DeFi Ecosystem

DeFi stands for Decentralized Finance: financial services built on public blockchains without traditional intermediaries.

Uniswap (DEX) and Aave (lending) are core DeFi protocols; apps that build on them sit in the Application Layer above.

AMMs like Uniswap allow trustless token swaps via liquidity pools, with no central counterparty.

TVL (Total Value Locked) aggregates the USD value of all assets supplied to a protocol’s smart contracts.

k is invariant; each trade adjusts x and y such that their product stays constant.

After the trade: 90 × y’ = 30,000,000, so y’ = 333,333 USDC. Cost = 333,333 - 300,000 = 33,333 USDC.

IL formula: \frac{2√r}{1+r} - 1 where r=2 gives ≈ -5.7% relative to holding.

Each marginal unit of a large trade receives a worse price because the curve steepens; small pools amplify this effect.

Health factor = \frac{collateral × liquidation threshold}{debt}; dropping below 1.0 triggers liquidation.

Max borrow = \10,000 × 0.75 = $7,500$; borrowing more than this violates the LTV constraint.

Health factor = 7,000 / 7,500 ≈ 0.93 < 1.0; liquidators can repay your debt and seize collateral at a discount.

Pseudonymous addresses have no persistent reputation; collateral solves the enforcement problem that credit scores address off-chain.

At 150% collateral ratio: $1,000 DAI requires $1,500 in ETH collateral.

DAI’s overcollateralized positions with liquidation mechanisms maintained solvency; UST had no backstop once the spiral started.

Each stablecoin design sacrifices one dimension: USDC (centralised), DAI (capital-inefficient), UST (unstable peg).

The algorithmic peg relied on LUNA as a shock absorber; once LUNA’s price collapsed, the mint/burn mechanism amplified rather than stabilized.

DeFi and CeFi entities were interconnected through loans and collateral; Terra’s collapse revealed the system-wide leverage.

Yield must originate from real economic activity (fees, interest); token inflation masquerading as yield is a red flag for imminent collapse.

Without enforceable identity and legal recourse, borrowers can default by abandoning an address; the system is gameable and lacks the off-chain legal infrastructure credit requires.

DeFi offers non-custodial savings in USD stablecoins and cross-border transfers without bank approval; smart contract risk and technical barriers are real but surmountable trade-offs for the unbanked.