Smart Financial Contracts
Topic: Decentralized Financial Markets
Research question: Evaluate whether a system like the BMV can move to a decentralized platform
Thesis Advisor: Guillermo Zamarripa @
Decentralized Financial Markets v.0
Thesis Proposals for Advisor
Decentralized Financial Markets v.0
Decentralized Financial Contracts v.1
Meeting Minutes
First Meeting with Guillermo Zamarripa
Follow-up Questions
Challenges in Structuring a Decentralized Stock Exchange
Code
Thesis Proposal for Director
Decentralized Financial Markets v.1
To do:
- I don’t understand article 9
- Art.19, Thesis + 8 = special mention
Fernando’s Response to the Questions
Theses generally have a general equilibrium model that must be contrasted with data
The tesina (minor thesis) is the formulation of a theoretical model
Orient the research question in the form: there is a market inefficiency, I seek to prove whether a certain technology can solve it
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Perfect divisibility of assets
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Market hours
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Brokerage trading commissions
Aurelio and Guillermo Zamarripa’s Responses
Aurelio: The 3 inefficiencies you identify are solved to different degrees
- With Robinhood you can invest in fractions of securities
- FX markets are already 24 hours
- In fact, I don’t think it’s that healthy
- That doesn’t mean I don’t think it will eventually happen
- “HUMANITY IS THE MEASURE OF THE WORLD”
- Brokerage commissions:
- The concern is that market participants won’t have incentives to provide liquidity
- “IT’S WORTH EXPLORING THE AMM ALGORITHMS”
He also said: Don’t overcomplicate things
- Think about the microsystem of stocks
- Explain what a Blockchain is and what nodes are and how to launch a crypto into circulation
He also suggested: you can apply Nixtla to financial time series and see if it works
GUILLERMO ZAMARRIPA’S FEEDBACK:
- They actually find the topic interesting
- Talk to Felix
- Let Fernando know
- Choose between thesis or tesina
- Think about first and second order implications
Inspiration
Applied Research Proposal
- Structure of the Mexican financial market + Automated Market Makers
- Delta Neutrality
- Central counterparty
- Legislation
- Where is algo trading today?
- How much is the liquidity risk?
Mail Memo
We wrote to each other on Easter Monday.
To make progress, see if you can review some tesinas so you understand what is required, and an outline of what you’re thinking to start working.
Saturday, December 9, 2023
Fernando asked me:
Do you already have your smoking gun?
The topic to address is:
- How can smart contracts be used to improve the efficiency and transparency of financial markets?
Fernando’s suggestion is:
- It turns out that when Homex misreported its accounting, there was a “surprise” that impacted stock prices and that harmed investors.
- See if implementing this technology costs more or less than what investors lost
Smoking guns by Bard
How does the efficiency of using dYdX compare to conventional derivatives exchanges?
See if a BTC future on CME costs more than one on dYdX
Dear Guillermo Zamarripa,
First of all, I hope you are doing very well. I wish you happy holidays and happy festivities. I want to let you know that I did run my first marathon, in the not very impressive time of 4:35. I thank you for the inspiration at the beginning of the year; I held on to small moments like that for motivation. I also want to tell you that I finished my finance courses and community service.
I apologize for losing contact for so long; I should have been more attentive or at least communicated my intentions to pause the project to prioritize other things. I wonder if you would consider resuming the project of advising my thesis next year. I know a lot can change in a year and I reiterate my apologies.
I share below some not-so-structured thoughts accompanied by pseudo-hypotheses to see if you think any of them could be material for a Financial Management thesis at ITAM, as well as to know if you would be interested in advising me on it.
Regards and congratulations,
Diego Jimenez Vergara
1. ETFs and voting power
Smoking gun: There are N shares of QQQ, which represent a portfolio of $V, with a vector of stock quantities and companies.
At the end of the day, Black Rock votes for its interests and since it has a different investment horizon than a Retail investor or even other large agents, their interests are not maximized.
Solution: Transmit the will of holders through representative voting
Background:
Simple math:
Investors seek to maximize ?
See if it's achieved better with a vote
2. Perpetual derivatives wtf!
3. Smart contracts and efficient market hypothesis.
Smoking gun: Grupo Homex caused a value loss of XXXX for XXX Mexicans due to the lack of transparency in their accounting reporting standards.
What to do? Program the NIFs and report in real time
See if it's cost-efficient to implement itFebruary 25, 2024
BYOB: The Case for Smart Contracts
How to Be Your Own Bank?
The way to be your own bank consists of participating in certain smart contracts of a financial nature. These contracts, like any other, must include the necessary elements for their legal validity and specify the terms and conditions under which the transactions will be executed.
For example, consider the collateralized loan. A user owns a bitcoin, which can be deposited in a smart contract with specific lending terms. The purpose would be to obtain a collateralized loan. For this to work, there must be a counterparty, who acts as their own bank, willing to lend money in exchange for interest, using the bitcoin as collateral. The details of this contract can vary. Imagine it is an overcollateralized loan, with a loan-to-value of 75%. If the lender wants to minimize exchange rate risk in case of default, they could acquire a derivative contract, such as a future, to mitigate this risk by selling a bitcoin at a fixed price.
Thus, if the set of contracts acquired by the lender satisfies their need or appetite for risk and their investment objectives, they can do so without additional intermediaries. The question arises of who drafts these contracts, what they look like, where they are executed, whether they include conciliation or termination clauses, and how the execution of the transaction is ensured.
If the contract is executed on Ethereum, one can be drafted that activates when certain conditions are met, exchanging tokens for dollars and the bitcoin for a wrapped bitcoin. A zero-knowledge approach for the bitcoin deposit could also be explored, evaluating the need for an additional counterparty, although it might be unnecessary with Ethereum.
Therefore, this method enables transactions of this nature, where the contracts must be open source to ensure code verifiability and have security and protection mechanisms. This allows for correcting possible errors in subsequent investments and creating an ecosystem where users can manage their financial will based on their assets.
The functionality of these blockchains falls within the domain of computation, but it is a viable option worthy of consideration.
[[building-interest-rate-markets-in-defi|Building Interest Rate Markets in Decentralized Finance: A Comparative Analysis with the Traditional Financial System]]