DeFi Playbook Part 1: Blockchains and Protocols

DeFi focused blockchains

  1. More than 40% of crypto’s market cap is dominated by Bitcoin, which is not a DeFi focused blockchain
  2. A long tail of DeFi focused cryptocurrencies are overvalued, with quick early adoption driven by speculations around a currently underdeveloped DeFi ecosystem

Types of DeFi protocols

  • DEXes are permissionless — users must be able to operate them without any 3rd party involvement
  • DEXes democratize market-making — allowing anyone to provide the liquidity required for the functioning of the protocol
  1. Direct staking: These are blockchain-built staking protocols where users can directly stake their cryptocurrencies and increase their chances of selection. Example: Terra Station manufactured by Terra
  2. Indirect staking: These are standalone protocols that pool cryptocurrencies on behalf of investors and stake them to increase the probability of selection. The probability is increased multifold due to the pooling together of cryptocurrencies. Example: Lido
  1. Maximize yields: They shift funds between various DeFi protocols to maximize the yields.
  2. Minimize gas fee: They also aim to minimize the gas fee associated with transacting on the Ethereum blockchain
  3. Improve user experience: Mainstream users can get the same result by utilizing one yield aggregator protocol as they would by investing in multiple yield-generating protocols.
  1. Crypto futures: Contracts where traders decide to sell a cryptocurrency in the future at a specific date and price. At the time of realization, the delta between the live price of the crypto and the decided price of the futures contract determines the profit or loss of the investor.
  2. Crypto options: Similar to futures, a crypto option allows traders to sell or buy a cryptocurrency in the future at a specific date and price. In this case, the trader has an option to not bear a loss by not executing the contract. However, (s)he would still have to bear a trading fee.
  3. Perpetual swaps: These are very similar to futures or options except that they don’t have an expiry date and can be kept for as long as the trader wants to. To keep the contract, the holder has to pay a holding fee called the funding rate. In the case when the price of perpetual futures rises, traders who have bought the contract, or have gone long, have to pay the funding rate to those who have sold the contract or gone short. In the case when prices fall, sellers have to pay the funding rate to the buyers.

DeFi protocols within blockchains

The approaches followed by mature DeFi ecosystems like Ethereum, Solana, and Terra are very different.

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Parth Chhaparwal

Parth Chhaparwal

VC @ Venture Highway | Ex-Bain & Co | IIT Kanpur