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Demystifying DeFi title image
Welcome to Demystifying DeFi, Stablecoins, and NFTs
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Course Goals

  • The road from Bitcoin to Ethereum to DeFi
  • How traditional financial applications are being decentralized
  • The values of the DeFi ecosystem: Openness, Modularity, Decentralization
  • The new financial applications building upon blockchain technology
  • How to navigate the DeFi ecosystem using various tools
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Ask a question: Why is DeFi a topic of interest? As Bitcoin established centralized money, new innovation trends are exploring if a decentralized financial system can function.

Why are we here? Why is DeFi worth studying? What is the potential impact that DeFi could have?

Properties Of DeFi

  • Open
  • Modular
  • Decentralized
  • Independent
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Describe the overarching values of the DeFi ecosystem

  • Open
  • Modular
  • Decentralized
  • Independent

There are several values that motivated the creation of a more inclusive financial system where the user has more control. Openness ensures a more fair, transparent financial system. The modularity of the applications around decentralized finance allows for developers to create completely unique tools by combining new innovations. Developers can choose from a variety of functions and create models as if they were building with Legos; mixing and matching whatever tools or components to create something new. The decentralized nature of this new financial system addresses the centralized banking system that has led to a few select individuals making decisions on behalf of the average person. The problem is these decisions have not always been in the best interest of the average consumer/investor/saver.

Decentralized finance, for the first time, allows the average person to serve the function of the bank.


The internet encompassing the globe
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Bitcoin, the first cryptocurrency, gave any internet user the ability to transfer funds across borders. Bitcoin looked especially promising for certain locations that did not have mechanisms to transfer cash in a digital manner. This is also true for basic financial services that are usually provided by larger financial institutions with lots of capital. Access to banking is limited by geography, with specific areas lacking basic banking services. DeFi applications transcend borders; anyone with internet access can participate in this developing global financial system.

One of the most unique aspects of decentralized finance is its inherent open and inclusive nature. DeFi builds upon established public blockchains. This means that anybody can join these communities/ecosystems, with all transactions able to be viewed in a transparent manner.

For the average person in a more developed economy, the rise of DeFi might just be an interesting option outside of the current financial system. Gatekeeping financial institutions have created a closed system where only they are privy to any information exchanged. They use data that consumers do not have access to in order to help their own business positions.

These banks also have control over who is able to use their services. This practice makes sense from a legal aspect, but there have been people that have been excluded from these closed financial systems. The existing global financial system's reason for this is simple; these institutions have not extended their services to certain geographic areas. The result is that a significant portion of the world doesn't have access to the financial services that others have the opportunity to use.

DeFi turns this concept on its head. Most of the areas that have been financially neglected happen to be poorer countries. Less money flowing into the system means less interest for banks and investors. Blockchain technology and DeFi's open nature has led to a viable economic option for those that traditional financial institutions have neglected, through a variety of applications like crypto-backed microlaons.


Building blocks
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DeFi is modular, as creators can use different parts of different innovations to create something completely new. Use "building blocks" as an example to show how customizable dApps can be. Note that all dApps are open-source, so the code for these tools can be audited or adapted by anyone. This property of DeFi encompasses the value of transparency, a key part of blockchain technology.

One of the most developer-friendly aspects of decentralized finance is that most innovations can be incorporated into new creations. Developers can pick and choose previously created tools (or even parts of these tools) to create something completely new, with a different or more successful use. For example, dApps like Metamask combine the ability to browse the decentralized web while also working as a cryptocurrency wallet.

This modularity allows the DeFi ecosystem to be a playground for developers. Let's say a new innovation is a single lego block. It can be combined with other blocks to make a new tool. All applications are open-source and can be audited, so users can be sure that they are incorporating reliable code into their respective projects. This can be as simple as a new feature being integrated, improving, or combining these tools. We've referred to the modular nature of DeFi dApps as Legos. Individual digital building blocks (dapps) can be added, substituted, and reconfigured into a completely new creation.


Decentralized nodes
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DeFi relies on decentralized networks:

  • Lack of a central administrator
  • Governance by protocol
  • Establishing scalable trust

Like Bitcoin, DeFi is a response to an overregulated financial system filled with moral hazard.

The rise of DeFi is a direct response to the overly centralized nature of our current financial systems. Access is restricted and decisions about the financial wellbeing of the average person are made by a few select individuals or groups in positions of power. This is not the first response to this problem, but rather the next step in the movement towards decentralization. That first response? The creation of Bitcoin, the first blockchain.

To provide the proper context of the creation of Bitcoin, we must examine the major world events occurring at the time of its creation. 2008 is a year that stands out for some very bad reasons. The world's largest economy, the US, had a series of reckless investments backfire on the centralized banks and investment institutions that made them. Reckless investing and lack of transparency and oversight triggered a domino effect and banks started to become insoluble. These decisions, fueled by greed, had greatly impacted everyday individuals. The middle class, which had much of their savings invested in the stock markets, were the ones that were impacted the most. These people lost their retirement funds, their life savings, because they were led to believe that their investments were not risky. The same banks and brokers that thought these investments to be safe got lured into a false sense of security that led them to believe that they could get away with even more reckless investments.

Banks Bailed Out

A safe falling with an open parachute attached
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The aftermath of the global financial crisis started with questions surrounding the fate of these insoluble banks. Should the government bail out the banks through a huge stimulus package or let them fail? To avoid more possible damage, the government ended up bailing out the banks.

Or should they let the banks default and go into bankruptcy proceedings? Each potential "solution" came with its own drawbacks. Bailing out the banks would keep an inherently flawed financial system intact. Additionally, the concept of moral hazard was an issue. Would the banks really learn their lesson if they were summarily rescued without being punished for their negligence? Critics said banks would likely not change their behavior and a repeat of the global financial crisis could occur without major reformation.

The other option would have been more drastic and had the potential for even greater disruption. Letting the insoluble banks default would likely lead to even more savings being wiped out. This would, however, reduce the existing financial system to rubble. Burning it all down would have consequences, but at least we would have the opportunity to build a more fair financial system.

You Can Be The Bank

Name tag with the name the bank written on it
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Explain how DeFi passes the gatekeeping to allow users to hold roles that were traditionally restricted to banks. Discuss how a third party institution can create the trust needed to complete financial transactions, the tradeoff being the extra expense taken by banks for their services.

A huge motivation that led to the creation of both Bitcoin and later DeFi has been the desire to circumvent unfair gatekeeping institutions, in this case, banks.

DeFi allows for types of transactions that traditionally needed a bank to be conducted. There are a variety of reasons that these institutions were given this almost exclusive privilege. One is the liability that these banks undertake when allowing unverified actors to use their services. AML/KYC laws state that banks must verify the identity of those using their services, otherwise they are liable.

Another main reason for banks controlling these services is because they were a third party institution that had the required capital. They provided value in the form of establishing trust between two other parties wanting to conduct a transaction. The economic principle of trust is simple. The less trust, the more people or institutions that have to be brought into the transaction, raising the cost for the original two parties.

Banks have almost had a monopoly on being these trustworthy institutions. They also had the capital to provide banking services. Now decentralized networks have proven to be viable, especially at establishing trust through a protocol, or a set of rules that govern a network.

The creation of Bitcoin allowed two strangers to conduct a transaction without the need for any entity to come in, facilitate the transaction, and take a cut of the asset or money being transferred. If banks are not needed to establish trust, and individuals have the capital that allows them to conduct transactions that were previously restricted to investment institutions, then why are banks needed?

This is the idea behind DeFi. Users trust a protocol and can then offer loans and other financial instruments. Trust is secured through established rules that are transparent to everybody. The technology to circumvent banks exists and is gaining rapidly, in terms of applications, money, and users.

Getting To DeFi

The road to DeFi
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DeFi has sparked much optimism, but why is this innovation now gaining traction? Put simply, a series of events and technological advancements needed to occur to spark what has become a decentralized finance system. In the next section, we'll examine how DeFi came to be, starting with the creation of Bitcoin.

DeFi did not magically appear out of nowhere. There have been several innovations since the creation of Bitcoin. Ethereum has enabled the creation of a DeFi ecosystem. Without these advancements, there would be no DeFi.

The Limitations of Bitcoin

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Introduce dApp development that expanded cryptocurrencies, smart contracts, and DAOs and how it relates to Bitcoin’s limitations.

