The DeFi Guide

Val­ue locked in DeFi on Ethereum explod­ed from 1B US$ in May 2020 to almost 4B in July. The DeFi craze put so much pres­sure on the Ethereum blockchain that we’ve con­stant­ly seen gas prices above 60 Gwei over the past few weeks. 

A sin­gle project, led by one man, has grown from insignif­i­cance to almost half a bil­lion US$ locked with­in mere weeks. This same project decen­tral­ized its own gov­er­nance in a sur­prise move. The gov­er­nance token reached a val­u­a­tion of 70M US$ in less than a week. 

Rumor has it that some Ethere­ans haven’t slept once since DeFi bust onto cen­tral stage in spring 2020. Yet many in the cryp­to sphere still go De…WHAT? Cut­ting through the hype behind the lat­est cryp­to craze, there’s quite a bit of sub­stance to be found. Let’s untan­gle DeFi, and put it back togeth­er accord­ing to our own terms, shall we?

De… WHAT?

In a nut­shell, Decen­tral­ized Finance (DeFi) is about bring­ing finan­cial instru­ments to the blockchain. The Inter­net dig­i­tized infor­ma­tion and any­thing relat­ed to infor­ma­tion (remem­ber news­pa­pers?). Blockchains dig­i­tized mon­ey, and are now dig­i­tiz­ing any­thing relat­ed to mon­ey (remem­ber banks?). 

Finan­cial instru­ments like shares, loans, options, or insur­ance con­tracts get a dig­i­tal life thanks to DeFi. New dig­i­tal­ly native instru­ments like flash loans are being invent­ed. The plat­forms where these instru­ments trade, flour­ish: decen­tral­ized exchanges, lend­ing plat­forms, peer to peer trans­ac­tion systems.

The fol­low­ing core attrib­ut­es define prod­ucts and ser­vices in DeFi:

• They are non-cus­to­di­al and per­mis­sion­less. Like with blockchains in gen­er­al, DeFi users trust the code they use over peo­ple. They remain in con­trol of the funds they own, and they don’t have to ask any­body for per­mis­sion to use a service.
• They are open and com­pos­able. DeFi ser­vices (more pre­cise­ly, DeFi pro­to­cols) can be stacked on top of each oth­er — some­times with­in a sin­gle Blockchain trans­ac­tion. This is the prin­ci­pal rea­son for the cur­rent explo­sion of pos­si­bil­i­ties hap­pen­ing in DeFi.

Let’s dive into some con­crete exam­ples. Start­ing with the curse of the mod­ern indi­vid­ual: debt.

DeFi Products and Services

Lending

Think­ing about tak­ing out a loan to buy a car, that new flat screen TV, or even a house? Easy. Go to a bank (hur­ry up while they still exist), show your salary state­ment, have your cred­it his­to­ry checked, sign a con­tract. You are now ready to live up to your duties as a con­sumer again. 

This type of lend­ing trans­ac­tion: giv­ing and receiv­ing cred­it based on social proof, is hard to repro­duce on the blockchain. The nec­es­sary infor­ma­tion and con­nec­tions: your salary, the likelky­ness of you repay­ing a loan, the legal mea­sures avail­able if you don’t, are not (yet?) avail­able in the blockchain context. 

For that rea­son, blockchain lend­ing plat­forms most­ly cater to the needs of peo­ple who want to keep expo­sure to a cer­tain asset, while gain­ing expo­sure to anoth­er. You have a lot of ETH and believe that the price of BAT rel­a­tive to ETH will go down soon? Easy. Deposit your ETH into Com­pound, take out a loan in BAT, sell that BAT on the open mar­ket for more ETH. You are now effec­tive­ly short BAT. Your spec­u­la­tion added up? You’ll be able to re-buy the BAT you sold for less ETH than you sold it for, repay the loan, and keep the left­over ETH from your trade as prof­it. You suc­cess­ful­ly short­ed BAT in a non-cus­to­di­al and per­mis­sion­less environment. 

The Inner Workings of A DeFi LenDing Protocol

In the back­ground, the ETH you used as col­lat­er­al to bor­row BAT for your trade got locked in Compound’s smart con­tract sys­tem. Also, you were only allowed to take a cer­tain %-age of your collateral’s val­ue as a loan to pro­tect the sys­tem against a sud­den drop in the val­ue of ETH. 

