In our previous blog post, we explored the origins of DeFi and how it differs from traditional finance. Now, let's dive deeper into the technical overview of DeFi.

DeFi applications are built upon a layered architecture:

1. Settlement Layer: This foundational layer encompasses the blockchain itself (like Ethereum or Solana), its native token (e.g., ETH, SOL), and the transactions that occur on the network.

2. Asset Layer: This layer includes a variety of assets:

   • Native Tokens: The blockchain's native cryptocurrency.

   • Tokens: These can represent anything, from currencies to digital art.

     • ERC-20 Tokens: Represent fungible assets (e.g., stablecoins like USDT and USDC).

     • ERC-721 Tokens: Represent non-fungible assets (e.g., NFTs).

3. Protocol Layer: This layer houses the smart contracts that power DeFi applications. Examples include decentralized exchanges (DEXs), lending platforms, and derivatives markets.

4. Application Layer: This layer consists of the user interfaces (websites, mobile apps) that allow users to interact with the underlying protocols.

5. Aggregation Layer: This layer integrates various DeFi applications, providing users a better experience. For example, a crypto wallet that utilizes multiple DeFi applications from the application layer to provide the users more flexible and cheaper options by checking all of them.

To leverage the power of blockchain technology, real-world assets must be "tokenized." This involves representing the asset as a digital token on the blockchain.

There are lots of different ways to represent an asset on the blockchain. Let’s have a look at few of them.

• Fungible Tokens (ERC-20):

  • Represent assets that are interchangeable, like shares of a company or units of a commodity.

  • Stablecoins are a prime example of fungible tokens.

    • There are different types of stablecoins like fiat-collateralized, crypto-collateralized, and algorithmic. We will cover each of them in another blog post.

• Non-Fungible Tokens (NFTs):

  • Represent unique, non-interchangeable assets.

  • NFTs have exploded in popularity, encompassing digital art, collectibles, and even real-world assets like real estate.

• Real-World Assets (RWAs):

  • Represent real-world assets, such as real estate, commodities, or stocks, on the blockchain.

  • The fungibility of an RWA token depends on the underlying asset.

    • A RWA corresponding to a Tesla stock would be fungible because all Tesla stocks cost same.

    • Another RWA that represent the paintings of a famous painter that would be non-fungible because each painting can cost different.

Conclusion

This post provides a foundational understanding of the DeFi stack and the crucial role of asset tokenization.

In the next post, we'll delve deeper into a specific area of DeFi: Decentralized Exchanges and cover topics like AMMs, liquidity pools, slippage, impermanent loss and more.

Stay tuned!

In our previous blog post, we explored the origins of DeFi and how it differs from traditional finance. Now, let's dive deeper into the technical overview of DeFi.

DeFi applications are built upon a layered architecture:

1. Settlement Layer: This foundational layer encompasses the blockchain itself (like Ethereum or Solana), its native token (e.g., ETH, SOL), and the transactions that occur on the network.

2. Asset Layer: This layer includes a variety of assets:

   • Native Tokens: The blockchain's native cryptocurrency.

   • Tokens: These can represent anything, from currencies to digital art.

     • ERC-20 Tokens: Represent fungible assets (e.g., stablecoins like USDT and USDC).

     • ERC-721 Tokens: Represent non-fungible assets (e.g., NFTs).

3. Protocol Layer: This layer houses the smart contracts that power DeFi applications. Examples include decentralized exchanges (DEXs), lending platforms, and derivatives markets.

4. Application Layer: This layer consists of the user interfaces (websites, mobile apps) that allow users to interact with the underlying protocols.

5. Aggregation Layer: This layer integrates various DeFi applications, providing users a better experience. For example, a crypto wallet that utilizes multiple DeFi applications from the application layer to provide the users more flexible and cheaper options by checking all of them.

To leverage the power of blockchain technology, real-world assets must be "tokenized." This involves representing the asset as a digital token on the blockchain.

There are lots of different ways to represent an asset on the blockchain. Let’s have a look at few of them.

• Fungible Tokens (ERC-20):

  • Represent assets that are interchangeable, like shares of a company or units of a commodity.

  • Stablecoins are a prime example of fungible tokens.

    • There are different types of stablecoins like fiat-collateralized, crypto-collateralized, and algorithmic. We will cover each of them in another blog post.

• Non-Fungible Tokens (NFTs):

  • Represent unique, non-interchangeable assets.

  • NFTs have exploded in popularity, encompassing digital art, collectibles, and even real-world assets like real estate.

• Real-World Assets (RWAs):

  • Represent real-world assets, such as real estate, commodities, or stocks, on the blockchain.

  • The fungibility of an RWA token depends on the underlying asset.

    • A RWA corresponding to a Tesla stock would be fungible because all Tesla stocks cost same.

    • Another RWA that represent the paintings of a famous painter that would be non-fungible because each painting can cost different.

Conclusion

This post provides a foundational understanding of the DeFi stack and the crucial role of asset tokenization.

In the next post, we'll delve deeper into a specific area of DeFi: Decentralized Exchanges and cover topics like AMMs, liquidity pools, slippage, impermanent loss and more.

Stay tuned!