Decentralized Finance (DeFi) Laboratory

Prof. Alfred Lehar (Academic Director), Professor of Finance, Haskayne School of Business, University of Calgary

Alfred Lehar is a Professor of Finance at the Haskayne School of Business at the University of Calgary. His areas of research interest include FinTech, bank regulation, financial stability and corporate finance. He is currently researching mining fees and price differentials in Bitcoin markets, decentralized exchanges, and under what conditions renegotiations can facilitate a private sector workout of a financial crisis. He also works on how information produced by financial markets can be optimally used in bank regulation. In his previous research he developed several methods on how to measure the probability of a financial crisis, analyzed conflicts of interest for financial analysts, and looked at the empirical fit of alternative option pricing models.

Prof. Kyoung Jin (KJ) Choi, Associate Professor of Finance, Haskayne School of Business, University of Calgary

Kyoung Jin (KJ) Choi is an Associate Professor of Finance at the Haskayne School of Business at the University of Calgary. He currently teaches FNCE 445 (Futures and Options) AND FNCE 559 FinTech at the undergraduate level, FNCE 789 FinTech for the MBA program, and FNCE 799.07 (Topics in Corporate Finance and Asset Pricing) at the graduate level. His research interests include investment, real options, dynamic contracting and FinTech.

Prof. Marius Zoican, Associate Professor of Finance, Haskayne School of Business, University of Calgary

Marius Zoican is an Associate Professor of Finance at the Haskayne Business School, University of Calgary. His research focuses on market microstructure and the impact of technology on trading, securities exchanges, and asset management -- with the aim to leverage innovation to build better markets. Marius' work has been published in leading academic journals, including The Review of Financial Studies, Management Science, and Journal of Financial Markets. 

Prof. Christine Parlour, Professor and Sylvan C. Coleman Chair in Finance and Accounting, Haas School of Business, University of California, Berkeley

Christine A. Parlour is the Sylvan C. Coleman Chair of Finance and Accounting at Berkeley Haas. Most of her work is in institutionally complex areas, such as market microstructure and banking. Her current work focuses on changes in the payments system and the effects on bank balance sheets. She has written for major finance and economics journals. She has been on the NASDAQ Economic Advisory Board and is currently on the steering committee for the New Special Study of Securities Markets.

Georgino Issak:
Georgino Issak is a student at the University of Calgary currently pursuing degrees in Finance (BComm) and Computer Science (BSc). He has been collaborating with Dr. Lehar as a DeFi research assistant since 2023.

Jaime Castillo Leon:
Jaime Castillo Leon is a second-year PhD student of finance at the University of Calgary. He was a member of the team that won the Business Creativity Award in the Banking, Financial, and Insurance Services category for creating the first human capital investment fund in Peru. As a former CTO of a financial company, his interest in technology and finance led him to specialize in FinTech. He is currently studying bridges and systemic risk in DeFi markets.

Motahhareh Moravvej:
Motahhareh (Moty) Moravvej is a PhD student and a graduate research assistant in the Finance area at the Haskayne School of Business, University of Calgary. Her current research area is in FinTech, specifically on blockchain technologies. With her professional background in the capital markets, she is also interested in trade engine and post-trade systems, clearing and settlement systems, market linkage projects and modern asset pricing.

Behnoud Alizadeh Bazrafshan:
Behnoud Alizadeh Bazrafshan is a Finance PhD Student at the Haskayne School of Business, University of Calgary. His main research interests are Financial Technology (FinTech) and Market Microstructure. Behnoud's current research focuses on wash trading in decentralized exchanges.

Arian Haghighat:
Arian Haghighat is an alumnus of the University of Calgary, holding a Bachelor of Commerce in Finance with an Embedded Certificate in Entrepreneurial Thinking (2020-2024). He worked with Dr. Lehar as a DeFi researcher starting in 2022, contributing to innovative projects in decentralized finance.

Ryan Stauffer:
Position: Assistant Professor of Finance and Perricelli Faculty Fellow, Bucknell University
Status: Alumnus, Haskayne School of Business PhD Program (2013 – 2020), University of Calgary

Brandon Rochon:
Brandon Rochon is an alumnus of the University of Calgary, with a dual degree in mechanical engineering (BSc) and business (finance) (BComm) (2016–2021). He currently holds a position of Data Scientist at Covalent. He has been working in the Haskayne DeFi Lab since January 2021, studying loan liquidations in DeFi and building data infrastructure for the DeFi Lab.

Dylan Rae:
Dylan Rae is a student at the University of Calgary who is pursuing degrees in electrical engineering and finance. He has been a FinTech Research Assistant at the Haskayne School of Business since September 2021.

Willie Li:
Willie Li is an alumnus of the University of Calgary, with degrees in software engineering and business (finance) (2022). He primarily performs data analytics and writes programs in the DeFi lab. He has been working with Dr. Lehar since September 2021 as a DeFi researcher.