Com­pound put mech­a­nisms in place to watch your col­lat­er­al­iza­tion ratio. The sys­tem will warn and even­tu­al­ly liq­ui­date you if the val­ue of the ETH you deposit­ed were to fall below a cer­tain thresh­old. Con­crete­ly, a liq­ui­da­tion would mean that the ETH you deposit­ed would be sold on the mar­ket to cov­er the costs of your BAT loan. Leav­ing you with the BAT, and maybe a small rest of your ETH deposit. It’s not Com­pound that would spring to action in this case. Oth­er free mar­ket actors, like this guy here, made it their job to watch for under­col­lat­er­al­ized loans and liq­ui­date them for profit. 

Mean­while, anoth­er mech­a­nism was charg­ing you inter­est on the BAT you took out as a loan, and reward­ing you with a small­er inter­est pay­ment for the ETH that you deposit­ed. Due to this inter­est mech­a­nism, some will sim­ply deposit funds in Com­pound, with­out tak­ing out a loan, to earn a part of the inter­est charged to bor­row­ers. The snap­py DeFi term for this is yield farm­ing, but more on that later.

When you sup­ply funds to Com­pound, you receive the cor­re­spond­ing cTo­ken in exchange. cTo­kens rep­re­sent deposits in Com­pound and accrue inter­est over time. You can freely move them around, or use them to reclaim the funds you sup­plied, includ­ing the inter­est you earned.

Beyond Collateralized DEBT

As men­tioned above, lend­ing with­out forc­ing peo­ple to deposit col­lat­er­al first is hard in a blockchain con­text. But it’s not impos­si­ble. Recent­ly, Aave, anoth­er lend­ing pro­to­col on Ethereum, intro­duced cred­it del­e­ga­tion: One blockchain user can give anoth­er user per­mis­sion to bor­row assets backed by his col­lat­er­al. There is trust asso­ci­at­ed with this process. The per­son del­e­gat­ing cred­it to anoth­er per­son must make sure, via social means, that the loans tak­en out against his col­lat­er­al will be repaid in due time. Pro­to­cols like Teller are plan­ing to bring real-world trust, for exam­ple your real-world cred­it his­to­ry, to the blockchain. 

An even more fas­ci­nat­ing inven­tion by Aave is the flash loan. A tru­ly blockchain-native type of cred­it that can be tak­en out, against a small fee, under the con­di­tion that it will be repaid with­in that same blockchain trans­ac­tion. If there is no repay­ment, the cred­it trans­ac­tion will fail and with that, the entire blockchain trans­ac­tion. Use flash loans, for exam­ple, to cre­ate arbi­trage trans­ac­tions. DAI is at 1.02 against USDC on one decen­tral­ized exchange, and at 1.00 on anoth­er? Take out a flash loan over 100’000 USDC, buy the “cheap” DAI, sell the “expen­sive” DAI, pock­et 2% prof­it (minus fees and trans­ac­tion costs), all with­out hav­ing to pro­vide your own col­lat­er­al. With flash loans, every­body can be a cryp­to whale for a few seconds! 

Here is an exam­ple of one of the first flash loan trans­ac­tions on Ethereum. The ini­tia­tor, Arbi­trageDAO, took out a flash loan over 3137 DAI. It then sent that DAI to the mak­er SAI-DAI migra­tion con­tract to obtain 3137 SAI. Those SAI were sold on Uniswap for 3157 DAI. 3148 DAI were then used to repay the flash loan includ­ing fees (fees were high­er back then). The DAO pock­et­ed a small prof­it of rough­ly 9 DAI before fees. 2 DAI remained after the Ethereum trans­ac­tion fees. This all hap­pened with­in a sin­gle Ethereum transaction!

The Things You Can do with a bit of Collateral

Col­lat­er­al deposit­ed in a smart con­tract sys­tem can back new asset types. Deposits serve as a guar­an­tee for the val­ue rep­re­sent­ed by those new­ly mint­ed assets. 

Stablecoins

Mak­er, the “OG” DeFi pro­to­col on Ethereum, devel­oped a com­plex mech­a­nism that allows users to deposit ETH in a smart con­tract, then use that ETH as col­lat­er­al to mint DAI. DAI is in turn pegged to the US dol­lar. The Mak­er depot cre­at­ed to mint DAI is called a “col­lat­er­al­ized debt posi­tion” (CDP). Recent­ly, Mak­er added the pos­si­bil­i­ty to use addi­tion­al tokens as col­lat­er­al for DAI. Mak­er has been around since 2016 and is among the pro­to­cols that laid the foun­da­tion for the DeFi revolution.

