Understanding DeFi

Chapter 2. The Building Blocks of DeFi

We’ve talked about blockchain as a whole; now let’s talk about the individual terms describing the building blocks of DeFi and how they fit together. These building blocks are protocols, platforms, decentralized applications (DApps), wallets, stablecoins, and governance tokens. Remember that Bitcoin and ETH (the base token of Ethereum) are permitted on nearly all DeFi chains because they are well established and the most liquid of the assets available. I am not explaining them further in this chapter, but they are also building blocks of DeFi.

After that, we will discuss some of the use cases of DeFi.

Protocols

Protocols are just a set of rules and procedures. DeFi protocols are the rules and procedures for lending and borrowing without using banks. These protocols are used in one of two things: a platform or a DApp. Let’s discuss the difference between the two.

Platforms

A blockchain platform is just like any technology platform. It establishes the environment, or basic rule system, that will allow applications to run. Blockchain platforms, as they currently stand, have a few basic requirements and one main issue to resolve. As you’ll see in Figure 2-1, platforms deal with these requirements and issues differently, and that’s what makes the key distinctions between various platforms.

Figure 2-1. Examples of blockchain solutions and where ...