Decentralize Your Future: A Hands-On Exploration of DeFi

Enlik Lee
6 min readFeb 12, 2024

Are you tired of high bank fees, limited investment options, and inaccessible financial services?

Enter DeFi, a revolutionary approach to finance that empowers individuals to take control of their money. Through blockchain technology and self-executing smart contracts, DeFi offers a glimpse into a future where finance is open, transparent, and accessible to all.

Let’s explore how DeFi can potentially transform the way we interact with money.

This article is a part of the final project for DeFi Talents Program (Cohort 5) organized by the Frankfurt School Blockchain Center and volunteer team.

source: Copilot

Introduction

Think of cryptocurrencies as the fuel powering the decentralized revolution. They act as the digital assets exchanged and utilized within the DeFi ecosystem. Bitcoin, Ethereum, and various other tokens serve as the foundation upon which DeFi applications are built. Without crypto, DeFi wouldn’t have its underlying currency or the ability to facilitate transparent, peer-to-peer transactions.

However, the relationship goes beyond mere fuel. Cryptocurrencies are also instrumental in securing DeFi protocols through consensus mechanisms like proof-of-work or proof-of-stake, ensuring the immutability and trustless nature of these financial applications. In essence, DeFi leverages the unique properties of cryptocurrencies to create a new financial landscape, offering alternatives to traditional institutions and empowering individuals to control their financial lives.

Development of multiple domains in the crypto ecosystem (source: Prof. Dr. Philipp Sandner)

As of February 2024, Ethereum maintains its dominance with close to 6,000 monthly active developers, solidifying its position as the most vibrant blockchain ecosystem in terms of developer engagement. Polkadot follows closely behind with an impressive 5,000 active developers, fueled by its interoperability and scalability promises. While specific figures for other cryptos remain fluid, Solana boasts a strong community exceeding 1,000 developers, followed by Cosmos and Polygon with similar developer counts. This rising tide of crypto development paints a promising picture for the future of this dynamic industry.

Monthly active developers since launch (source: Prof. Dr. Philipp Sandner)

DeFi Stacks

source: wikipedia.org

1. Settlement Layer

This is the foundation layer of the DeFi ecosystem, which is the blockchain itself. Ethereum is the most commonly used blockchain technology for DeFi.

2. Asset Layer

We can think of it as a diverse treasure collection where various forms of value reside. It boasts:

  • Native coins: Each blockchain has its own native token, acting as the base currency for transactions and fees (think ETH for Ethereum, SOL for Solana).
  • Fungible tokens (FTs): These represent interchangeable units of value, often pegged to real-world assets like fiat currencies or commodities. Stablecoins like USDC and DAI fall into this category.
  • Non-fungible tokens (NFTs): These unique, irreplaceable tokens represent ownership of digital assets like artwork, collectibles, or virtual land. Think CryptoPunks or NBA Top Shot moments.
  • Synthetic assets: These mirror the price movements of external assets like stocks or commodities, allowing for decentralized exposure without direct ownership.

3. Protocol Layer

It’s the brains behind the operation, the ‘backend’ system where DeFi magic happens, transforming the raw potential of the underlying blockchain infrastructure into an array of financial applications.

4. Application Layer

If Protocol Layer is the backend system, then the Application Layer is the frontend system with User Interfaces (UI) that offers diverse and user-friendly interfaces for interacting with DeFi protocols.

5. Aggregation Layer

This layer acts as the glue that seamlessly connects various components and empowers users with centralized-like convenience in a decentralized world. Imagine an information hub that sits atop the DeFi stack, gathering data and opportunities from various protocols across different blockchains. This layer acts as:

  • A search engine for DeFi: Users can compare rates, analyze risks, and discover the best lending, borrowing, trading, or yield farming opportunities across the DeFi landscape.
  • A portfolio management tool: Track investments across different protocols, analyze performance, and rebalance holdings effortlessly.

Examples of DeFi aggregation platforms include Zerion, Instadapp, and 1inch.

Programming Languages

In the vibrant world of blockchain, smart contracts — self-executing programs that govern transactions — hold the key to unlocking a decentralized future. But what powers these contracts? Enter the diverse landscape of smart contract programming languages, each offering unique advantages and considerations:

  1. Solidity, the OG: Developed for Ethereum, Solidity reigns supreme with its large community, mature tooling, and extensive library of existing projects. However, its complexity and EVM-specificity limit its reach.
  2. Rust, the Rising Star: Known for its speed, security, and memory management, Rust is gaining traction thanks to its cross-platform capabilities and formal verification tools. However, its steeper learning curve might deter newcomers.
  3. Vyper, the Security-Focused Contender: Python-like and readable, it prioritizes security through static analysis and restricted language features. Ideal for security-conscious projects, its limited community and scope hold it back.
  4. Move, the Diem Darling: Designed for safety and compliance, Move powers the Diem blockchain. While boasting formal verification and strong security, its limited ecosystem and nascent stage require caution.DeFi Terminology
  5. Beyond the Big 4: Languages like Yul, Chainlink Scripting, and Hyperledger Fabric Chaincode cater to specific needs, offering performance optimizations, external Oracle integration, and enterprise-grade features.

DeFi Terminology

In the dynamic world of DeFi, understanding key terms is crucial for navigating its opportunities and risks. Some essential terms need to be learned:

Staking: Imagine locking your crypto assets in a secure vault to earn rewards. That’s essentially staking, where you contribute your holdings to support a blockchain network’s security and validate transactions. In return, you earn interest on your staked assets, similar to a fixed deposit but within a decentralized protocol.

Yield Farming: This term evokes images of cultivating bountiful harvests, and rightfully so. Yield farming involves strategically depositing your crypto assets across various DeFi protocols to maximize returns. Imagine lending your tokens to earn interest, then using those rewards to participate in another liquidity pool for even higher yields. However, be aware of the potential risks like impermanent loss due to price fluctuations.

Liquidity Mining: The lifeblood of decentralized exchanges (DEXs) is liquidity, and liquidity mining incentivizes users to provide it. By depositing your crypto assets into a DEX’s liquidity pool, you essentially become a market maker, facilitating trades for others. In return, you earn rewards, often in the form of the DEX’s native token. This incentivizes participation and ensures smooth trading experiences.

Credits to: Tobias Meyer (DeFi Talents cohort 5)

What’s Next in DeFi

DeFi’s burgeoning landscape is not only reshaping finance but also creating exhilarating career paths for innovative and tech-savvy individuals. If you’re fascinated by this decentralized revolution, here are some opportunities to join the movement:

Entrepreneur: You’ll wear many hats, be a visionary, identify problems, and dream up solutions to disrupt traditional financial models.

Technologist: Be the architects of DeFi protocols, building secure and efficient applications using languages like Solidity or Rust.

Regulator or Lawyer: As a regulator, you’re setting boundaries and ensuring stability amidst the Wild West of DeFi. As a lawyer, you’re the shield against fraud and the architect of legal frameworks that foster trust and transparency.

Investor: Venturing into the uncharted waters of DeFi, where innovation and risk collide. Your days are fueled by researching cutting-edge protocols, analyzing complex tokenomics, and navigating the ever-evolving DeFi landscape.

Multiplicator: A role focused on amplifying returns or leveraging resources within the DeFi ecosystem.

Career opportunities after completing the program (source: DeFi Talents program)

“Thanks to the DeFi Talents program (https://web3-talents.io/defi-talents), an 18-week mentoring program to empower talent for leadership in the decentralized finance space.”

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Enlik Lee

Lifelong learner, explorer, podcaster. I write in English and Indonesian. Homepage: enlik.tech