While the US dol­lar peg might occa­sion­al­ly be a cause for con­cern, Maker’s mech­a­nisms effec­tive­ly back the val­ue of DAI with the val­ue of ETH. If push comes to shove, and as long as the over­all sys­tem remains suf­fi­cient­ly col­lat­er­al­ized, DAI could sim­ply be liq­ui­dat­ed for ETH, and nobody would loose too much mon­ey. Here is a post explain­ing Mak­er in some more detail. And here is one that explains the token mod­el. Looks super sim­ple, right?

Mak­er cur­rent­ly remains the dom­i­nant DeFi project on Ethereum in terms of total val­ue locked, but oth­ers are clos­ing in fast. Kava brings the Mak­er idea to the Cos­mos ecosys­tem, and Acala does the same for Polka­dot. mStable iter­ates on the sta­ble­coin theme itself by inte­grat­ing sta­ble­coins, lend­ing and swap­ping into one standard. 

Derivatives And Insurance

Many projects build on the core idea of cre­at­ing assets backed by col­lat­er­al deposits. Most notably Syn­thetix, a project that brought a great vari­ety of syn­thet­ic assets to Ethereum. Syn­thetix helped pio­neer liq­uid­i­ty min­ing on Ethereum by dis­trib­ut­ing its native token, SNX, to liq­uid­i­ty providers.

dYdX is an exchange pro­to­col that allows for trust­less lever­aged trad­ing and the cre­ation of per­pet­u­al con­tracts (per­pet­u­al swaps). 

Augur enables the cre­ation of pre­dic­tion mar­kets around the out­come of real-world events. Anoth­er “OG” DeFi project found­ed in 2015, Augur always got a lot of atten­tion, but so far attract­ed only min­i­mal cap­i­tal flow.

Opyn imple­ments a pro­to­col that enables the cre­ation of options, for exam­ple put or call options on a pub­licly trad­ed token. On-chain options can be used to trust­less­ly pro­tect a port­fo­lio against declin­ing token prices, volatil­i­ty or flash crash­es. Opyn takes this sys­tem a step fur­ther by pro­vid­ing insur­ance options on Com­pound deposits. In a typ­i­cal DeFi man­ner, Opyn imple­ments a two-sided mar­ket, match­ing those who want to buy pro­tec­tion with those who are ready to pro­vide pro­tec­tion in the hope of earn­ing yield.

Nexus Mutu­al brings human judg­ment to the on-chain insur­ance process and can there­fore cov­er a broad­er array of DeFi relat­ed risks. Mem­bers of “the Nexus” even­tu­al­ly decide whether an insur­ance claim is legit­i­mate or not. 

DECENTRALIZED EXCHANGES

For some time, decen­tral­ized exchanges (DEX­es) were the place to trade ICO tokens that were not yet avail­able on any “real” (cen­tral­ized) exchanges. A num­ber of recent devel­op­ments have giv­en DEX­es an entire­ly new sig­nif­i­cance, and impres­sive trad­ing volumes. 

The Rise of AMMs

Ethereum is too slow and clum­sy to host a full-fledged decen­tral­ized exchange oper­a­tion. Espe­cial­ly the order­books we know from cen­tral­ized exchanges are hard to bring on chain. There’s sim­ply not enough afford­able stor­age space. In this con­text, so-called Auto­mat­ic Mar­ket Mak­ers (AMMs) have found a grow­ing niche. Sounds scary, but actu­al­ly isn’t: many already trad­ed on Uniswap, the “OG” AMM on Ethereum. 

Uniswap works by keep­ing pools of liq­uid­i­ty: assets that peo­ple have deposit­ed into the Uniswap smart con­tract sys­tem. Uniswap is always able to quote a price for these assets. Uniswap’s pric­ing mech­a­nism is quite sim­ple (go here for a bet­ter under­stand­ing). How­ev­er much you want to buy, Uniswap will quote a price so that, after the trans­ac­tion goes through, the prod­uct of the assets amounts it holds in the cor­re­spond­ing pool remains con­stant. In prac­tice, this means that the more you want to buy rel­a­tive to the pool size, the less favor­able the quot­ed price will be. AMMs are a suc­cess sto­ry on Ethereum, because their inner work­ings are lean. No order books, no com­plex mech­a­nisms to match trades. This results in cheap and fast trans­ac­tions, as long as traders define rea­son­able trade sizes rel­a­tive to the pools they use. 

