CS294-177/CS194-177/PHDBA 297T.1/MFE 230T.3: Decentralized Finance

Instructors

Christine Parlour Dawn Song
Christine Parlour Dawn Song
UC Berkeley UC Berkeley

TAs

Vivek Nair; Nate Pola; Neil Giridharan; Xiaoyuan Liu

Class Time

Synchronous lecture: 10:30am-12:30pm PT Thu (Remote), starting Aug 26; or follow online asynchronously with video lectures

Office Hour

All times are in PST. There will be no office hours until the week of September 6th.

Vivek Nair (Head TA/GSI) 12:30pm-01:30pm Tue Zoom link
Dawn Song (Professor) 05:00pm-05:30pm Wed Zoom link (ID: 93029293682, Passcode: 5q47hS3N)
Xiaoyuan Liu (TA/GSI) 12:30pm-01:30pm Thu Zoom link
Neil Giridharan (TA/GSI) 03:00pm-04:00pm Fri Zoom link

Enrollment and Participation

For graduate students, please register for CS294-177; for undergraduate students, please register for CS194-177. Please join our edstem.

Syllabus (subject to change)

Grading

The class will have short written homework and hands-on labs. Weekly quizzes will all be of equal weight (graded on completion), and will count for 10% of your overall grade. In addition, each student will participate in a group project (group size: 3-5 students) of choice aiming to develop new solutions or analyze existing solutions and real-world deployment in DeFi.

Class participation 10%
Weekly Quizzes 10%
Lab 1 5%
Lab 2 15%
Project proposal 5%
Project milestone 15%
Project presentation and final report 40%

Quiz

All quizzes are released in parallel with (or shortly after) the corresponding lecture and will be due midnight the following Wednesday. Please remember to complete the quiz each week. Although it’s graded on completion, we encourage you to do your best. The questions are all multiple-choice and there are usually at most 5 per quiz.

Group project

Students will be completing an open-ended research project culminating in a presentation and a workshop-style paper submitted at the end of the semester. You will choose an area of research in DeFi that you wish to explore and are encouraged to read related papers in that area. You will then identify an area that you believe needs improvement or merits further research and build systems and/or conduct experiments to further the state of the art within your chosen field. Students are welcome to choose their own topics, but we’ll also provide a list of topic suggestions that you can take inspiration from if you wish.

The proposal should be submitted through this google form. The final report should be within 6 page with additional appendix and references as needed (and total max 10 pages). For project presentation, each group needs to record a 3-min video to summarize the results and findings of the project and need to submit the video (in mp4 format) and slides (in pdf format).

Timeline

Group formation 9/13
Lab 1 out (link) 10/01
Project proposal 10/04
Lab 1 due 10/12
Project milestone 11/01
Lab 2 out (link) 11/02
Lab 2 due 11/22
Project presentation 12/02
Project final report 12/13

Course Description

The purpose of this class is to bring together students and interdisciplinary experts in Computer Science and Finance to discuss the emerging area of Decentralized Finance (or DeFi). DeFi has experienced an unprecedented growth, with hundreds of projects and a countless stream of financial, distributed systems, and blockchain innovations. The total value locked (TVL) in decentralized finance — a measure of the total value of assets committed to the DeFi ecosystem — has reached over $80 billion. When compared to the traditional centralized finance (CeFi), DeFi offers products and services serving similar financial goals, but critically innovates with novel capabilities such as instantaneous multi-billion USD flash loans. By utilizing blockchain and smart contract technologies, DeFi as a whole aims to provide a new platform for programmable, automated finance services that remove the reliance on central trust and intermediaries.

Our goal is to provide a framework to understand this new area of financial services. For each finance function, we will consider 1) the current intermediated structure, and then b) the DeFi version (actual or proposed) that fulfills the function. Is either one of these optimal? We will evaluate both through the lens of CS and finance. Is the application computable (efficiency, decidable), programmable (automatic)? Is the application welfare-enhancing and stable (not a source of systemic risk). How do the new and old systems interact? We aim for the students to be able to critically evaluate whether a new DeFi protocol is novel and practical. We further will capture the security danger in DeFi, as well as their impact on the underlying consensus security. Lastly, we hope to give an insight into how to program and structure secure and incentive-compatible DeFi applications.

Through the exposure to cutting-edge research as well as remaining open challenges, we hope for our students to quickly integrate into academic as well as industrial projects related to DeFi.

Summarizing, we will cover a broad spectrum of topics, including:

  1. A comprehensive introduction covering a computer science and finance background required for the remainder of the course. We will discuss the basics of decentralized systems, permissionless blockchains, consensus, smart contracts and contrast DeFi to traditional finance.

  2. We will cover the computer science and economic aspects of DeFi assets, and how they link to CeFi through stablecoins. The course will elaborate on DeFi asset exchanges and contrast the traditional limit order book models to automated market makers. Just like in CeFi, debt and derivatives play a fundamental role in DeFi. We’ll dive into the various debt models, such as under- and over-collateralized debt, as well as synthetic assets in DeFi. Insurances, portfolio management and prediction markets form equally crucial elements to a decentralised economy as we will elaborate on. Last but not least, we will show different attempts at measuring and tracking systemic risk and its computability.

  3. To link blockchains with financial information from the real-world, we will provide a deep-dive into oracles. We will discuss decentralized reputation, identities and proof of properties. Because most DeFi is transparently readable, including transaction amounts, fees, dates/times, etc, privacy plays an increasingly important role in DeFi. We will cover various privacy technologies including zero-knowledge proofs and their applications in DeFi. We will also discuss various attempts at how to enforce data ownership, data monetization and valuation as well as controlled use and misuse of data.

  4. A digital economy would not thrive without strong security. We will outline the many past security attacks, introspect a few of them in closer detail and provide recommendations on how to strengthen DeFi security. We will discuss the systemic risks stemming from Miner Extractable Value (MEV) and how MEV can be minimized by design. Decentralized governance provides power to a pseudonymous collective, and we will explore how governance works, and how it may be attacked.