DeFi Protocols
Decentralized Finance (DeFi) recreates traditional financial services — lending, borrowing, trading, insurance — using smart contracts, removing banks and brokers from the equation.
DeFi Ecosystem
┌──────────────────────────────────────────────┐
│ DeFi ECOSYSTEM │
├──────────────────────────────────────────────┤
│ │
│ EXCHANGES │ LENDING │
│ ├─ Uniswap (AMM) │ ├─ Aave (flash loans) │
│ ├─ SushiSwap │ ├─ Compound │
│ └─ Curve (stable) │ └─ MakerDAO (CDPs) │
│ │ │
│ DERIVATIVES │ YIELD │
│ ├─ Synthetix │ ├─ Yearn Finance │
│ ├─ dYdX │ ├─ Convex │
│ └─ GMX │ └─ Beefy Finance │
│ │ │
│ STABLECOINS │ INSURANCE │
│ ├─ DAI (decentral) │ ├─ Nexus Mutual │
│ ├─ USDC (central) │ └─ InsurAce │
│ └─ FRAX (hybrid) │ │
└──────────────────────────────────────────────┘
Automated Market Makers (AMMs)
Traditional Order Book: AMM (Constant Product):
┌──────────────────┐ ┌──────────────────┐
│ SELL orders │ │ Liquidity Pool │
│ 105 ─ 200 units │ │ ETH: 100 │
│ 103 ─ 500 units │ │ USDC: 200,000 │
│ 101 ─ 100 units │ │ │
│ ─────────────── │ │ x × y = k │
│ BUY orders │ │ 100 × 200000 │
│ 100 ─ 300 units │ │ = 20,000,000 │
│ 98 ─ 400 units │ │ │
└──────────────────┘ │ Price = y/x │
Needs market makers │ = 2,000 USDC/ETH │
Matching buyers/sellers └──────────────────┘
No order book needed
Price moves by trade
Lending and Borrowing
Lending Protocol Flow:
┌──────────────┐ ┌──────────────┐
│ Lender │────────►│ Pool │
│ deposits ETH │ │ collects │
│ earns APY │◄────────│ interest │
└──────────────┘ └──────┬───────┘
│
┌──────────────┐ ┌──────▼───────┐
│ Borrower │────────►│ Over- │
│ deposits │ │ collateral- │
│ collateral │ │ ized loan │
│ (e.g. 150%) │ │ 75% LTV │
└──────────────┘ └──────────────┘
If collateral < loan value → liquidation
DeFi Risks
Smart Contract Risk: Bugs can lead to fund loss.
Impermanent Loss: Liquidity providers may lose value vs holding.
Oracle Risk: Price feeds can be manipulated.
Rug Pulls: Malicious teams can drain liquidity.
Regulatory Risk: Laws are still evolving globally.