Understanding DeFi

Understanding DeFi

by Alexandra Damsker
Released February 2024
Publisher(s): O'Reilly Media, Inc.
ISBN: 9781098120764

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Book description

Decentralized finance (DeFi) is a rapidly growing field in fintech, having grown from $700 million to $100 billion over the past three years alone. But the lack of reliable information makes this area both risky and murky. In this practical book, experienced securities attorney Alexandra Damsker explains DeFi's role in both blockchain and finance.

Ideal for developers looking to build decentralized applications (DApps), this book compares DeFi to traditional bank-led fintech and explains why DeFi is exploding in interest and popularity. You'll explore the growing array of DApps and platforms in various categories, including their benefits and drawbacks, and learn how DeFi tools work together from the perspective of both users and developers.

With this book, you will:

  • Learn how DeFi fits into the blockchain and fintech worlds
  • Understand why it's important to move beyond the banking system
  • Explore the tools for building a useful, functional DeFi application
  • Learn the risks, benefits, regulatory concerns, and unresolved issues in this nascent and fast-growing industry
  • See which technologies are well-positioned to be incorporated into DeFi blockchains in the near future
  • Assess your own risk level to determine which strategies are most appropriate

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Table of contents

  1. Preface
    1. How Is This Book Organized?
    2. Who Is This Book for, and What Will You Learn?
    3. Conventions Used in This Book
    4. O’Reilly Online Learning
    5. How to Contact Us
    6. Acknowledgments
  2. 1. Introduction to DeFi
    1. What Is Blockchain, Anyway?
    2. A Brief History of Accounting
      1. Single-Entry Bookkeeping
      2. Double-Entry Bookkeeping
    3. Massive Fraud, or the Status Quo Officially Doesn’t Work Any Longer
      1. Triple-Entry Bookkeeping
      2. Triple-Entry Accounting
    4. The Bitcoin Revolution: The First Blockchain Use Case
    5. Ethereum and the Smart Contract Revelation
      1. Smart Contracts
      2. Ethereum’s Innovation: Self-Executing Programming → Smart Contracts
    6. Tenets of Blockchain (According to Me)
      1. Open
      2. Shared
      3. Distributed
      4. Consensus
      5. Permanence (or Immutability)
      6. Anonymity
      7. Trustless
    7. What Does Any of This Have to Do with Finance?
      1. What Is Finance?
      2. How Money Flows in Banks and Economies
      3. Banks Are Using Your Cash—and Not Paying for It
    8. What Is Decentralized Finance, and Why Is It Important?
    9. Conclusion
  3. 2. The Building Blocks of DeFi
    1. Protocols
    2. Platforms
      1. A Trilemma Solution
      2. Deployment Network
    3. Decentralized Applications
      1. Incentivized
      2. Decentralized
      3. Blockchain-Based Protocol
      4. Open Source (Maybe)
    4. A Word on Wallets
      1. Custodial Versus Noncustodial
      2. Are There Any Problems?
    5. Stablecoins
      1. Asset Versus Currency
      2. Enter Stablecoins
      3. Types of Stablecoins
    6. Governance Tokens
      1. Lending
      2. Derivatives and Synthetics
      3. Insurance
      4. Prediction and Betting
    7. Conclusion
  4. 3. The Tools of DeFi
    1. Smart Contracts
      1. Wallets (Again!) and Oracles
      2. The Oracle Problem
    2. Stablecoins Versus CBDCs
      1. Incentivized Governance Tokens
      2. Wallets Part III: Hosted Versus Unhosted and the Purpose of Knowing Customer Identity
      3. True or False?
    3. Anti-Money Laundering and Know Your Customer
      1. AML
      2. KYC Versus AML
      3. What Is Required?
      4. What Is the Impact?
      5. US Regulation
    4. Custodians and Intermediaries
    5. Conclusion
  5. 4. How to Build a DeFi Application or Protocol
    1. Basic Principles of Financial Tools
    2. Developing Your Application
      1. Rule 1: Which Market?
      2. Rule 2: Did You Apply Basic Business Principles and Process?
      3. Rule 3: Where Do You Build?
      4. Rule 4: What’s Your Token, and Did You Apply Proper Tokenomics?
      5. Applying Tokenomics
      6. Rule 5: Did You Audit Your Tech?
      7. Rule 6: How Do You Launch?
    3. Conclusion
  6. 5. Making Money with DeFi
    1. Investing with a DeFi Protocol on Blockchain
    2. Is It Really “Investing”?
    3. DeFi Protocol Types
      1. Protocol 1: Staking a Token
      2. Protocol 2: Lending Protocols
      3. Subprotocol 2A: Liquidity Provider on a Swap or Decentralized Exchange
      4. Subprotocol 2B: Borrower-Lender Platforms
      5. Subprotocol 2C: Borrowing Platforms
      6. Subprotocol 2D: Yield Farming
      7. Protocol 3: Memecoins
      8. Things to Consider
    4. Harvesting Profits and Losses
    5. Taxes
    6. Conclusion
  7. 6. The Future of DeFi
    1. The Rise of Asset-Backed Tokens
      1. Real-World Assets
      2. Does DeFi Even Need Regulation?
    2. A Better Regulatory Structure for Crypto and DeFi
      1. Who Is Issuing Tokens and Coins, Anyway?
      2. What About Tokens That Do Many Things?
      3. Tokens As Securities
      4. Commodities
      5. Derivatives
      6. How Does Crypto Come into This?
      7. Smarter Regulation
    3. Securitization and Collateral
      1. Collateral
      2. Securitization
      3. Better Regulation
    4. Currency
      1. We Need Fiat Alternatives
      2. Future Regulation
    5. Promoters
    6. Community Projects
      1. How Should They Be Regulated?
      2. Customers Versus Traders
    7. Centralized Marketplaces
    8. Decentralized Marketplaces
    9. Dark Pools
    10. Intellectual Property
      1. Problems and Solutions
    11. Identity
      1. A Viable Solution
      2. The Need for Accountability
    12. Accredited Investor Rules
    13. Taxes
    14. Conclusion
  8. Index
  9. About the Author

Product information

  • Title: Understanding DeFi
  • Author(s): Alexandra Damsker
  • Release date: February 2024
  • Publisher(s): O'Reilly Media, Inc.
  • ISBN: 9781098120764