Decentralized Finance (DeFi) is redefining the future of finance. The underlying infrastructure supporting financial applications is undergoing a major shift that is changing the way we think about permission and control, transparency and risk.

DeFi is a developing market sector at the intersection of blockchain technology, digital assets, and financial services. according toData from DeFi Pulse, the value of digital assets locked in DeFi applications has increased tenfold, from less than $1 billion in 2019 to more than $10 billion in 2020, and reached its peak so far at more than $80 billion in 2021. Still in the early stages of development.

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Key structural commonalities of DeFi applications

DeFi applications are financial applications without a central counterparty. In practice, this means that you don't have to interact with any institution (such as a bank) to access these financial applications; users are directly interacting with programs (such as smart contracts) on top of the protocol itself.

Interoperability and Programmability (Composability)

• Use the underlying blockchain as the core ledger

• Open source and transparent by default

• Interoperability and Programmability (Composability)

• Use the underlying blockchain as the core ledger

Use the underlying blockchain as the core ledger

Compared to traditional financial applications that use core banking systems (Fiserv, Jack Henry, FIS, etc.) as their underlying record books, DeFi applications use blockchain as their underlying core ledger.

Some of the most notable blockchains used to build DeFi applications include Ethereum, Solana, and Binance Chain, among others. These underlying blockchains store the ledger state of deposits to DeFi applications, content stored in smart contracts, transactions, and withdrawals.

Ensuring that all core accounting functions of matching inputs and outputs are handled by the blockchain itself, DeFi applications do not need to create external systems to reconcile balances, as all transactions can be queried across various block explorers.

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Open source and transparent by default

This leads to three interesting properties:

This leads to three interesting properties:

• Composability - DeFi applications themselves can be forked, remixed and reused in many other applications.

• Transparency — Since DeFi applications are open source, audits are entirely possible to understand exactly what smart contracts do in terms of functionality, user permissions, and user data.

• Auditability - Since the underlying blockchain itself is open source, the entire flow of funds is fully auditable, including collateral in the system, transaction volume, default, etc.

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Interoperable and Programmable

In order for developers to gain the trust of users, most DeFi applications are completely open source - including the front end and the smart contract itself. Furthermore, since DeFi applications all run on a common platform (the underlying blockchain), these DeFi applications are fully interoperable with each other and can be programmed to work with any other DeFi application in the ecosystem.

This is often referred to as DeFi's "money blocksComposabilityComposability” aspect. All these DeFi applications are like individual Lego bricks that can be remixed with other Lego bricks to build something new.

Contrast this with the traditional financial system;

• Infrastructure Fragmentation - Traditional financial applications are not built on common infrastructure.

• Siled Applications - Traditional financial applications are typically proprietary to one banking institution. For example, all of Wells Fargo's "fintech apps" work together, but not across different banking institutions.

• Not developer friendly - Traditional financial applications are not meant to be built on top of other developers.

The traditional financial system does have common standards; however, achieving consensus among market participants is extremely difficult because financial institutions view their software as their competitive moat rather than the product as a differentiator.

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open and accessible to all

With traditional financial applications, new users often go through lengthy onboarding processes, income verification, credit checks, and even face-to-face meetings—just to be able to use a given financial product.

Because of these arbitrary rules set by financial institutions, these onboarding processesincludeincludeloan discrimination、Refusal of basic banking services、Opening a line of credit without consent、wait.wait.

With DeFi applications, you only need a wallet address to interact with these systems. DeFi apps require no income verification, no credit checks, and in most cases, they don't even need to know who you are outside of the wallet address you're using.

licenselicense. If you have funds in your wallet for the transaction you want to make, you can do it. No agency or intermediary will stop or refuse to serve you. No matter what your background is or what country you are from, DeFi apps will not discriminate.

This is one of the least appreciated aspects of DeFi products.

Traditional FinTech Architecture vs. DeFi Architecture

Below is a comparison chart on some of the key differences between centralized and decentralized financial applications:

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DeFi Infrastructure - Market Map

Below is a market graph of two different DeFi ecosystems, one built on the Solana ecosystem and the other on the Ethereum ecosystem.

The reason I chose these two ecosystems to focus on is to demonstrate the breadth of DeFi applications built across two different underlying protocols. I also believe Solana is the most interesting protocol because of its high transaction throughput (50k+ transactions per second), sub-second latency and transaction confirmation times, and the speed with which developers can build DeFi applications on top of the Solana protocol. growing ecosystem.