And those deposit­ing mon­ey in the pools? They earn a fee charged on each exchange trans­ac­tion. Anoth­er pos­si­bil­i­ty to farm yield in DeFi.

Image: trad­ing on Uniswap is sim­ple. Make sure to take a look at the “price impact” infor­ma­tion. This trade would only suf­fer from a small price impact because it is tiny com­pared to Uniswap’s ETH-DAI pool. The price impact of a trade is nor­mal­ly called “slip­page”. Uniswap helps you avoid cost­ly trad­ing mis­takes by lim­it­ing slip­page in the settings.

Oth­er projects have since iter­at­ed on the Uniswap idea. Bal­ancer Labs works with more com­plex pools that are able to quote prices on a vari­ety of asset com­bi­na­tions. Curve is able to offer cheap­er swaps on assets that should nor­mal­ly have almost the same price (like USDC/DAI), by apply­ing a dif­fer­ent price curve in the AMM mech­a­nism described above. Ban­cor is a pool-based exchange sys­tem that pre­dates Uniswap. 

ORDERBOOK DEXES

A num­ber of DEX­es have come up with ways to solve the order­book and order match­ing conun­drum. The 1st gen­er­a­tion of order­book DEX­es used to rely on cen­tral­ized order­book and order match­ing ser­vice, set­tling trades on chain via smart con­tracts. Some will remem­ber Etherdelta, now Forkdelta. The prob­a­bly best known order­book DEX that works in this man­ner, Idex, is cur­rent­ly rolling out a more decen­tral­ized solu­tion, where ded­i­cat­ed nodes han­dle order­book stor­age and trade match­ing. Due to its par­tial­ly cen­tral­ized nature, Idex took a heavy hit when the project had to intro­duce KYC procedures. 

The order­book DEX mod­el has since evolved. 0x set­tles trades on chain, while orders reside off-chain in whichev­er for­mat or data­base the devel­op­er choos­es. Kyber uses a com­bi­na­tion of liq­uid­i­ty pools and dis­tinct lim­it orders. Loopring evolved the Lay­er 2 approach to order­book stor­age and trade-match­ing by intro­duc­ing the 1st Ethereum-based DEX work­ing with zkRollups.

Contract-Callable Liquidity

DeFi pro­to­cols have mech­a­nisms in place to act on the open mar­ket. Often, they moti­vate free mar­ket par­tic­i­pants to act on the protocol’s behalf. For exam­ple to liq­ui­date under­col­lat­er­al­ized loans, or to help rebal­ance a user’s port­fo­lio. To effi­cient­ly exe­cute these trans­ac­tions, DeFi pro­to­cols need on-chain liq­uid­i­ty. Their smart con­tracts can­not reach into the liq­uid­i­ty pool of a Lay­er 2 DEX like Loopring. Cen­tral­ized liq­uid­i­ty pools are even fur­ther away. On-chain liq­uid­i­ty is some­times called con­tract-callable liq­uid­i­ty, because it is liq­uid­i­ty that is avail­able to smart con­tracts. Anoth­er advan­tage of pool-based DEX sys­tems and AMMs is that they eas­i­ly pro­vide con­tract-callable liq­uid­i­ty. On-chain liq­uid­i­ty and the DeFi ecosys­tem are part of a feed­back cycle. Suc­cess­ful DeFi prod­ucts lure liq­uid­i­ty on chain, and at the same time, more liq­uid­i­ty improves the expe­ri­ence pro­vid­ed by those products.

DEX Aggregators

DEX­es do not always offer opti­mum liq­uid­i­ty for each pair they have list­ed. To mit­i­gate that, a niche mar­ket of DEX aggre­ga­tors has sprung up. DEX aggre­ga­tors like 1inch, Paraswap or dex.ag gath­er price infor­ma­tion from mul­ti­ple DEX­es. They offer their users an overview of the avail­able DEX liq­uid­i­ty and price spans. 

