the sum of total liquidity in the liquidity pool. Market Cap is calculated by multiplying the circulating supply of tokens by their price in USD. As a rule of thumb, the lower the Market Cap / TVL ratio, the more undervalued a DeFi project is, and vice versa.

b. Fees / TVL ratio is used to measure the efficiency of a protocol relative to the protocol’s liquidity. Every time a trade is executed on a DeFi project, liquidity providers (LPs) earn fees proportional to the amount of liquidity they have supplied. A higher Fees / TVL ratio indicates higher fee generation per dollar locked.

c. Based on calculations in (a) and (b), which DeFi service or project seems to be able to generate higher fees for participants while tends to be undervalued by the market? (Note that investors always seek to invest in undervalued DeFi projects with high efficiency in generating returns.)

4. Research about the recent FTX bankruptcy. Use your own words to explain the FTX collapse. How did the FTX saga reveal the problems with centralized finance? Where do you see the future of CeFi and DeFi? Are you feeling convinced to invest in DeFi now? Please elaborate on your answers by providing a well-resourced argument.