While structurally similar, each underlying protocol has its own ecosystem built on top of it that is largely independent of the others. Below are further explanations and the tradeoffs between them.

base layer (first layer)

Node infrastructure

Node infrastructure

The never-ending amount of data on the underlying ledger needs to be queried (retrieve blocks, find transactions, sync data, write transactions, etc.). Within the Ethereum ecosystem, an entire industry has sprung up to address this need (Infura, Alchemy, etc.).

Second floor

Second floor

On Ethereum, there are various second-layer solutions mainly for scaling, since Ethereum itself cannot handle all transactions. Two promising scaling solutions include Matic, Optimism, etc.

Order Book Aggregation

Order Book Aggregation

Solana is unique in that there is aSerumAn additional layer is taken up by the DeFi project of , which provides a CLOB (Central Limit Order Book) for use by all DeFi projects built on top of it.

When new DeFi projects are built on top of Solana (DEX, AMM, Options, etc.), they can pull orders from Serum and push orders back to Serum, greatly reducing the cold start challenges most new financial applications face.

The best way to think of it is as a "network liquidity" and "order management" system, which is used by most projects in the Solana ecosystem.

DeFi toolset

DeFi toolset

From a developer or end-user perspective, running these DeFi applications requires a common set of tools. These services have no direct traditional financial analogs, but they include:

• Wallet — The main interface people use to store assets and interface with DeFi applications.

• Oracles — on-chain data feeds used by DeFi applications to reference prices and execute trades (eg: liquidations).

• Block Explorers & Analytics - Tools like Block Explorers were created to allow people to directly query the blockchain ledger itself. These are most commonly used when validating transactions.

• Stablecoins - The two main assets used in the DeFi ecosystem include underlying native protocol tokens (ETH or SOL) and ideally on-chain stablecoins (USDC, Dai or Pai).

• DeFi applications

DeFi applications

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The Potentially Missing Piece of DeFi Infrastructure

Here are a few highlights:

Here are a few highlights:

• Consumer Applications - In the traditional financial world, consumers typically use consumer applications (e.g. Robinhood, Chime, Transferwise) rather than the underlying protocol itself. The front end of the DeFi space can be greatly improved and play a greater role in the overall consumer experience. Overall, the UI/UX of most DeFi apps is still difficult to use from a consumer perspective.

• CRM — The DeFi space doesn’t really have the concept of customer relationship management, nor does it typically collect any amount of consumer data. While great from a privacy standpoint, getting to know your customers better is also valuable.

• Notifications - Notifications or alerts simply do not exist in the DeFi space. On a broader level, there isn't any good way to communicate with users either.

• Product Analytics - There are tools to measure blockchain activity, but not engagement in DeFi applications.

• Security — DeFi products typically undergo security audits; however, none of the security audits guarantee the most common protections that consumers are used to in the traditional financial world. On top of that, the demand for security auditors exceeds the supply, so this is a big bottleneck.

• Transaction Rollback - In traditional finance, if you make a mistake, the financial institution can initiate a rollback of the transaction. This does not yet exist in DeFi.

• Escrow — Currently, most DeFi projects require interaction from a personal wallet perspective. There is no single custodian that allows you to interact with DeFi applications.

• Developer Platform - Most developers in the crypto space are built on top of the layer 1 protocol itself. There is currently no concept of a developer platform or middleware.

• Embeddable Wallets - Wallets are considered these external services, no white label wallet product can embed them directly into the DeFi application itself. There are initiatives such asTorus, but these are still in their infancy.

• The Future of Financial Applications

• The Future of Financial Applications

In traditional finance:

In traditional finance:

• The underlying ledger is not open source or developer friendly.

• There's a whole bunch of "banking-as-a-service" apps out there just to wrap the underlying partner bank in a developer-friendly platform.

• Fintech applications are very challenging to regulate and often require years of development before a single product is released.

All transactions are public.

• Everything is open source, including the ledger itself.

• All transactions are public.

• Everything is built from the perspective of developers building applications on top of the protocol.

• New DeFi applications are built and launched in weeks, not years.

DeFi developers will change the way the financial world works forever. We are very bullish on the DeFi infrastructure stack and community.