Bitcoin’s Purpose

Visualization of bitcoin transactions
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Review the invention of Bitcoin and the goals it set out to accomplish. Satoshi Nakamoto, the mysterious creator of Bitcoin, described their creation as an electronic peer-to-peer decentralized cash system. After 12 years of Bitcoin, we can confidently say that yes, Bitcoin has definitely satisfied that goal.

In our previous course, we were introduced to the innovation that is Bitcoin. We talked about how it allowed for peer-to-peer cryptocurrency transactions. There is no doubt that Bitcoin was THE trailblazer in the cryptocurrency space, but did it fulfill its stated goal?

We would argue yes, and then some. Not only did Bitcoin prove itself to be a viable way to transfer value, it arguably became a much better way to send value around the world than the existing cash transfer systems. When people send money across borders, they usually do it through a bank or a money transmitter like Western Union. This process can take up to several days, and often comes with exorbitant fees. With Bitcoin it might take up to an hour (if the network is busy) and a fee of under a dollar, no matter how much bitcoin is being sent.

Bitcoin’s Purpose (cont.)

Sending bitcoin across borders
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Reexamine the motivations behind the creation of Bitcoin. While Bitcoin has fulfilled its stated purpose as peer-to-peer decentralized cash, developers asked if the Bitcoin blockchain could do more with the chain. Developers sought to create new features such as non-fungible tokens and decentralized finance applications.

These entities could charge these fees for their inefficient services because there was no alternate option. They had essentially cornered the market and had no incentive to further innovate. These banks and money transmitters were making a lot of money and were happy with the status quo.

That's why the introduction of Bitcoin was so interesting; it introduced competition into an industry that previously had no challengers. For the first time, banks weren't the obvious option to send money, especially across borders.

People started to ask a question that would become very important: What if blockchain technology can do more than simply transfer cryptocurrency? What if a blockchain could process data, both financial and non-financial? What if we could build decentralized programs on a blockchain?

Smart Contracts Introduced

Contracts on display
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Introduce smart contracts by examining Nick Szabo's conceptual innovation. The first smart contracts were built on the Bitcoin blockchain, but ultimately met technological limitations.

That last question was explored as Bitcoin went through its early years. At this point bitcoin didn't have the high price it does today; it was trading at cents, then dollars. Despite the relative lack of value compared to today, those early days did prove one thing; that Bitcoin could work. Rarely do people look at innovation and leave it be. There is always room for improvement, and people are constantly trying to iterate on new technology. Bitcoin was no exception.

The early years involved a lot of exploring of what Bitcoin could be. What if we could program and develop on a blockchain-based ecosystem. What tools would be required for this to happen?

The answer to this question already existed. In the late 1990s, a concept that would become known as "smart contracts" was introduced by computer scientist Nick Szabo.

What are Smart Contracts?

Cryptocurrencies sitting in a vending machine
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Introduce the concept of smart contracts beyond Bitcoin using a vending machine as a real-world example. Explain how smart contracts play into the blockchain ecosystem.

Smart contracts are autonomous, self-executing programs that live on the blockchain. They can be programmed to conduct a specific action without human intervention as long as funding and instructions are provided. A network of smart contracts can be used to form a dApp, or decentralized application.

The best real-world analogy to a smart contract would be a vending machine. Remember, smart contracts are able to execute a directed action if properly funded. This is the exact same situation as using a vending machine. After entering your money, you punch the corresponding number that will provide your desired snack. You are providing funding paired with a special set of instructions and the vending machine functions autonomously. Nobody has to be there to dispense your snack. The machine can do it on its own.

These traits are shared by smart contracts. Smart contracts are decentralized programs that are given a specific function that they can carry out themselves if the required funding and directions are provided. Smart contracts are autonomous and self-executing; they do not need human intervention to function. Instead of trusting a third party to provide a service that is needed, the protocol can be trusted. Establishing trust with code is a lot easier, and more cost-efficient than trusting a third party. This is even more true if the smart contract's code is transparent, as it is on the blockchain. It is auditable by anyone.

Technological Limitations

Bitcoin restrained by chains
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Bitcoin’s technical limitations led developers to seek other options. These limitations included Bitcoin’s block confirmation time and block size. Developers had a difficult time programming using the Bitcoin blockchain, so they looked towards better options.

Satoshi Nakamoto was very clear about his intentions for the Bitcoin network. The stated goal laid out in the Bitcoin whitepaper states the network was designed to be a decentralized peer-to-peer cash system.

As mentioned before, Bitcoin met this goal and is still doing so. It is a robust, resilient network that facilitates the transfer of value in a quick and inexpensive manner. However, some looked at the blockchain technology underlying the network and wondered if it could do more beyond simple cash transfers. Bitcoin was faced with a choice. The network was reaching capacity in terms of transaction throughput. The network was becoming clogged, resulting in increased fees. Since protocol changes are decided by the network, Bitcoin users were faced with a choice:

The obvious answer was to decrease the size of block headers which would reduce the data processing burden on the network. This, however, would solidify Bitcoin's status as a cash transfer system which would be difficult to build upon because of data restrictions.

This is an inherent limitation of the network. Developers that recognized the difficulty of building upon Bitcoin quickly explored other options, first on the Bitcoin network, then by creating blockchains of their own.

Altcoins Address Bitcoin’s Deficiencies

Altcoins filling in the gaps for Bitcoin
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Examine the innovations that other blockchains have made. While Bitcoin had its inherent limitations, these projects attempted to address them.

Despite Bitcoin's success, there were inherent limitations when it came to developing upon the Bitcoin blockchain. One of these limitations was the amount of data that could be held in a block along with the fact that Bitcoin aimed to confirm a batch of transactions just once every ten minutes. Smart contracts containing data and blocks are limited by how much data they can hold. Developing complex smart contracts on Bitcoin was made more difficult by lengthy confirmation times.

The technological shortcomings that kept Bitcoin from advancing were noticed by several other projects. Many decided to create their own forms of currency or even their own blockchain in order to improve upon the established Bitcoin protocol.

Some of these technological issues included supply availability, transaction times, the use of non-fungible tokens to represent real-world assets, and the creation of a blockchain designed to run decentralized applications.

The years after Bitcoin launched saw rapid innovation. The standard for blockchains was set by Bitcoin. Now other projects were looking to iterate off of the decentralized peer-to-peer cash transfer system in order to apply blockchain technology to applications outside of simple money transfer.

Colored Coins

A rainbow of colored bitcoins
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Colored coins were an attempt at creating non-fungible tokens. The implication of colored coins for block sizes and chain use.

Colored coins were the first attempt to expand bitcoin's utility beyond the simple transfer of value. Normal bitcoins are divisible to many decimal places. One bitcoin can be divided into smaller units, especially useful considering bitcoin's high price. It simply wouldn't be practical if you could only transfer a whole bitcoin at once.

Like any viable currency, a single bitcoin can be divided into "change". Without this functionality, a peer-to-peer cash transfer system would likely not be able to function properly. It would be like trying to pay for a $20 product with a $100 bill without the ability to get your $80 in change.

When developers looked to add other functionalities to the Bitcoin blockchain, one of the first things they incorporated were units known as colored coins. They realized that if they could create tokens that could not be divisible, or non-fungible, in order to represent real-world assets that cannot be divided.

For example, it wouldn't make sense to create multiple tokens to represent the deed to one house. You would need a different type of non-fungible token, or NFTs, in order to represent nondivisible assets. If this could be accomplished, then the Bitcoin blockchain could function as a decentralized digital asset manager.


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Mastercoin used data management to improve upon the Bitcoin network.

Some developers knew of the limitations of developing upon the Bitcoin network. But what if they could add another layer to the existing Bitcoin protocol in order to facilitate capabilities including the deployment of smart contracts and creating new virtual currencies? This question was explored in 2013 by a project known as Mastercoin. Its goal was to create a robust, decentralized digital economy that could utilize the capabilities of smart contracts.

By creating this second layer, Mastercoin theoretically could add these capabilities to the Bitcoin network without altering the protocol itself. It would work in addition to, not instead of, Bitcoin. Successfully implementing this functionality would have allowed Bitcoin to move past simple money transfer; the network could be used to manage things like assets, stocks, and other investments. Users could trade in their bitcoin to receive a newly created alt-coin that would be native to the mastercoin network. This was achieved by adding a bit of code at the end of Bitcoin transactions in order to manage the transfer of Mastercoins.

This, however, created a major problem. Since the Bitcoin protocol could not properly govern the actions of Mastercoin, users could possibly manipulate the Mastercoin network. Additionally, there was dispute within the community that Mastercoin could sufficiently deploy and house smart contracts. The project was rebranded to Omni in 2015. However, that year another blockchain-based platform would be introduced.

