# DeFi 2 - The DeFi Stack and Asset Tokenization

By [Rise In](https://paragraph.com/@rise-in) · 2025-01-08

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[![]({{DOMAIN}}/editor/youtube/play.png)](https://www.youtube.com/watch?v=DDik7wyQTY0)

In our previous [blog post](https://mirror.xyz/dashboard/edit/Q6fhLQq9RKCpUnEWpioV0F5Jx4UrPLBwnV_z_uiexyM), we explored the origins of DeFi and how it differs from traditional finance. Now, let's dive deeper into the technical overview of DeFi.

### The DeFi Stack: A Layered Approach

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.
    

![The DeFi Stack](https://storage.googleapis.com/papyrus_images/1257322b005af94f00adea7a09a538fc184c987cad1b64defda04aed6f90070f.png)

The DeFi Stack

### Asset Tokenization: Bringing Real-World Assets to the Blockchain

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!

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*Originally published on [Rise In](https://paragraph.com/@rise-in/defi-2-the-defi-stack-and-asset-tokenization)*