Their util­i­ty to the end user has turned DEX aggre­ga­tors into gate­keep­ers for the mul­ti­tude of DEX­es that exist on Ethereum. Con­se­quent­ly, those plat­forms are try­ing to get their own share of the avail­able dealflow, offer­ing lim­it orders, aggre­gate trades across var­i­ous DEX­es, cus­tom mar­ket mak­ing and oth­er good­ies like gas price rebates that improve the avail­able prices, or low­er trans­ac­tion costs.

Tokenize all the Things!

With so much action around finan­cial instru­ments com­ing on chain, tok­eniz­ing real-world assets — from hous­es to com­pa­ny stock — has attrac­tive prospects. We already spoke about the pos­si­bil­i­ty to cre­ate syn­thet­ic ver­sions of those assets on chain. Plat­forms like Poly­math want to bring the real deal to the dig­i­tal world, by estab­lish­ing new token stan­dards and by imple­ment­ing var­i­ous reg­u­la­to­ry require­ments asso­ci­at­ed with the tok­eniza­tion of real-world assets.

A spe­cial tok­eniza­tion case are non-fun­gi­ble tokens (NFTs). On Ethereum, NFTs are rep­re­sent­ed by the ERC721 stan­dard. Non-fun­gi­ble tokens can­not be divid­ed into small­er sub-units and are com­mon­ly used to rep­re­sent things peo­ple want to own. Works of art, badges and rewards, rare in-game items etc. Vis­it Super­rare to see an exam­ple of a trad­ing plat­form for NFTs. With a dai­ly turnover in the mid 5 dig­its on Ethereum, NFTs are an emer­gent asset class that is worth a clos­er look.

Other DeFi Protocols and ServiCes

Over time, a vast array of DeFi relat­ed ser­vices sprung up. Here’s a short overview:

• Port­fo­lio man­age­ment: TokenSets enables the cre­ation of on-chain port­fo­lios with reg­u­lar auto­mat­ic or man­u­al rebal­anc­ing. Mel­on goes fur­ther, essen­tial­ly bring­ing the entire oper­a­tion of a (hedge) fund on chain, in a com­plex pro­to­col that took sev­er­al years to build.
• Robo-advi­sors like Ray can help peo­ple earn opti­mum yield on their on-chain asset hold­ings by reg­u­lar­ly rebal­anc­ing assets into the sys­tems that cur­rent­ly offer the high­est yield. 
• Yearn offers a com­plex array of some­times quite exper­i­men­tal ser­vices in the DeFi space, all based on the impres­sive com­pos­abil­i­ty of DeFi protocols.
• DeFi-focused wal­lets like Argent, InstaDApp or Pil­lar pro­vide easy access to the nerdy DeFi uni­verse and its dApps. 
• DeFi-dash­boards like Zap­per or Zeri­on nice­ly wrap DeFi-ser­vices into sim­ple to use brows­er interfaces.
• Flexa focus­es on instant pay­ments. Imme­di­ate and cheap pay­ment con­fir­ma­tion, even before the next block on Ethereum arrives, guar­an­teed by funds deposit­ed into the sys­tem. Those funds earn a small yield in return. 
• A num­ber of ser­vices pro­vide data and prod­uct insights for the DeFi uni­verse. DeFi Pulse com­pares DeFi pro­to­cols by their total val­ue locked. DeFi Mar­ket Cap offers a sim­i­lar ser­vice with a broad­er, but less detailed cov­er­age. Not focused on DeFi alone, Dap­pRadar gives a good overview of the avail­able dApps on var­i­ous chains. Dap­pRadar also shows that actu­al usage num­bers in DeFi are still small. Pools.fyi com­pares the yields of var­i­ous stak­ing pools.
• The recent DeFi fren­zy on Ethereum caused a lot of projects to rebrand or piv­ot to DeFi. Through­out this arti­cle, we aimed to avoid the “every­thing is DeFi in the end” trap. Ser­vices like Chain­link’s decen­tral­ized ora­cle sys­tem are emi­nent­ly impor­tant for DeFi, but must not forcibly be con­sid­ered DeFi themselves.