BAT and Brave

Brave's lion logo
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Basic Attention Token (BAT) was introduced as a way for publishers and advertisers to reward users who interact with their ad content. This was an interesting development, as BAT represented an abstract concept, representing and rewarding attention with cryptocurrency. BAT is used in concert with the Brave Browser.

One of the earlier, innovative cryptocurrencies based on ethereum was the Basic Attention Token (BAT). This project dedicated itself to addressing the publisher/advertiser/viewer relationship. While the current system abuses personal data and doesn’t reward users for paying attention to ads, BAT flipped this concept on its head.

Instead of advertisers throwing an ad at you and hoping that you would watch it, the project introduced interactive ads that could prove that attention has been paid to that ad. As a result, BAT can be paid to users who interact with ads. An additional feature gives users the ability to reward their favorite content creators with their own BAT.


Ethereum logo
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Ethereum addressed Bitcoin's ability to act as a decentralized world computer by introducing a network that could process data as a Turing-complete network. This next section is a basic intro to ethereum.

After seeing the complications with colored coins and Mastercoin, the challenges of expanding the Bitcoin protocol towards a financial platform looked to be a very difficult task. In 2015, a group of like-minded developers, led by Vitalik Buterin, created a decentralized computing platform that could effectively process data without the use of a central server.

These developers were motivated by the lack of ability to create smart contracts on the Bitcoin blockchain. After participating in projects such as colored coins, it became clear that in order to reach the goal of decentralized computing and development, a new blockchain would have to be created. Smart contracts were too much for the existing Bitcoin blockchain, but what if there was a blockchain specifically designed for the development of smart contract based decentralized applications.

In 2015 the ethereum Blockchain was launched.

Ethereum: A New Paradigm

Ethereum Paradigm
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Transition to learning how ethereum became a decentralized world computer. Developers started to have trouble building using the Bitcoin blockchain and forged a new network.

The limitations of Bitcoin led some to create a more developer-friendly blockchain. In this section, we will examine the ethereum network, its differences compared to the Bitcoin network. But first, let's examine the motivations behind the creation of the network.

Motivations for Creating Ethereum

Vitalik Buterin
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Introduce Vitalik and team while going over the stated goals of ethereum and how they contrast with Bitcoin.

It would be accurate to state that ethereum was greatly influenced by Bitcoin. Beyond the obvious commonality of using blockchain technology, the advancement of both projects are linked in interesting ways. ethereum was largely an advancement in blockchains that was inspired by some perceived deficiencies in Bitcoin. Bitcoin was the pioneer that paved the road that is blockchain technology. ethereum would act as a tool to allow development on that paved road.

Ethereum started with a few simple ideas. Vitalik Buterin was a 19-year-old programmer who had a fascination with all things decentralized. This led Vitalik to work on the colored coins project, which he eventually stopped working on when it became apparent that the Bitcoin blockchain could not fully support the project. During this time, a team was formed to work on ethereum. Vitalik was a Bitcoin enthusiast, but he recognized some inherent limitations that burdened Bitcoin.

What is Ethereum?

Thinking about Ethereum
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Continue to tell Ethereum's origin story.

In 2013, a cryptocurrency researcher named Vitalik Buterin wrote a whitepaper proposing a wider conceptual version of the blockchain concept. Buterin labeled his concept as ethereum and suggested that it would provide greater utility by allowing block data to include executable code which peers could run for each other in a complete computing environment. A cryptocurrency known as ether would help support the network by providing economic incentive.

Rather than the blockchain existing as a ledger of transactions, Buterin proposed that the chain might instead serve as a source of communal truth for the results of computations. Instead of value being transferred in the form of coded data, why couldn't data be processed in a decentralized network with many equal participants? In order for this to happen, ethereum would have to add a component that could effectively process this data, a functionality that was limited in bitcoin because of how much data can be processed.

In this new version, the network of peers collectively would send data to be processed in the form of transactions, while a communal ledger recorded these transitions. The rules of this transition and functionality are encompassed in the consensus rules, which you may want to explore on Github. Collectively, the group of peers are referred to as the ethereum Virtual Machine (EVM).


The Ethereum Virtual Machine
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Introduce the EVM and it relates to transactions, smart contracts, and dApps

The Ethereum Virtual Machine is comprised of the collective members of the network. While it is not a single entity, it uses the power of the nodes on the network to help process data. The ability to process data in a reliable and quick manner allows for developers to build applications upon this decentralized platform, appropriately named decentralized applications, or dApps.

dApps function as normal applications could, but instead of relying on a central server that could fail or compromise private information, they rely on ethereum's decentralized network and the EVM in order to execute user actions. While servers are good at processing data, the inherent security risk and lack of transparency has led to the rise of an ecosystem where security and privacy are paramount. While the EVM isn't the most efficient way to process information, it does so in a decentralized manner.

EVM (cont.)

ethereum symbol broken up into parts
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  • Introduce the EVM
  • Gas vs fees
  • Decentralized processing of data

Because the EVM is an open system, there is a substantial risk of a rogue actor attempting to subvert the network by running code that repeats endlessly or otherwise monopolizes the computational power of the network. In order to prevent this, a pricing unit known as Gas must be paid to run computations. Gas is purchased at the time a smart contract is triggered and must be paid with ether. Because the price of Gas can vary independently from the price of ether and will increase when many parties try to purchase it simultaneously, this provides an economic disincentive that prevents spam within the network.

When a computer is not limited to the execution of a particular type of computation task, we call this Turing complete. Another way of referring to this state is computational universality, because broadly speaking, all Turing complete machines are interchangeable.

In a decentralized context, this means that any code submitted to the network can be computed reliably by every node. The EVM is thereby able to operate as a single computer even though it runs on separate devices all around the world.

Because the ethereum Virtual Machine is Turing complete, many new features are built using smart contracts, and rarely require changes to the core ethereum protocol. In these cases, the ERC process will mainly define a standard that developers can use to increase interoperability of their code.

Block Time Decreased

A block displaying a clock face on each side
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Bitcoin's block time of 10 minutes was reduced to just 10 seconds in the ethereum network. These faster confirmation times allow for the quicker processing of data. It is this characteristic that allows ethereum to act as a functional decentralized platform.

In order to reach their goals of being a world decentralized computer, the ethereum blockchain had to find a way to process data more quickly than the Bitcoin network. The developers found that if they greatly decreased Bitcoin's block time, more data could be processed by the network. ethereum set their block times to be around ten seconds each, several times faster than each Bitcoin block is created.

And it had to be this way. For decentralized applications to work, requests have to be received and fulfilled by the network quickly. You're not going to use a decentralized application that takes several minutes to process each action you are trying to complete; it just isn't feasible.<.p>

A robust decentralized platform with functional decentralized applications would process each action quickly and fluidly, allowing users to interact with dApps without having to wait minutes for the latest data request to be processed.

Although ethereum was limited in the amount of data it could fit into each block, this network construction and block time decrease was better suited to act as a platform for decentralized applications than Bitcoin.

Ethereum and MetaMask

MetaMask interface
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MetaMask is one of these dApps that connect a wallet to the decentralized web, but it works in concert with dApps instead of acting as a browser. MetaMask allows you to be able to use your traditional browser to use the wallet capabilities needed for browsing and using dApps. Of course, phishing is a potential issue. Always make sure you are visiting the actual page you're intending to. Even the most careful of us might accidentally go to the wrong URL. Luckily, MetaMask affords an extra layer of security by automatically alerting you of potential phishing attacks.

Connecting hardware wallet

A newer feature that has been rolled out by MetaMask has been to increase interoperability between the extension and popular hardware wallets. Both Trezor and Ledger wallets are now compatible with Metamask, which is a significant improvement upon the limited ways to spend using a hardware wallet. MetaMask is all about interoperability and is a big part of the decentralized web. As a result, it can work with a large number of dApps. The same cannot be said for these hardware wallets; many hardware wallets cannot easily connect with dApps. MetaMask acts as a bridge between your hardware wallet and the decentralized web.

