The third module has to do with swaps and loans. A swap is just an exchange of one token for another token. We'll talk about collateralized loans, which we've already talked about a little bit. Then my favorite, the flash loans, which I've mentioned a number of times and it must be a little mysterious to you, but we'll cover it in this module as the third part. Let's, start with swaps and begin with centralized exchange. This is a course in the centralized finance. But nevertheless, there's a lot of stuff going on and centralized finance that we need to be aware of. When I talk about centralized exchange, I'm talking about centralized exchange of decentralized tokens. The so-called CeDeFi, C-E-D-E-F-I. Swap. What is a swap? Basically an exchange, one token for another. There's many different ways to do this. But the most popular today to do this is with a centralized exchange, for example, Coinbase or Coinbase Pro. There's many other exchanges. There's hundreds of exchanges. What's interesting with these centralized exchanges and contrast to the usual centralized exchange, where the New York Stock Exchange you decide to list on that exchange, that's where you would trade IBM, for example. But within this world of decentralized tokens, the same token can be traded on hundreds of different exchanges. Again, one option is centralized and this is just an example of some of the more popular tokens, and this is just the regular Coinbase screen that you could actually buy using Coinbase. But for those that are trading, you would use something like Coinbase Pro. Coinbase is a US fully regulated exchange. Indeed Coinbase is a public company now, so stock is traded and exchanged on centralized exchange for Coinbase. This is what it actually looks like in terms of Coinbase Pro. You can see on the far right, you've got the previous transactions, and then you've got basically the bed and the mass. There are people that are willing to buy and those are in green on the left and obviously want to buy at a low price. This actually shows all of the different amounts that people are willing to buy at the cheapest price. Then on the right, those that are willing to sell and they want a higher price. That's why they're on the right-hand side and in red, and then there's a matching in the middle and there's often a spread between the two. The exchange actually makes money. The centralized exchange makes money in that they earn a spread. There's also a trading fee that they would earn and that depends upon the particular exchange. But this is just an example of centralized exchange. One issue here is that there's so many exchanges that you need to be careful. Many of you will join the world of DeFi. You will potentially use decentralized exchange as we will go through in the stores. But many of you will also use a centralized exchange to deal with the DeFi. One issue is that there could be a much different price for a crypto depending upon the exchange that you actually look at. This is a screenshot from last year where you could see a very large difference between different exchanges for buying, let's say Bitcoin. Again, this is something that is different than what we're used to because if you go to the NYSE, there's one price for a share of IBM. Here we've got hundreds of prices. There are many incentives for some of these centralized exchanges to exaggerate volume. If they seem like they're big, then people will basically think, well this is a popular exchange, I should go there. They might attract initial coin offerings or initial exchange offerings, and the more business you do, the more money that you would actually make. It turns out that you need to be aware because on most of these exchanges the volume is fake. It turns out it's really easy to fake volume in the space. Indeed, think of it as, and I've already mentioned this, that I could easily transfer my coin from one wallet to another wallet that I own, and then go back and forth and back and forth, I still have the same amount of token, but I've created a lot of volume. You need to be aware, and there certain things that you should look for. This is just the same shot that I showed you before with the previous traits on the right. We've got the order book. That is the amounts and the prices that people are willing to buy and sell at. That graph in the middle, where the green and the red meet, that is where the trading actually takes place. What are we looking for in terms of an exchange that's a real exchange? Well, an obvious thing is if you use something that's fully regulated by the US government, the odds are that it is not a fake exchange. I think that's fairly clear, but there's various things that you can look for. I will actually go through some slides to show you some red flags in terms of what the order book looks like, what the spreads look like, simple things like round numbers. For example, people put orders in for, let's say one ether, two ether. It's unusual you put an order in to buy like 2.05647 ether. Again, there's some basic things that you can do in terms of forensics to figure out if an exchange is real or not. There's again, many different things that you could look at in terms of what did the previous trades look like, what is the correlation amongst the changes that you've got a strong prior belief are real exchanges. I've already mentioned the round numbers. The history, again, is going to be really important in terms of, what does the trading volume look like? We'll take a look at that and forensics and what about some examples here. This is an example of an exchange that is likely a fake exchange. If you look at the actual trades, you can see that they're almost immediately offsetting, because it's a buy and a sell of the same amount and just keeps on going like that, and it doesn't make any sense. The spread on this exchange is way higher than an exchange like Coinbase. This is an interesting one because this exchange claims to have five times the volume of Coinbase Pro or even more. But when you actually look at the history, it looks very suspicious. This is another exchange, and notice that the trading only occurs during a certain period and that doesn't make any sense. Again, this is the hours of zero trading, that's got to be a red flag. You can compare that to other exchanges where it doesn't look like that. Again, this is another exchange, it's got roughly the same volume as Coinbase Pro. The volume is constant, which doesn't make any sense. Volume does have some seasonality within the day or the week, but this is all basically the same volume. You look at that and you'd say, no, this can't be real. It's likely fake. Trade sizes. On the top, it looks very reasonable. Notice that most of the volume is with a smaller numbers, so smaller trades, which is exactly what we'd expect. The volume should be greater for smaller trades, and then for the bigger trades, it gets lower. Now, notice those spikes on the top two where we've got Coinbase and Kraken. Well, those spikes are things like 1, 2, 3, so they're round numbers. Then the two exchanges on the bottom, which have very large volume, it looks completely different. Again, you need to be careful here that these are red flags, that this volume just doesn't make any sense. The top two are very intuitive of good economic foundation, the bottom doesn't make any sense. This is just volume over an extended period of time. Notice the top two are actually pretty correlated. If you're looking at the correlation of the volume, it make sense. Then look at the bottom two, it doesn't make any sense. It has no correlation with the exchanges like Kraken or Coinbase or whoever you want to look at. There's essentially no correlation. Then the spreads. If you look at the spreads here on the top, you've got a couple of exchanges that seem quite reasonable in terms of the spreads. It does vary through time. But then look at the bottom two. The one on the left at the bottom especially, just doesn't make any sense. Notice where I'm pointing to like the zero is. Basically these are volatile high spreads that don't make any sense. It's pretty easy to do the forensics here, so you don't need to hire a forensics firm to identify a problem. Some people have estimated that if you look at the total volume of trading that's reported in the world across all these exchanges, that less than five percent of the volume is real. Again, this is something to be aware of. This is a way to get people to use your centralized exchange. Running an exchange is incredibly profitable. We saw from the IPO of Coinbase that this is extremely profitable business. I want to emphasize again that this is centralized finance. What these exchanges like Coinbase or Kraken, they're buynets. They're no different than the exchange like the New York Stock Exchange or Nasdaq. It's the same basic mechanism. The same screens you've seen, the same structure of an auto book is available. They are profitable. What does that mean when they're profitable? Well, they're making money because you as a user are basically paying them. Some of the value, your value, is being transferred to the centralized exchange. It's really important here to put that in context and this is the reason that I'm going through the centralized exchanges to put into context what decentralized exchange actually does. Decentralized exchange is going to be different because we're not trading with the broker, we're trading with an algorithm, and the algorithm doesn't care if you're buying or selling.