• Bank of Canada
• Canada Foundation for Innovation
• Covalent
• CSI Research Foundation
• Social Sciences and Humanities Research Council
• Tel Aviv University
• University of Paris Dauphine

FNCE 481 FinTech: Links conventional finance theory to FinTech—new technological innovations and their applications in finance. Topics include blockchain, cryptocurrency, smart contracts, crowdfunding, initial coin offerings (ICOs), machine learning and other current topics.

Level: Senior-level course for undergraduate BComm students

FNCE 631 FinTech: An understanding of fast-moving recent technological improvements in various industries and how they change conventional thinking and trading in the banking and finance industries.

Level: MBA-level elective course

FNCE 559.9 Decentralized Finance: Finance is undergoing a revolution with the arrival of blockchain technology and smart contracts. Decentralized Finance (DeFi) is an ecosystem of smart contracts that allow token trading, lending, investing (yield farming), and the handling of non-fungible tokens (NFTs). New innovations arrive constantly, reflecting the growth of DeFi from zero to tens of billions of dollars in the last three years. The underlying technology will have a huge impact on finance. This class delivers the frontier of knowledge in this space.

Level:  Senior-level course for undergraduate BComm students

FNCE 559.12 Tokenomics: This hands-on course introduces students to the foundational concepts of digital finance (“tokenomics”): the Ethereum blockchain, smart contracts, and decentralized finance applications. The course is structured around three core modules: Ethereum Virtual Machine (EVM) Basics, Solidity Programming, and Decentralized Applications. Students will explore both the theoretical and practical aspects of blockchain technology as applied to financial markets, with a focus on Ethereum.  

Level:  Senior-level course for undergraduate BComm students

Decentralized Exchange: The Uniswap Automated Market Maker

Journal of Finance (forthcoming)
Alfred Lehar, Christine A. Parlour

In a study published in the Journal of Finance (2023), we uncover deviations from perfect competition in blockchain settlement markets, specifically within the Bitcoin blockchain. Our analysis identifies that 5.88% of transactions, termed as 'private,' circumvent the competitive bidding process and are directly sent to specific miners. These private transactions are characterized by higher activity and more evenly spaced postings on the blockchain. Interestingly, despite their increased activity, these users typically have their transactions confirmed by only one miner, a scenario unlikely in competitive markets. This pattern suggests the existence of long-term agreements between frequent users and particular miners, where users benefit from lower and more consistent fees in exchange for exclusive transaction routing. This paper provides groundbreaking insights into the structuring of settlement contracts and the distribution of gains and incentives among blockchain participants.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3905316

Trading Gamification and Investor Behavior

Management Science (In Press, 2024)
Philipp Chapkovski, Mariana Khapko, Marius Zoican

 We study the effect of gamification on retail traders’ behavior using a randomized online experiment. Participants with lower financial literacy prefer platforms with hedonic gamification elements, such as confetti and achievement badges. On average, hedonic gamification increases trading volume by 5.17%. However, the difference in trading activity between gamified and nongamified platforms is driven primarily by self-selection (70%) rather than gamification (30%). Participants who prefer hedonic gamification exhibit noisy trading strategies, whereas those favoring nongamified platforms display stronger contrarian behavior. Further, price trend notifications enhance learning for investors with accurate beliefs, but they reinforce trading mistakes for those with incorrect beliefs.

https://pubsonline.informs.org/doi/10.1287/mnsc.2022.02650 

Liquidity Fragmentation on Decentralized Exchanges 
Alfred Lehar, Christine A. Parlour, Marius Zoican

Revise and Resubmit, The Review of Financial Studies

Paper presented at: Tokenomics 2023, Gillmore Centre Annual Conference 2023, Edinburgh Economics of Technology, Financial Intermediation Research Society 2023, the Northern Finance Association 2023, the UNC Junior Faculty Finance Conference, the Microstructure Exchange, University of Melbourne, Hong Kong Baptist University, Chicago Booth

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4267429

Bitcoin Microstructure and the Kimchi Premium
Kyoung Jin Choi,  Alfred Lehar,  Ryan Stauffer 

Revise and Resubmit, Journal of Financial and Quantitative Analysis 

Between January 2016 and January 2020, bitcoin were on average 2.27% more expensive in Korea than in the United States, a fact commonly referred to as the Kimchi premium. We argue that capital controls amplify frictions from the microstructure of the bitcoin network that limit the ability of arbitrageurs to take advantage of price differences. We find that the bitcoin premia are positively related to transaction costs and volatilities of the bitcoin price and the premium, in line with the idea that the costs and the associated price risk during the transaction period make trades less attractive for arbitrageurs, and hence allow prices to diverge. A cross country comparison shows that bitcoin tend to trade at higher prices in countries with lower financial freedom.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3189051

Blockchain, Information Production, and Ownership Structure: Decentralized Academic Journals 
Kyoung Jin Choi, Jaevin Park

Recently there has been a burst of literature proposing blockchain-based academic publishing in science. This paper investigates the economic implications of the decentralized refereeing process suggested by the literature, in which authors and referees are individually incentivized. We study models in which the journal publishes qualified papers under two types of information asymmetry: paper quality and type of referee. We characterize the conditions under which equilibrium in decentralization exists or fails and leads to a better outcome than in centralization. Our research also helps us understand how to design an incentive structure for specialists required for funding decisions, loan inspections, and credit ratings.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3730355