Screens with steps

  1. Click on account Icon
  2. Select “Connect Hardware Wallet” Option
  3. Choose either Trezor or Nano
  4. Select the connect tab
  5. Select the cryptocurrency address you would like to connect to MetaMask

Adding ether to MetaMask

Adding ether to MetaMask
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If you currently have Ether in another wallet, getting your cryptocurrency into Metamask is as easy as conducting a simple transaction. Remember, Metamask functions as a cryptocurrency wallet. Upon downloading the extension for your first use, you are prompted to write down your seed phrase and are given a wallet address, just like other crypto wallets. Simply go to the wallet, select the buy cryptocurrency option, click on the “directly deposit ether” option, and put your Metamask wallet address in the receiving address field. Once the transaction is mined and added to the blockchain, your funds will now be in your Metamask wallet. If anything happens to your computer or browser, simply use the provided seed phrase to restore your Metamask wallet.

Upon downloading Metamask, you’ll have two options: generate a new wallet and receive a new seed phrase, or restore an existing wallet using a seed phrase from a previous Metamask wallet. If you select the option to restore and enter in your seed phrase, your crypto will now be available in your Metamask wallet. Remember, your cryptocurrency exists on the blockchain. Your wallet manages your public and private keys in order to prove your ownership of that cryptocurrency.

Transactions with Ethereum

Conducting a transaction on MetaMask
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Here are the key steps to conducting a transaction on MetaMask. First, make sure you are on the Ethereum mainnet. This option can be found next to your account icon. The other networks act as sandboxes where people can test their dApps without transferring real value.

  • From the home screen select the send option
  • Enter the receiving address
  • Fill out the name of the cryptocurrency you want to transfer, the amount you want to send, and your gas price

The Ethereum Virutal Machine has limited network resources that have to be allocated properly. One way to do that is through fees, the method that the Bitcoin network uses to create a monetary disincentive for those who are looking to clog the blockchain by spamming it with transactions. Ethereum uses a fee mechanism known as gas, which functions slightly differently than Bitcoin fees, yet has the same general goal of preserving account resources. The price of gas is set based on the supply and demand of transactions, specifically finding the required gas price that the miners are collecting. This data is available publicly and can indicate times when the blockchain is busy or does not have a lot of network traffic. The goal is to find the gas price that is needed to power the EVM at that specific time. While Bitcoin fees are determined by the amount of data being transferred, gas prices are determined by the amount of effort required by the EVM in order to complete that operation. Gas is priced in ether and is the only asset that can be used to purchase gas. Basically, you need ether to utilize the network.

Beyond the price of gas, there is another variable that dictates how fast your transaction will be mined. Gas limit is the maximum amount of gas you are willing to spend on one transaction. If the transaction is set to exceed the gas limit you have specified, the transaction will not go through. This is used to help users avoid accidental exorbitant gas expenditures. MetaMask will let you pick from some suggested gas prices, or you can manually enter a gas price along with a gas limit. These act as parameters for your transaction.

Troubleshooting Stuck Transactions

Troubleshooting a stuck transaction
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A nonce is an added variable that is used to prevent double spending by keeping your transactions ordered. Each transaction per wallet has a unique nonce used to keep this order. If someone was to send their entire wallet balance containing one ether with a low gas fee, and then tries to send that same amount with a higher gas fee, the nonce is the variable assigned to transactions that makes sure they are executed in order, avoiding a double-spend scenario.

For each transaction conducted with that wallet, the nonce increases by exactly one. It does not skip a number. The transaction with a higher nonce cannot be processed before a transaction with a lower nonce. The practical effect is that these transactions must occur in order. If one gets stuck, the others do too. This must be done in order to avoid double spending. In order to speed up or cancel a transaction, we need to learn how to clear or modify a nonce. But first, we need to know where to find this information.

Metamask keeps track of every single transaction conducted using the wallet, which can be especially useful in troubleshooting. If you are confused about the status of your transaction, you have a couple of options:

  • Use the three dots on the main wallet page to select “view account on Etherscan”. This will take you to a block explorer page that has an overview of all your account activity
  • If you are looking to troubleshoot a specific transaction, select it from your transaction history and select “view transaction on Etherscan”
  • If you are trying to speed up or cancel a transaction, make sure to note the nonce of the stuck transaction. It must be modified in order for the transaction to become unstuck

Alternately, you can go straight to a block explorer and enter in your account information, and select the transaction in question. This adds an extra step, but it’s good to know. Block explorers are searchable by address, transaction hash, or block number.

Sometimes your transaction will get stuck because there was a rapid increase in gas price. Basically, your transaction is in limbo until a miner decides to include it in a block. Your transaction might never get processed if gas prices sustain its increased price. Since you have one stuck transaction, any successive transaction from the same wallet cannot go through. This provision is used to prevent double-spending, and effectively works by numbering the order of the transactions from your wallet. This is the purpose that a nonce serves, a basic order of transactions. To unstick our transaction, we need to reorder the transactions coming from our wallet in order to increase the gas provided to execute the original transaction. To do this we must manually change the nonce of our second transaction:

  • Go to your account icon
  • Click Settings
  • Choose advanced settings
  • Enable customizable nonce, allowing us to reorder our wallet’s transactions

Now when you send a transaction, a field will appear, allowing you to enter a specific nonce. To unstick a transaction, send a very small amount of Eth with the same nonce that is found on the pending transactions using a block explorer. Your transaction with the custom nonce will be processed along with your original transaction, effectively adding gas to the stuck transaction.

Ethereum and DeFi

Ethereum balanced with a coin representing DeFi
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The ability for Ethereum to act as a platform for decentralized applications has made it the go-to development sandbox for DeFi applications.These dApps are built in a modular, collaborative way, with open-source software being the norm for DeFi dApps. The open-source nature of this software plays a big part in the development of this ecosystem. All smart contracts that govern dApps are transparent; anyone can audit the code and then incorporate that tool or feature into their own project.

With so many young projects in the ecosystem, the first decentralized applications had to deal with crowdfunding. One of the first projects to do this was Lighthouse, a crowdfunding application built upon the Bitcoin network.

In 2015, Mike Hearn launched Lighthouse as a decentralized crypto crowdfunding application. Lighthouse touted that it had made the process of decentralized crowdfunding possible by using smart contracts. Lighthouse was a hit, with users eager to help fund development of projects they believed in or specific charitable causes. However, it soon became clear that the Bitcoin chain was limiting Lighthouse’s capabilities.

Early dApps

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Introduce dApp development that expanded cryptocurrencies, smart contracts, and DAOs and how it relates to Bitcoin’s limitations.

The Lighthouse Crowdfunding Issue

A lighthouse by the ocean
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Go over one of the first dapps, Lighthouse, which was used for crowdfunding. Lighthouse could only allow ~200-250 donations per every 10 minutes due to blocksize constraints. Each transaction took up block space, creating network bloat and slowdowns. There needed to be another decentralized option that could process more data.

Lighthouse's popularity also exposed its limitations (a recurring theme with blockchain based projects, they are limited by the platforms on which they are built). While the Bitcoin network could utilize smart contracts to facilitate crowdfunding. And it worked, to an extent.

Lighthouse was able to facilitate fundraising using smart contracts on the Bitcoin network, but a previously mentioned limitation of Bitcoin caused issues. The block sizes and confirmation times of the Bitcoin networks protocol essentially limited how many transactions could be conducted daily. Since more data was required to utilize a smart contract as opposed to a simple transaction, Bitcoin blocks could only conduct so many of these transactions before their data limit was reached. Lighthouse could allow around 200-250 donations per block, but network bloat and slowdown always followed. Additionally, it was difficult for the network to close the ICO at a specific time or properly distribute tokens because Bitcoin is not Turing-complete.

Mike Hearn became convinced that large-scale crowdfunding could not be achieved on Bitcoin. He predicted the scaling issues that Bitcoin would later face. It became clear to developers that other decentralized technologies had to be created.

Ethereum and Crowdfunding

Floating blocks increasing in size representing ethereum and crowdfunding
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Ethereum ended up solving the Lighthouse crowdfunding problem by confirming blocks at a much faster rate, making it conducive to accepting the volume of funds contributed.

This occurred around the time that Ethereum would be launched. The next few years saw massive growth for the platform, and one of the areas that it had excelled in happened to be in crowdfunding. This crowdfunding model eventually would turn into a way for new projects to initially distribute their tokens through a crowdsale. This process was known as an "Initial Coin Offering", a play on the concept of an IPO. With so many tokens being created, there were often several ICOs on a single day. Ethereum's block structure and quick confirmation time made Mike Hearn's original goals a reality.

2017 saw over $1.5B raised via Ethereum-based ICOs, causing massive growth in the platform's popularity. This alternative fundraising method allowed projects to skip the traditional venture capital route, instead valuing a decentralized funding model where they would sell their new token. These events coincided with a time that saw a lot of dApp growth on the Ethereum network.

