FIN 480 Week 3 Blockchain and Decentralized Finance Example

Should Workers Get Paid in Digital Dollars? ShiftPay Weighs a Stablecoin Option for Cross-Border Transfers and Turns Down a DeFi Yield Pitch, With the Mechanics Explained

[Student Name]

University of Phoenix

FIN/480: FinTech and DeFi

Week 3 Assignment

[Instructor Name]

[Date]

ShiftPay, its users and the proposals are composites written for a model paper; blockchain mechanics, market events and laws are summarized generally from the sources listed.

About a third of ShiftPay's users, the composite earned-wage startup's hourly workers in Texas, send money to family in Mexico each month, often paying $8 to $12 per transfer plus exchange rate markups. Several asked whether ShiftPay could offer something cheaper. At the same time, an investor suggested that ShiftPay earn yield on the roughly $14 million of balances on its cards by placing them in decentralized lending protocols paying 6 to 9 percent. Both ideas used the same technology, but one aimed to move money more cheaply and the other to take risk with money that belonged to workers. This paper explains the technology and makes both decisions.

What a Blockchain Is

Nakamoto (2008) proposed a system in which a network of computers maintains a shared ledger of transactions, grouped into blocks linked by cryptographic hashes, so that changing a past entry would require redoing the work of every later block. Participants agree on the ledger's contents through a consensus mechanism. Bitcoin uses proof of work, in which miners compete to solve computational puzzles. Ethereum and many newer chains use proof of stake, in which validators lock up tokens as collateral and lose part of them if they act dishonestly. Neither needs a central operator, but both rely on the honesty of most participants and the security of the code.

Smart Contracts

A smart contract is a program stored on a blockchain that runs automatically when conditions are met. It can hold tokens, release them and record outcomes without an intermediary. Smart contracts are the building blocks of decentralized finance, but they execute exactly as written, so errors in the code become errors in the outcome (Schär, 2021).

How Dollar Stablecoins Work

Most dollar stablecoins are issued by companies that hold reserves, such as cash and short-term Treasury bills, and promise to redeem each coin for one dollar. Their stability depends on the quality of reserves and the issuer's ability to pay redemptions quickly. A different design, the algorithmic stablecoin, tried to hold its value through a linked token rather than reserves. In May 2022, the largest such coin, TerraUSD, lost its peg as holders rushed to redeem; its companion token collapsed, and tens of billions of dollars of value disappeared within days. The episode showed that stability without reserves rested on confidence alone.

The 2025 Federal Law

In July 2025, Congress enacted the first federal framework for payment stablecoins, requiring issuers to be licensed, to hold reserves one for one in cash, bank deposits, short-term Treasury bills and similar assets and to publish reserve reports regularly. The law gives holders of regulated stablecoins clearer protection and makes reserve-backed coins a more realistic tool for payments.

A DeFi Loan, Step by Step

On a decentralized lending protocol, a borrower who deposits $15,000 of ether can borrow up to a set share, say $10,000 of a dollar stablecoin, a loan-to-value of about 67 percent. If the protocol's liquidation threshold is 80 percent, the position is liquidated when the ether falls to $12,500, a drop of about 17 percent, at which point the contract sells collateral to repay the loan plus a penalty. Lenders earn interest paid by borrowers, at rates that rise when borrowing demand is high. Because loans are overcollateralized and liquidation is automatic, lenders are protected against ordinary price drops, but not against code failures, frozen markets or manipulated price feeds.

An Automated Exchange, Step by Step

Decentralized exchanges often use automated market makers. A pool holding 1,000 ether and 3 million dollars of stablecoins keeps the product of the two balances, 3 billion, constant. A trader buying 10 ether leaves 990 in the pool, so the stablecoin side must rise to about $3,030,303, and the trader pays about $30,303, an average price of about $3,030 against a starting price of $3,000. That 1 percent difference, plus a typical 0.3 percent fee, is the cost of trading against a formula, and it grows with trade size.

Where DeFi Yield Comes From

DeFi lending yields come from borrowers, many of whom borrow stablecoins against crypto collateral to make larger bets on crypto prices, and from token rewards some protocols pay to attract deposits. When speculative demand falls, yields fall. Harvey et al. (2021) describe DeFi's transparency and open access as real innovations while noting the risks of smart contract exploits, which have cost users billions of dollars, and of governance controlled by insiders.

The Remittance Decision

For transfers to Mexico, ShiftPay compared a regulated dollar stablecoin with its existing bank network. Through a licensed partner, a worker's dollars could be converted to a regulated stablecoin, sent on a blockchain in minutes and converted to pesos by a licensed exchange in Mexico for deposit or cash pickup, at a total cost the partner quoted near $3 for a $300 transfer, including the exchange spread. A conventional partner offered about $4.50. ShiftPay approved a pilot through the licensed partner, with the stablecoin handled only behind the scenes, so workers never hold crypto and the partner bears compliance duties.

The Yield Decision

ShiftPay rejected the DeFi yield proposal. Card balances are workers' money held at the sponsor bank; moving them into DeFi protocols would expose them to code failures and price shocks, likely violate the bank partnership agreement and offer no deposit insurance. The proposal's 6 to 9 percent yield reflected those risks rather than a free gain.

What the Pilot Will Measure

The stablecoin transfer pilot will run for six months with 2,000 volunteer users. ShiftPay will measure total cost per transfer including the exchange spread, time to delivery, failed or delayed transfers, customer complaints and any compliance holds. If costs stay at least a third below the conventional partner and failures stay under one in a thousand, the option will be offered to all users. If not, ShiftPay will negotiate lower fees with its conventional partner using the pilot results as evidence of what is possible.

Conclusion

Blockchains let a network agree on a ledger without a central operator, stablecoins carry dollars on that ledger when backed by real reserves and DeFi automates lending and trading through code. For ShiftPay, a regulated stablecoin behind a licensed partner offers cheaper cross-border transfers, while DeFi yield on customer money adds risks the company has no right to take.

References

Harvey, C. R., Ramachandran, A., & Santoro, J. (2021). DeFi and the future of finance. John Wiley & Sons.

Nakamoto, S. (2008). Bitcoin: A peer-to-peer electronic cash system. https://bitcoin.org/bitcoin.pdf

Schär, F. (2021). Decentralized finance: On blockchain- and smart contract-based financial markets. Federal Reserve Bank of St. Louis Review, 103(2), 153-174. https://doi.org/10.20955/r.103.153-74