Towards a Multichain Universe

It’s impos­si­ble to over­look that most of the DeFi action is cur­rent­ly hap­pen­ing on Ethereum. Oth­er chains have lit­tle to no DeFi activ­i­ty. Their small num­ber of DeFi prod­ucts are either iter­a­tions on Ethereum-based prod­ucts (like the above-men­tioned KAVA), or out­right ripoffs (like many DeFi prod­ucts cur­rent­ly being set up on Tron). Still, it’s worth try­ing to imag­ine how a mul­ti­chain DeFi uni­verse could look a few years from now. 

The Cos­mos blockchain is slow­ly gain­ing devel­op­er mind­share as a tech­nol­o­gy which makes it easy to cre­ate a sys­tem of inter­op­er­a­ble blockchains. Polka­dot is fol­low­ing a sim­i­lar adop­tion path. Many emerg­ing chains are direct­ly bridg­ing to Ethereum to gain access to Ethereum’s liq­uid­i­ty, or they use bridg­ing tech­nolo­gies like Ren to achieve the same goal. Due to the lim­it­ed pro­gram­ma­bil­i­ty of the base lay­er, DeFi on Bit­coin is an uphill bat­tle. Still, projects like the Light­ning Net­work should be con­sid­ered part of the DeFi universe. 

It is worth keep­ing close tabs on these devel­op­ments. If DeFi is real­ly here to stay — which we strong­ly believe -, DeFi con­cepts will even­tu­al­ly find their way onto oth­er chains. The dom­i­nant chains will become more dense­ly inter­linked in their quest to gain access to DeFi’s lifeblood: on-chain liquidity. 

Defi Themes

Let’s touch on a num­ber of themes that fre­quent­ly pop up in the con­text of DeFi.

Governance

DeFi pro­to­cols are sup­posed to be, well, decen­tral­ized. The same must apply to their gov­er­nance. A protocol’s core para­me­ters and its over­all evo­lu­tion should be deter­mined by its users. Users should define the appro­pri­ate reac­tion to crit­i­cal sit­u­a­tions, and resolve dis­putes. For that rea­son, var­i­ous pro­to­cols start­ed to issue tokens that rep­re­sent pro­to­col own­er­ship and facil­i­tate the gov­er­nance process. Often, gov­er­nance tokens are dis­trib­uted to pro­to­col users for free, based on usage pat­terns. The market’s greed for “free” gov­er­nance tokens like COMP, BAL, MTA or YFI trig­gered a rush of mon­ey into DeFi pro­to­cols. Pro­to­col tokens gave life to the “yield farm­ing” meme in DeFi.

Yield Farming

DeFi pro­to­cols are often mul­ti-sided. Peo­ple deposit mon­ey for oth­ers to bor­row. Or they offer secu­ri­ty by bet­ting against a par­tic­u­lar price move­ment, for oth­ers to use as a hedge. Par­tic­i­pants are moti­vat­ed by inter­est or fee pay­ments charged to the “tak­ers” of these ser­vices. In that sense, deposit­ing funds in DeFi is often an oppor­tu­ni­ty to earn yield. Yields in DeFi are typ­i­cal­ly high­er than the yields you’d expect in tra­di­tion­al finance. The emer­gent nature of the mar­ket is a cause of this, and the high­er risk for depositors.

DeFi yields went off the rails when gov­er­nance token dis­tri­b­u­tions became a com­mon occur­rence. For as long as sup­ply lasts (no joke), DeFi yields reach(ed) astro­nom­i­cal heights, up to 1000% APR or more. This sparked a new meme, “yield farm­ing”, com­plete with its cyber-agri­cul­tur­al jar­gon, like crop rota­tion (mov­ing funds between DeFi pro­to­cols to opti­mize yield), or liq­uid­i­ty min­ing (the process of pro­vid­ing rewards to users of DeFi pro­to­cols to increase liq­uid­i­ty). The yield farm­ing meme has brought the spot­light on DeFi, but it is unlike­ly that APRs of this mag­ni­tude will per­sist for a long time. Fur­ther­more, many yield farm­ers are in for a rude awak­en­ing, when net­work fees, or pro­to­col hacks, eat their hard-earned profits.