NFTs and Colored Coins, and ERC-721

Cryptokitties logo over a pile of colored coins
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Bitcoin's colored coins met limitations that were addressed by the ERC-721 standard for non-fungible tokens. ERCs are often token standards voted on by the community. These standards are set to ensure interoperability between tokens and wallets.

We've already discussed the colored coins project that ultimately lost momentum, but that did not end the attempts to make a non-fungible token to represent assets.

Non-fungible tokens are different from their fungible counterparts because they cannot be divided. What is the purpose of having such tokens? Well to represent real world assets that cannot be divided, like a house of a car. Non-fungible tokens would allow for these assets to be represented on the blockchain, essentially opening up several possible decentralized finance applications.

With the creation of non-fungible tokens, the terms of a loan could be properly expressed with all of the information living on a blockchain.

History of NFTs

Some of the first test cases of NFTs occurred when some municipalities decided they wanted to digitize paper records, mainly the deeds to houses. These paper records are usually kept in storage and could get lost or destroyed over time. That is especially concerning if these deeds are the only proof of who owns that property.

Like many things with Ethereum based dApps, we had to walk before we could run. We needed to see a solid NFT proof of concept, hopefully one that would be relatively popular. That project came up in the most unlikely of forms: Digital cats.

Yes, you read that correctly. Cryptokitties was a dApp that facilitated the transfer of ERC-721 (non-fungible) tokens in the form of collectible kitties. Each cat had a unique set of features based on their hash; parts of the embedded transaction data would result in specific physical characteristics, some more rare than others.

These non-fungible kitties were sold on a market through the cryptokitties website. People we're making actual cryptocurrency from flipping cryptokitties. Later functionality allowed a pair of cryptokitties to "reproduce" to form a new NFT.

The decentralized community went crazy for this idea, and the unintentional result was that the Ethereum network's ability to meet real world demand would be tested. The network was not quite ready for the challenge. The months that saw the height of cryptokitty popularity posed the toughest challenge for the network. Backlogs occurred, fees went up. The network slowed to a crawl. This made a couple of things clear. The first is that NFTs had proven themselves to be useful in terms of tracking non fungible collectibles or assets. The second was that the network still had work to do in order to scale to meet real world demand.


Crowdfunding and ICOs
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Ethereum had many different projects that would ultimately create innovations that overcame the limitations faced by Lighthouse.

We already discussed crowdfunding via Ethereum's ability to conduct ICOs, but it is difficult to fully understand the scope of the madness that was going on at the time. Once the first ICOs proved to be successful, several other projects decided to jump on the trend. They were excited to find a method of fundraising that seemed so easy.

The problem was that these projects either bet on themselves by holding vast amounts of their own token, or they exchanged ICO funds for other cryptocurrencies, such as ether or bitcoin. By the height of the ICO craze, there were about 2000 unique tokens on the market. Unfortunately, a lot of these projects did not reach a point of viability. The market got too big too soon and the cryptocurrency market saw massive drops in the value of cryptocurrency. However, by this time over $4.5B was raised.

Stablecoins: From Tether to DAI

Graph of Tether logo, fiat cash, Dai logo and gold increasing and decreasing similarly
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Introduce stablecoins:

  • What are stablecoins?
  • What is their function and practical use?
  • Stablecoins are governed by smart contracts.

A major part of what caused those projects to go under was their inability to diversify from cryptocurrency, which was a particularly volatile asset at this point.

Cryptocurrency prices experienced wild swings during this time. It was routine to see the market swing 20% either way. Many companies kept their holdings as volatile cryptocurrency, and when the ICO bubble popped, cryptocurrencies uniformly vastly decreased in value.

The advent of a different type of cryptocurrency looked to solve this problem. Instead of creating a speculative asset with a fluctuating price, this new digital currency was designed to hold a specific value, usually one USD. This allowed projects the confidence that their funding would not vastly decrease overnight. The same confidence was extended to merchants who could protect against volatility.

Additionally, it was not always easy to turn crypto to fiat and back again. Stablecoins acted as a compromise, a middle state that allowed people to easily enter and exit the volatile crypto market.

What are Stablecoins

What are stablecoins?
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  • Establish that stablecoins hold a specific price (usually USD)
  • Easy access to stablecoins limits the volatility of crypto, making lots of financial instruments able to use a cryptocurrency element

Stablecoins are cryptocurrencies that have their total supply and price pegged to a corresponding value, whether backed by fiat or assets. While they are classified as cryptocurrencies, stablecoins are more accurately described as an asset with a set price.

Goals of Stablecoins:

Limits volatility

We’ve mentioned the problems with holding and exchanging volatile assets. Stablecoins offer a consistent price which provides the peace of mind and security that may propel new investors into the cryptocurrency market. Additionally, stablecoins might gain users from economies experiencing currency volatility.

Acts as an onboarding tool to get more people into the cryptocurrency markets

Buying cryptocurrency is much easier to do with an onboarding step. It is difficult to directly buy cryptocurrencies with fiat, so stablecoins act as a bridge to make this process more efficient. Instead of trying to buy cryptocurrency directly with fiat currency, it is much easier to buy stablecoins with fiat currency, then convert those stablecoins into other cryptocurrencies.

Faster settlement times

Sending money across borders traditionally is expensive and slow. You might have to wait a week for a cross-border money transfer to be finalized. Cryptocurrency has proven to be an efficient and relatively inexpensive way of transferring money around the world. Stablecoins offer the ability to transfer value quickly without having to worry about the possibility of a rapid decline in price.

Volatility and Cryptocurrency Markets

An erratc growth chart breaking apart representing volatility in crypto markets
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  • Volatility is the frequency of drastic price change
  • Made it difficult to invest in, apply futures etc
  • Volatile markets are uncertain, but allow for the opportunity to make money.
    • Adding stablecoins mitigates some of the risk of cryptocurrency investment.

Volatility and Markets

Volatility is defined as the range of price that an asset concurrency could potentially reach, whether positive or negative. In other words, it is the variation of price over a duration of time. It’s nearly impossible for a market to maintain the price of an asset, with the price varying on a day-to-day basis, sometimes by the microsecond due to automated high-frequency trading. Some assets and currencies have proven to be more stable than others. It’s important to note that volatility does not exclusively apply to downward price movements; it includes both gains and losses.

While there have been many efforts to limit the volatility of an asset, it is impossible to completely limit swings in price, as markets are fluid. Volatility cannot be completely eliminated, but we are able to create measurements that estimate the risk or volatility of an asset or asset class. Mathematically, volatility is usually measured in standard deviation, but there are more specific measurements that have been developed. For example, the Chicago Board Options Exchange (BOE) created VIX, short for Volatility Index. This index measures the level of price volatility that can be expected in the near future.

Capitalizing off of Price Volatility

While price volatility can be a major issue for merchants and buyers, volatility is not necessarily a bad thing; it largely depends on your role in the market. If you want or expect your assets to slowly appreciate at a steady pace, you probably don’t like volatility. However, if you are a trader that is closely following the market in order to make a profit, volatility can mean opportunity. It is a lot easier to turn a profit in a timely manner by buying and selling an asset that is likely to have a bigger price increase in a shorter amount of time. However, volatility can also burn traders, as a sharp price decrease could derail any plans to turn a profit. No matter your role in the ecosystem, price volatility greatly affects how markets perform in a given duration of time.

Too much volatility is a bad thing even for traders, as it can result in steep price decreases and loss of value. A stock market decline of 10% is considered a “correction” and can be a catalyst to holders dumping their stock. For cryptocurrency, a 10% swing within a day is routine. Volatility existed well before cryptocurrency, but it is specifically evident within those markets. While the young age of cryptocurrency contributes to this, there are numerous other factors that influence the price of traditional cryptocurrencies. Smaller markets and the young age of cryptocurrencies creates a substantial amount of volatility within the cryptocurrency markets.

Why Stablecoins?

A graph showing a stablecoin maintaining a consistent price compared to Bitcoin
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Explain the purpose of stablecoins and some parties that may be answered in utilizing this technology. Start to explore the role that stablecoins play in the DeFi ecosystem.

The frequent price changes we see in the digital currency market has slowed down the mass adoption of cryptocurrency. A merchant is not going to be keen to accept a volatile asset, as a steep drop in price could happen overnight. A cryptocurrency used to buy a good may be worth a dollar at the time of purchase. That value may decline 15% overnight, and the merchant is stuck with 85 cents on the dollar. Volatility has the potential to disrupt the steady business operations conducted by small and medium-sized businesses. Put simply, volatile assets are not ideal for everyday spending for either the purchaser or seller.

