The document provides an overview of decentralized finance (DeFi) including common terms and applications. It discusses how DeFi allows for lending, borrowing, and farming of crypto assets using smart contracts in a permissionless and trustless manner. Specific DeFi applications mentioned include stablecoins, automated market makers, liquidity pools, yield farming, lending platforms, decentralized exchanges, flash loans, and the composability of combining different DeFi building blocks.
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What the Duck is DeFi
1. What the Duck Is DeFi:
Lending, Borrowing and Farming for Crypto
2. • Reimagining legacy financial products as
decentralized primitives using smart contracts
• Money markets, lending, borrowing,
derivatives and much more
• Composable, protocols become “money
legos” allowing stackable financial products
• It’s (whisper it…) fun
What is Decentralized Finance (DeFi)?
8. Stablecoins
• Not ideal in most financial transactions to
use a cryptocurrency that has price
volatility e.g. taking out a loan
• Stablecoins aim to reduce price volatility
(many pegged to USD)
• Centralized stablecoins backed 1:1 by fiat
in a bank account e.g. USDC
• Decentralized stablecoins can be crypto
collateralized or algorithmic
9. Maker
• Decentralized stablecoin on Ethereum that is
overcollateralized by crypto
• Stablecoin DAI can be minted by anyone through
locking up crypto as collateral to take out a DAI
loan e.g. lock up $200 of ETH to borrow $100 of
DAI
• If price of collateral drops, then assets are seized
and liquidated
• Common use case is leverage
10. Wrapping
• Wrapping creates a tokenized version of one
token in the form of another
• It’s pegged to the value of the asset it
represents and typically can be redeemed for
it (unwrapped) at any point.
• It usually represents an asset that doesn’t
natively live on the blockchain that it’s
issued on.
11. Automated Market Maker
• An automated market maker (AMM) is a
type of decentralized exchange (DEX)
protocol that relies on a mathematical
formula to price assets.
• Instead of using an order book like a
traditional exchange, assets are priced
according to a pricing algorithm.
• Market makers help you get a good price
and tight bid-ask spread on an order book
exchange like Binance.
12. LP - Liquidity Provider
• Users called liquidity providers (LP) add an
equal value of two tokens in a pool to create a
market.
• In exchange for providing their funds, they
earn trading fees from the trades that happen
in their pool, proportional to their share of the
total liquidity.
• As anyone can be a liquidity provider, AMMs
have made market making more accessible.
13. Liquidity mining
• Projects distribute governance tokens
to community
• Often reward adding liquidity through
“liquidity mining”
• Different levels of rewards based on
requirements e.g. lock up for longer,
reward vesting, retroactive rewards
14. Farming
• Staking or locking up cryptocurrencies in return
for rewards.
• Individuals can earn tokens in exchange for
their participation in DeFi applications. Yield
farming can also be called liquidity mining.
• As each new project that emerges offers new
tokens or ways to earn rewards, users have
been flocking to it, hoping to get a cut of the
yield on offer.
• In turn, this creates a demand that pushes up
the value invested in the project and the
tokens.
17. Impermanent Loss
• A temporary loss of funds occasionally
experienced by liquidity providers because of
volatility in a trading pair.
• This also illustrates how much more money
someone would have had if they simply held
onto their assets instead of providing liquidity.
• The loss only becomes permanent if a provider
decides to withdraw their liquidity for good.
18. Composability
• Enables products and services to interlock
permissionlessly, which expands the
innovation vector outside of a siloed
company.
• Entrepreneurs don’t need to build things
that already exist, but only use existing
products to make something new.
• So far, tokens and smart contract calls are
the best examples of DeFi composability
19. Layer 2
• Layer 2 refers to a secondary framework
or protocol that is built on top of an
existing blockchain system.
• These protocols are designed to solve the
transaction speed and scaling difficulties
of major cryptocurrency networks.
• Two major examples of layer 2 solutions
are the Bitcoin Lightning Network and the
Ethereum Plasma.
20. Bridge
• Blockchain bridges enable interoperability
between vastly different networks such as
Bitcoin and Ethereum.
• It either operates under different consensus
rules or inherits its security from the parent
blockchain (e.g., rollups built on Ethereum).
• Deploy digital assets hosted on one blockchain
to dapps on another.
• Conduct fast, low-cost transactions of tokens
hosted on otherwise less scalable chains.
• Execute dapps across more than one platform.
21. What can we do with DeFi?
• Lending and Borrowing
• Decentralized Exchanges
• Token governance
• Flash loans
• Composability (Money Legos)
• Magic...
22. Decentralized lending and borrowing
• Lend or borrow directly from smart
contract
• Some have interest rates that
dynamically change based on supply
and demand e.g. Compound and Aave
• Provide collateral in crypto in order to
borrow funds (loan needs to be
overcollateralized)
23. Lending as a savings account
• Anchor offers 20% fixed interest on UST
• Tranched products offer degrees of
exposure allowing for fixed rates of return
on lending (Barnbridge, Saffron Finance)
24. Decentralized exchange (DEX)
• Anyone can trade assets that conform to
token standard (e.g. ERC-20, ERC-721)
• Can have decentralized order books that
look like traditional exchange e.g. 0x,
dYdX
• Automated market maker (AMM)
provides pricing algorithmically based on
liquidity available and will always provide a
price e.g. Uniswap, Sushiswap
• Aggregators pull liquidity from all e.g.
Matcha, 1inch
26. Token governance
• Token holders vote on direction of project or various parameter settings e.g. Maker
(MKR) holders can vote on parameters such as fees charged
• Can be referred to as a decentralized autonomous organization (DAO)
27. Flash loans
• Someone can borrow funds
and repay in same transaction
• If not repaid in same
transaction, then it fails
• Enables uncollateralized loans
• Common use case is for
arbitrage opportunities in DeFi
28. Composability with DeFi
• Interesting possibilities when
combining DeFi building blocks or
“money legos”
• Refinancing loans
• Leveraged positions
30. Using Flash Loans to refinance a loan
• A debt is taken from a Compound protocol at a 9.5%
interest rate.
• But there is another protocol that offers debt at 7%
interest. The smart contract contains logic that can
explore these rates and refinance your debt at 7%.
• This can be accomplished using these money lego
components:
• Take out a flash loan using the Aave protocol
• Pay the debt on the Compound protocol
• Borrow from the 7% debt offer
• Payback the flash loan on the Aave protocol
All this happens in a single transaction.
31. Magic...
• DeFi can accomplish what looks like magic
• Realise future gains right now (for a price)
• Turn illiquid assets into liquid ones
32. Walk in my shoes
• DefiRate
• Coingecko
• Daily Ape
• Loanscan
• Bankless
• Zapper
33. We are living in a simulation
Head over to defisaver.com