Risk

DeFi pro­to­cols come with their own risks. Tech­no­log­i­cal risks come from bugs and hacks in the com­plex smart con­tract sys­tems. Weeks with­out a major DeFi hack are still rare. Eco­nom­ic risks lie in bad­ly designed pro­to­cols that can be drained, or oth­er­wise tricked into unex­pect­ed out­comes by increas­ing­ly sophis­ti­cat­ed attack­ers. Cen­tral­iza­tion risks exist when a pro­to­col has cen­tral back­doors, for exam­ple a cen­tral “admin” address used to change pro­to­col para­me­ters or deploy new con­tract ver­sions. Reg­u­la­to­ry risks lie in what­ev­er reg­u­la­tors might see in these nov­el pro­to­cols. Were there cen­tral points of con­tact or cen­tral actors? How will new asset types be clas­si­fied, who or what is respon­si­ble for their issuance through com­plex tech­ni­cal systems?

Defi People, DeFi Memes

DeFi brought us a rich har­vest of hilar­i­ous new Twit­ter accounts, fomo-induc­ing memes, and the occa­sion­al pro­found analy­sis. You do the wading:

• @DegenSpartan OG DeFi alpha hunter, will shill his takes until you can’t hear them any more. 
• @DeFi_Dad, approach­es DeFi from an ear­ly adopter end-user perspective.
• @bneiluj, engi­neer with a back­ground in finance. He will liq­ui­date your CDP if you don’t pay atten­tion, or he’ll teach you how to liq­ui­date others.
• @Weeb_Mcgee, devel­op­ing high­ly spe­cial­ized tools for those already a lit­tle too deep into the yield farm­ing meme.
• @AndreCronjeTech, the mad­man behind yearn.finance. Most dan­ger­ous smart con­tract devel­op­er in DeFi.
• @StaniKulechov, the sharp tongued founder of Aave.
• @lemiscate, Aave’s also sharp tongued tech evangelist.
• @kaiynne, the equal­ly sharp tongued founder of Synthetix.
• @hiFramework, a VC with an exclu­sive DeFi focus. Make sure to fol­low their two founders, Vance and Michael. 
• @zhusu, CEO of Three Arrows Cap­i­tal, anoth­er VC with a strong DeFi focus. 
• @Arthur_0x, the­sis dri­ven DeFi investor.
• @SBF_Alameda, firm­ly root­ed in CeFi, Sam recent­ly post­ed a num­ber of inter­est­ing and mild­ly con­trar­i­an thoughts on DeFi. 
• @Rewkang, cryp­to trad­er with a strong focus on DeFi. Don’t chal­lenge Andrew to a snakeoil sell­ing con­test, he’ll win.
• @safetyth1rd, anoth­er cryp­to trad­er with a strong DeFi focus.
• @Daryllautk, Coingecko research ana­lyst with a strong DeFi focus.
• @nocturnalsheet, DeFi per­mab­ull, OTC broker.

Since you’re a weeb, join­ing DeFi’s inner cir­cle will come nat­u­ral­ly to you. DeFi’s offi­cial acces­so­ry is the wai­fu pil­low. Tend­ing your DeFi crops to opti­mize yield is hard, but hon­est work.

OKOK, Just Show me the Money Now

Moun­tain and Valley’s strat­e­gy on Icono­mi fea­tures a num­ber of DeFi tokens. For a pure DeFi expo­sure on Icono­mi, choose their DEFI strat­e­gy. Dig­ging a bit deep­er, but still remain­ing with­in the “index” theme, you could look into the sDE­FI synth on Syn­thetix.

As an alter­na­tive, start research­ing the projects men­tioned in this arti­cle. Then, if you feel like it, start mak­ing indi­vid­ual invest­ments into those projects. If you’d rather stay on the cut­ting edge of the cut­ting edge, research the nascent DeFi ecosys­tems on oth­er chains. We rec­om­mend to check out Cos­mos (exam­ple: Kava), and Polka­dot (exam­ple: Acala, Lam­i­nar).

Use the exist­ing DeFi prod­ucts to get a feel for what’s going on. Maybe you’ll even farm some of that hon­est yield. Why not bridge your Bit­coin to Ethereum with Ren and stake it on Curve to earn some yield? It’s exciting! 

As men­tioned before, DeFi, and DeFi invest­ments come with sub­stan­tial risk. Do not inter­pret any of the rec­om­men­da­tions in this intro­duc­tion as an invi­ta­tion to blind­ly risk your money. 

Any val­ue locked in DeFi is tru­ly yours. Until the under­ly­ing smart con­tract gets hacked.

Cov­er image: Berca Mud Vol­ca­noes, Roma­nia, by Giuseppe Milo.