Additionally, some investors and speculators have shown a reluctance to part with their volatile cryptocurrency. While many express desire to buy goods with cryptocurrency, some own cryptocurrency as an investment and are more concerned in holding the asset in the hopes it will appreciate over time. A major hurdle to cryptocurrency's mass adoption is the volatility in the price of even the most popular cryptocurrencies. The value of the bitcoin used to buy two pizzas, the first recorded physical purchase using the cryptocurrency, went from roughly $41 at the time of purchase to a value of above $200M at bitcoin’s price high in late 2020.

No one wants to accept a currency that could be of significantly less value just a day later. Many don't want to make purchases using cryptocurrency because they fear missing out on a rapid price gain. Volatility acts as a hurdle for sellers because of the prospect the asset will not maintain its value. Volatility is a problem for consumers, who are reluctant to part with an asset that has the ability for possible exponential growth. Digital spending has increased, but volatile cryptocurrencies are yet to gain mainstream adoption. As a result, we’re seeing a push to create reliable, stable cryptocurrencies that hold their value corresponding to a certain currency. These cryptocurrencies are known as stablecoins.

Merchant Perspective

Stablecoins allow merchants to accept digital currency while knowing the value of the stablecoin will not drastically change over time. Mainstream cryptocurrency adoption has yet to fully take hold in part because the unsteady nature of cryptocurrency prices makes them unrealistic to accept as a merchant. Most cryptocurrencies can be easily converted to stablecoins, allowing merchants confidence that their coins will maintain their value.

However, not all merchants may want to convert all of their received cryptocurrency to stablecoins. Merchants can use a percentage of cryptocurrency as non-stablecoin investments if they desire. Investments could be increased or decreased based off of the willingness for the merchants to invest. Of course, any cryptocurrency kept can be converted to stablecoins if an investment strategy changes.

There are several services that will convert the majority of a customer’s volatile cryptocurrencies into stablecoins, while either keeping the coin as an investment or even converting the customer’s token into one the merchant would rather have as an investment.

Stability in the Face of Hyperinflation

As previously illustrated, vast change in value isn’t always desired. Stability may be prioritized in order to protect value over time. While many leading economies maintain a relatively stable currency, monetary stability is a luxury in other places of the world. Zimbabwe, Venezuela, and Turkey are all examples of countries that have experienced relatively recent currency crises.

The introduction of stablecoins to these economies offers an option to hedge against a wildly fluctuating currency, whether it be fiat or crypto. We have seen cryptocurrencies utilized in economies that experience hyperinflation, and many get stuck with fiat currency that is worth practically nothing. What if these citizens had a different option other than storing their wealth in a hyperinflated currency?

The consistency of stablecoins offers those in failing economies an option. The relationship between stablecoins and a country’s fiat currency is yet to be determined and likely will vary depending on the unique economic situation that each faces. A failing currency may fall even more if a stablecoin option is introduced. Stablecoins act as a bridge from fiat to cryptocurrency.

Stablecoins and Markets

You cannot simply go to a bank and purchase cryptocurrencies, at least not yet. We are seeing the rise of cryptocurrency ATMs, but they have yet to gain mainstream popularity. Cryptocurrency is usually purchased at an online exchange, but there are not many fiat-to-cryptocurrency markets. Instead, stablecoins are used as an intermediary tool for market pairing. It would be difficult to create separate markets for each fiat-to-crypto market. Instead, fiat can be converted to a popular stablecoin that has many different market pairings. Tether was one of the earliest stablecoins to gain popularity. As a result, most exchanges offered markets with BTC(Bitcoin), ETH(Ethereum), and USDT(Tether) pairs.

It is often difficult to trade less popular tokens directly for other tokens. Again, too many markets would have to be created on an exchange. Instead, tokens are traded for more popular cryptocurrencies or stablecoins which can then be used to trade for other tokens. Converting to fiat currency is expensive and untimely. Stablecoins allow for the quick transfer and settlement of funds, allowing for a more consistent and reliable cash flow.

Stablecoins, Markets, and Financial Services

An abstract image of financial charts and graphs
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Examine the relationship between stablecoins and markets to explain how they maintain a consistent value.

Stablecoins offer the opportunity for more traditional financial markets to arise surrounding cryptocurrencies. Additionally, a stablecoin may provide investors the confidence they need to get involved with cryptocurrencies, as stablecoins act as an easy way to preserve the value of your crypto by avoiding volatility. Users of the stablecoin will not be impacted by volatility and it allows for easy conversion from the stablecoin to another cryptocurrency. If desired, each user can customize how much of their cryptocurrency they want to be subject to volatility or be assured of stability, essentially giving the user control over their own cryptocurrency investments. Stablecoins are all designed to hold a consistent price, however, different stablecoins have found different ways of achieving this goal.

Different Types of Stablecoins

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There are three general classifications of stablecoins, based on their backing:

  • Asset backed
  • Backed by dollars
  • Crypto leveraged

Stablecoins are further classified depending on how they function or their financial backing. The next three slides examine the most popular types of stablecoins and what makes them unique.

Currency Backed

A crypto coin backed by various fiat currencies
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Some cryptocurrencies are backed by an equal amount of currency.

The simplest of stablecoins. The token is pegged to a fiat currency. For example 1 GUSD (Gemini Dollar) = 1 USD. The tokens value is represented as a digital dollar. Most stablecoins follow this pattern. Fiat backs tokens on a 1:1 ratio. For every unit of currency held there is one token issued. When the token is exchanged for fiat, they are taken out of circulation. When someone wants to buy the stablecoin, their fiat is sent to the reserve and new coins are created and issued. Simply put, these stablecoins are backed by relatively stable fiat currencies. The vast majority of stablecoins either represent the USD or Euro as they are the most popular global currencies.


Tether is a cryptocurrency that is designed to mirror the value of one USD. 1USDT=1USD. Basically, Tether is used to turn fiat into a stable, digital token. The original idea was that the company behind Tether would maintain a cash reserve equal to the number of tokens. If Tether is redeemed, those tokens are burned. Tokens are created by contributing to the Tether reserve.

Over the past two years, there has been some controversy surrounding Tether, specifically their cash reserves. The root criticism is based on the fact that Tether is highly centralized. This also means that their reserves didn’t have the transparency needed to instill trust in its users. This led some to question whether Tether had the funds to back their supply. Many called for Tether to be audited. There was also concern about what would happen to the entire cryptocurrency market if it was found that Tether did not have the funds that they claimed they did.

Before any type of audit could occur, the Hong Kong-based company behind Tether changed the wording on their website ever so slightly. Instead of claiming that Tether was backed 1:1 by dollars, they now claimed that their cash reserves and other assets were used to back the value of the token. This change may have scared some users away, but those using USDT as a short-term medium of exchange have not been deterred. We have, however, seen more stablecoins gain popularity as questions around Tether’s backing assets remain.


Another popular stablecoin is known as the Gemini Dollar. This token was introduced by the team behind the Gemini Exchange, which was started by early Bitcoin enthusiasts, the Winkelvoss twins. Gemini Dollar is an Ethereum-based token that uses the Ethereum platform to function. GUSD is the first regulated stablecoin, as recognized by the New York State Department of Financial Services. This transparency is in extreme contrast to Tether. The funds that back Gemini dollars issued and in circulation are held at State Street Bank and Trust Company. Additionally, the USD balance of the relevant bank accounts is examined by a registered public accounting firm. Their reports are made public. However, this isn’t the only audit that GUSD has undergone. The code within the GUSD smart contract is public and has been publicly audited. The approval of this regulatory body and the stringent practices employed by Gemini gives users confidence that their funds are sufficiently backed.

Asset Backed

A crypto coin backed by various assets
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Some cryptocurrencies are backed by the value of physical assets like gold.

Digix Gold

Some stablecoin creators have decided to use assets to back the value of their token. For example, Digix has released the Digix Gold Token. Each token is supposed to be backed by a gram of gold in a vault in Singapore. Gold is a notoriously stable asset. This has allowed the Digix Gold Token to fluctuate only 25% since 2016.