Miner Collusion and the BitCoin Protocol 
Alfred Lehar, Christine A. Parlour

Bitcoin users can offer fees to the miners who record transactions on the Blockchain. We document high variation of Bitcoin fees, not only over time, but also within blocks. Further, the blockchain rarely runs at capacity, even though there appears to be excess demand. We argue that this is inconsistent with competitive mining but is consistent with strategic capacity management. If agents believe that only high fee transactions are executed in a timely fashion then strategic capacity management can be used to increase fee revenue. We note that mining pools facilitate collusion and estimate that they have extracted least 200 million USD a year in excess fees by making processing artificially capacity scarce.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3559894

Battle of the Bots: Flash Loans, Miner Extractable Value and Efficient Settlement 
Alfred Lehar, Christine A. Parlour

Settlement on decentralized ledgers enables flash loans — loans that are both originated and repaid within the same instant of settlement time. We document empirically that these are used primarily for arbitrage. The settlement also allows settlement agents to expropriate profitable arbitrage trades. We show theoretically and empirically that private settlement emerges endogenously as a mechanism to mitigate this expropriation. We document payments from arbitrageurs to private settlers that exceed 1 million USD per day. In a simple model, we characterize the socially optimal mix of private and public settlement.

Central Bank Digital Currency and Banks' Risk-taking 
Kyoung Jin Choi, Keeyoung Rhee

This paper investigates the impact of the introduction of the central bank digital currency (CBDC) on banks' stability when depositors' financial intelligence is heterogeneous. There is a non-linear relationship between banks' risk-taking behaviour and the level of regulation/infrastructure provision for CBDC, which provides important policy implications.

Decentralized Money Supply: Lessons from Algorithmic Stablecoins 
Kyoung Jin Choi, Jaevin Park

We show that the key mechanism of algorithmic stablecoins is to induce decentralized open-market operations (OMPs). Insights into this mechanism can improve the current system of fiat money supply. The paper also explains why Terra-Luna collapsed and why it is a bad decision to have a reserve asset such as bitcoin to back up the cryptocurrency TerraUSD (UST).

Private Settlement in Blockchain Systems 
Alfred Lehar, Motahhareh Moravvej-Hamedani

We provide evidence that the settlement market in blockchain systems deviates from a perfectly competitive market. Examining the bitcoin blockchain, we document that 5.88% of transactions, which we label as private, bypass the competitive process and seem to be channelled directly to miners. Users of private transactions post more transactions on the blockchain and space their transactions more evenly. Despite being more active than the average user, they tend to get their transactions confirmed by only one miner, which is statistically a very unlikely outcome in competitive markets. Our findings are consistent with frequent users engaging in long-term agreements with specific miners. In return for channeling all their transactions to one miner, they pay on average lower fees and face a lower variation in fees. Our paper provides novel evidence of how settlement contracts are structured and how potential gains and incentives can be shared amongst the system participants.

Systemic Fragility in Decentralized Markets 
Alfred Lehar, Christine A. Parlour, Marius Zoican

We analyze a unique data set of liquidations on two DeFi lending platforms – Compound and Aave. Using Blockchain transaction data, we document the high frequency price impact of these liquidity trades on 9 different decentralized exchanges. Consistent with large block trades in equity markets there is a temporary and permanent price impact of collateral asset sales in DeFi. Our work highlights the systemic fragility of Decentralized Finance.

“A Proposal for a Canadian CBDC: Model X Final Report”
Dr. Kyoung Jin Choi, PhD; Dr. Ryan Henry, PhD; Dr. Alfred Lehar, PhD; Dr. Joel Reardon, PhD; Dr. Reihaneh Safavi-Naini, PhD
Prepared for the Bank of Canada, Feb. 11, 2021

https://science.ucalgary.ca/sites/default/files/teams/1/model-x-final-report-ucalgary.pdf

“Blockchains Beyond Bitcoin: The Rise of Decentralized Finance”
Haskayne Hour Presentation
April 14, 2021

Presenters:

Dr. Alfred Lehar, PhD, Associate Professor of Finance

Amy ter Haar, an independent lawyer who assists industry leaders to implement frontier research into practical business applications

“Financial Literacy: Blockchain and NFTs”
Edmonton Public Library
May 7, 2022

Presenter:

Dr. Alfred Lehar, PhD, Associate Professor in Finance

“What’s ahead for cryptocurrency? UCalgary expert explores regulatory changes and Russian questions”
UCalgary News
March 14, 2022

“The future of money: The digital currency revolution is here, and may sweep away 5,000 years of monetary history” 
The Globe and Mail
June 5, 2021

“UCalgary computer science and business professors advise Bank of Canada on central bank digital currency design” 
UCalgary News
February 11, 2021

“Model X Design Challenge: UCalgary professors advise the Bank of Canada on a central bank digital currency design” 
UCalgary News
February 2021

“Understanding the impact of blockchain technologies on capital markets” 
UCalgary News
February 5, 2019