Leveraged by Cryptocurrency

A crypto coin backed by various cryptocurrencies
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Explain how collateralization of crypto can be used to create stablecoins

Some stablecoins are actually backed by cryptocurrency itself. While this seems like an impossible prospect considering the volatility of cryptocurrency, projects have created ecosystems that have been able to maintain a relatively stable value. To ensure some stability, this type of stablecoin is usually backed by the more stable cryptocurrencies, mainly bitcoin and ether. To further ensure price stability, cryptocurrency backed stablecoins can be backed by more than one cryptocurrency; if you spread your backing assets among several cryptocurrencies, there is less chance of experiencing overall volatility compared to relying on one cryptocurrency to hold its value. However, cryptocurrency backed stablecoins are more likely to see fluctuation in price when compared to cash backed stablecoins.

The solution is a practice called over-collateralization. Instead of a fiat backed stablecoin that is backed by a 1:1 token to cash reserve, crypto-backed stablecoins are often backed by a 1:>1 token to cryptocurrency reserve. Simply put, since cryptocurrency is more likely to fluctuate than fiat currency, the reserves have to amount to more than the value of tokens in circulation. With this method, price drops of the backing assets can occur without the stablecoin losing value. Since the backing asset is a cryptocurrency, not only is there transparency within the stablecoin contract, there is also a transparent blockchain that is recording the history of the backing cryptocurrencies. Transparency can be achieved without the help of a third party.

MakerDAO is an Ethereum-based project that uses two volatile cryptocurrencies to stabilize a third.. Basically, MakerDAO uses ether and the Maker token in order to stabilize the price of a third cryptocurrency, DAI. Despite this somewhat complex ecosystem, DAI is supposed to remain around 1 USD. DAI has been battle-tested; the price of ether saw drastic drops in 2018, however, DAI maintained 93% of its value and quickly returned to 1 USD.

“Maker’s DAI is a stablecoin that lives completely on the blockchain chain with its stability unmediated by the legal system or trusted counterparties.” -Gregory DiPrisco

A key mechanism that allows DAI to maintain enough collateral to back its tokens is what is known as a Collateralized Debt Position (CDP). The amount of ether that has to be staked in order to create a DAI token is variable. Usually, it takes about 1.5 ether to create a dollar amount of DAI. For example, $150 worth of ether can be leveraged to create 100 DAI. If the price begins to fall, the amount of ether required to create DAI may be decreased in the hopes that more money will be injected into the Maker ecosystem. The Maker token is used to pay for fees on the network. It is not mineable and the token supply is managed in order to stabilize the price of DAI. This process is facilitated through a smart contract that creates collateralized debt positions.

A traditional loan usually requires some type of collateral to be posted in return for borrowed cash. However, if the value of the posted collateral decreases, the lender may ask for the loan to be paid back, as the value of the collateral could no longer mitigate a default on the loan repayment. Basically, there are no assets to liquidate if the loan is not being repaid. If the collateral maintains value and the loan is not being repaid, the collateral could be liquidated.

This is how the Maker ecosystem functions. You put ether into the Collateralized Debt Position (CDP) smart contract as collateral and receive a corresponding loan in DAI. If the value of ether goes up, there is no problem as the loan remains overcollateralized. If the value of ether goes below a certain point, you have to repay the loan. Otherwise the ether is sold off to pay back the loan.

The amount of DAI created by the smart contract corresponds to the amount of ether sent. This ratio is fixed by the Maker network, but can be amended to stabilize the price of DAI if there is a significant fluctuation in ether’s price.

For the sake of example, let’s say that ether is worth $100 and the collateralization ratio set by Maker is 150%. Sending 1 ether (valued at $100) will result in the smart contract creating 100 DAI. If I send 1 ether ($100) into the CDP smart contract, then I am now able to create 66 DAI. This means that, at the current value of ether, each 100 DAI that I’ve created is backed by 1.5 ether collateral. Once you pay back the DAI, you receive the ether originally sent to the contract. Your collateral is returned. Once this occurs, the DAI is burned, or digitally destroyed.

Converting Eth to Dai

Swaping cryptocurrency on MetaMask
Play Video
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In order to swap your cryptocurrency for another within MetaMask, select the swap option from the home screen.

  • Select the crypto you want to exchange in your MetaMask wallet and enter the amount that you want to swap
  • Select the cryptocurrency asset that you want to swap for
  • Advanced users can set a “price drop tolerance” that is designed to make sure that your exchange won’t occur if the price changes rapidly. There are different thresholds for this setting
  • Select Get quotes
  • MetaMask uses at least 8 different liquidity pools in order to find your the best price for your trade
  • View available prices and select the best rate. These markets might differ slightly in price, but they are usually within the close price range.

Properties of DeFi

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Describe the three overarching values of the DeFi ecosystem: Openness, Modularity, Decentralization.

There were a lot of innovations based that went into the ecosystem that DeFi has become. This innovation has revolved around a few specific categories:

  • Decentralization
  • Finance
  • Technology

All three were key components that were needed in order to reach the point that this growing industry has risen to. This section examines the unique properties of DeFi and how they come together to create a fair, robust, decentralized finance ecosystem. These values have become the driving force behind the DeFi phenomenon.

There are several values that motivated the creation of a more inclusive financial system where the user had more control. Openness ensures a more fair, transparent financial system. The modularity of the applications around decentralized finance allows for developers to create completely unique tools from new innovations that come up. Developers can choose functions and create models as if they were building with Legos. The decentralized nature of this new financial system addresses the overly centralized current system that has led to a few select individuals making decisions on behalf of the average individual. The problem is these decisions have not always been in the best interest of the average consumer/investor/saver.

Decentralized finance, for the first time, allows the average person to serve the function of the bank.


An abstract image representing the decentralized nature of a blockchain
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DeFi takes financial instruments and services traditionally offered by banks and investment institutions and puts users in control by utilizing decentralized protocols with no central administrator. Trusting third parties is removed from the equation. Only the open protocol, which is auditable, has to be trusted.

DeFi takes financial instruments and services traditionally offered by banks and investment institutions and puts users in control.

But how can we do that without the institutions that manage our money? How do we create a system where users are in control? The answer is decentralization.

Decentralized protocols have no central administrator. Instead, the network is governed by a set of transparent rules, or a protocol. Trust is removed from the equation. Only the open protocol, which is able to be audited by any user, is necessary. This unprecedented transparency allows for a decentralized financial system that is fully inclusive and cannot censor any transactions, as there is no central administrator calling the shots. For the first time we are seeing truly open, inclusive financial options emerge.

Open to All

Open sign which reads 'Yes! We're DeFi.'
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Banks have acted as gatekeepers, the only ones allowed to administer certain services and products. DeFi takes control away from these central entities, allowing average crypto users the ability to "be the bank".

There is no single point of failure in DeFi applications. Since there are no administrators, who decides who will be part of the network?

The answer is no one. Blockchains are decentralized, egalitarian software that anyone can join. Simply download and run the program, download the blockchain, and you're part of the network.

For most, this is a luxury, an added option to their existing financial system. Decentralized technology is specifically designed so that every person could participate. This makes sense considering some of Satoshi's visions concerning the average person having a say over the financial systems they participate in. Too often we have been beholden to banks that are more interested in corporate profits and staying in power than creating a financial system that is open to all.

This openness doesn't just extend to who is allowed to use this system. “Open to all” also indicates an open financial system where users have full control over their financial decisions. This means that transactions cannot be censored in an open system. Compared with banks that don't have the average person's best interest in mind, an open, inclusive financial system offers more economic fairness.

Censorship Resistant

An X over a redacted letter
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The transparent nature of a blockchain and the lack of a central administrator means that no individual can censor or remove transactions. The gatekeeping role traditionally filled by banks does not exist in DeFi ecosystems.

Previously we have seen banks censor purchases or actually stop them from going through. While banks have a legal obligation to not do business with certain entities, we've seen banks and payment processors stop legitimate transactions from going through. Different legalities in unique jurisdictions further complicate this matter.

For example, 2017 and 2018 saw some banks decline to process transactions involving the purchase of cryptocurrency. This anticompetitive behavior only seeks to fulfill the interests of the banks, not the average person.

An open DeFi system using blockchain technology doesn't just provide some guarantee against censorship of valid transactions, it provides an opportunity to those who have been disenfranchised from banking services.

Banking the Unbanked

No banking availability to many around the world
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Banking services are limited by geography. Some banks have decided that their profit model does not include expanding their services to those who cannot get a savings account or access simple financial services. Our existing system has left these people behind with little hope for economic growth. DeFi allows anybody to be the bank. This opens an opportunity for individuals wanting to offer services traditionally offered by a bank.

Banking services are limited by geography. Some banks have decided that their profit model does not include expanding their services to those who cannot get a savings account or access simple financial services. Our existing system has left these people behind with little hope for economic growth. DeFi allows anybody to be the bank. This opens an opportunity for individuals wanting to offer services traditionally offered by a bank

There is no denying that some have been left out of the existing financial system. As of 2017 (according to the World Bank), 1.7 billion people do not have access to banking services. IBM breaks down the number of unbanked by location as follows, "The most deprived areas include 80 percent of sub-Saharan Africa, 67 percent of adults in the Middle East, 65 percent of Latin America, and over 870 million individuals across East and Southeastern Asia." The problem is widespread and exacerbated by many other obstacles, yet cryptocurrency is becoming an option for these people for the first time. Part of this was the development of the DeFi ecosystem. Before the advent of reliable stablecoins, it wasn't feasible for these individuals to maintain their savings in such a volatile asset.

Stablecoins are just one aspect of DeFi that can help the unbanked. From savings to lending, both of which we'll visit later in the course, financial services beyond simple banking are being offered. A global financial marketplace is taking shape. It is one that transcends borders, allowing use by everyone.


a dollar bill made up of binary code
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DeFi has recreated the financial system we are used to in a way that connects users without the use of a central entity. As a result, the investments that have traditionally been reserved for banks and certain individuals are now a realistic option for the average cryptocurrency user.

The innovation of decentralized technology has opened up a new realm of possibilities for how we can conduct necessary financial services. New financial instruments that have been traditionally reserved only for banks and select investors are now being brought to the cryptocurrency world.

Finance is a very general term, and there is a lot to that field. A variety of the features of the traditional financial system are being introduced to the crypto ecosystem. Just because finance has been decentralized doesn’t change the core goal: invest money in the hopes of gaining more money. There is a saying that goes along the lines of “make your money work for you”. All this phrase really means is investing your money in order to let it grow as opposed to keeping all of your funds in low-interest-bearing accounts.

The only issue with this? Centralized systems use gatekeeping tactics and take high fees for the services they provide. And they don’t always have their customer’s best interests in mind, as we saw during the 2008 financial crisis.

DeFi has given users the opportunity to bypass these centralized systems. Instead of letting their fiat money work for them, they now have the option to enter into a system where their cryptocurrency can yield more cryptocurrency. The term assigned to investing your cryptocurrency for growth is, appropriately, yield farming.

Yield Farming

Cryptocurrency gradually growing like plants would
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Yield farming has quickly become one of the most intriguing aspects of a developed DeFi ecosystem. As we just discussed, there is now a major focus on making your cryptocurrency available for financial activities in the hopes that they will grow. This can be done in a variety of ways with a variety of strategies. It is important to note that yield farming is an umbrella term that simply describes making your crypto work for you so it has the opportunity to grow into more cryptocurrency.

Yield farming is a general classification. There are many specific activities that are considered yield farming. This can range from simply making your crypto available for trade or lending to taking out a variety of complex leveraged loans in order to gain a return on your original investment. The most creative yield farmers use tactics such as margin trading and a leveraging a series of loans and lending activity in order to garner consistent returns. More and more users are entering the cryptocurrency space. Those that already have are now afforded the opportunity to let their cryptocurrency grow via yield farming. While yield farming simply seems like an opportunity to grow your cryptocurrency, it’s popularity can also be attributed to the trend of mass innovation in the DeFi space. There are options to grow your crypto, ranging from risky to relatively conservative. Let’s take the next few slides to examining how yield farming works in a variety of ways.

While yield farming simply seems like an opportunity to grow your cryptocurrency, it’s popularity can also be attributed to the trend of mass innovation in the DeFi space. There are options to grow your crypto, ranging from risky to relatively conservative. Let’s take the next few slides to examining how yield farming works in a variety of ways.

Liquidity Pools

Money abstractly forming aggregated pools
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Liquidity pools fill the role usually held by banks, allowing users to lock their funds into smart contracts. Effectively, this makes that cryptocurrency available for lending or swap.

Decentralized finance cuts out the bank's role in our financial system by connecting users via a decentralized network. It may seem counterintuitive, but DeFi services aren't conducted on a peer-to-peer basis. Let's use the example of a decentralized exchange to illustrate why it's impractical to facilitate loans on a peer-to-peer basis. Let's say you want to trade a certain amount of ether for some DAI. If this swap only occured on a peer-to-peer basis, you'd have to find someone or multiple people that are looking to trade the corresponding amount of DAI at an agreed upon exchange rate at that given time. You would have to pair up with accounts that fit these exact parameters which could involve long waiting times. Basically, you would have to find the perfect trade every time you wanted to transact.

The way DEXs handle this problem is with an innovation known as liquidity pools. Instead of users being directly matched in order to find the liquidity normally provided by banks, these pools act as available capital for others to utilize. Previously, the availability of these funds is what gave centralized banking such a stranglehold on the system. No one else had the necessary capital to conduct financial services on a large scale. This is no longer the case

Liquidity Pools provide the necessary available funds in order to make these trades and other DeFi activities possible. They are made up of smart contracts that can "lock up" funds made available for swapping or lending while keeping track of whose funds are in the smart contract. A corresponding amount of interest is rewarded for users that make their crypto available to these pools. Liquidity pools provide the DeFi ecosystem with the necessary capital in order to bring these financial activities to cryptocurrency. However, it isn’t the only method of locking your funds to gain more as there are other activities that fall under the umbrella of yield farming.

Adding a Pair

Adding a currency pair to a liquidity pool in Uniswap
Play Video
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By providing your currency pair to a liquidity pool can be done in order to receive a return on your staked cryptocurrency. Uniswap works with both ether and ERC-20 tokens, as long as the necessary liquidity is present in the pool.

  • Go to Uniswap and connect your Metamask wallet to the website. This allows your wallet to directly interact with the DEX
  • In the upper left hand corner, select the “add liquidity” option
  • Select the token pair you are willing to provide to the exchange. You must provide the same value in each currency in order to maintain balance for the liquidity pool
  • Select the two assets that you are providing to the liquidity pool

You will be given exchange rates for each of the two currencies you are providing in order to make sure that you are providing equal value of each currency to the pool. You will also be told the percentage of the currency you provided in relation to the entire pool, helping you calculate the expected interest gained.

Your pair is taken and you are given “pool tokens” that can be used to claim your rewards. To remove your provided liquidity to claim your rewards, select the pool option from Uniswap’s home page and select the “your liquidity” option.

  • Select remove liquidity
  • Confirm the transaction using your metamask wallet. You’ll get your original tokens back plus the interest gained from providing your pair to the liquidity pool

Adding a Pair (cont)

Providing Eth-Dai pair to liquidity pool
Play Video
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Technological Advancements

String - Abstract circuit board
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Examine the technological components of DeFi that were required for the ecosystem to take shape. Both NFTs and stablecoins were crucial inventions that were necessary to create a cryptocurrency climate for DeFi to thirve.

We have already talked about the innovations that needed to happen for there to even be a DeFi ecosystem. Now that it is developed, there are certain practices and ideals that have become apparent as more decentralized applications have been released. There are some common traits between the technological advancements that have come together to make DeFi a reality.

Open Source

Individuals sharing ideas
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Explain the role that open-source software plays in the DeFi ecosystem. While providing open-source code has technical advantages, it also creates an environment designed for collaboration

Open-source software is the norm for DeFi applications. There is a certain value of collaboration that has been established, allowing developers to pick and choose what innovations they want to incorporate or iterate upon.

Additionally, there is a security component to open-source software. If everyone can view and audit the code, users can be assured of smart contract security when using a dApp. Many projects actually offer bounties for the public to find bugs in their software. However, the transparent nature of these applications does also pose a security risk if there are attack vectors left unaddressed. Hackers can see what is going on under the hood of the dApp, allowing them to focus on and attack what they perceive to be a weak point.

Despite the vulnerabilities, most DeFi dApps have avoided major issues. Open-source software can help improve security if proper measures are taken. There are also some other interesting security measures at play involving the relationship between cryptocurrency and finance.

Using Crypto Security

Money securely locked in a cage
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While DeFi is adapting many tradtional financial concepts, the centralized finance space has the opportunity to utilize security features of a decentralized networks and cryptography. Crypto security features can be introduced via decentralized applications and then adapted to the tradiotional financial system.

We have talked about traditional financial instruments coming to cryptocurrency, but the crypto-finance relationship might prove to be a two-way road. There are new technological advancements that are being brought to the traditional financial industry, specifically the security aspects built into the blockchain.

Traditionally, we have had to rely on centralized institutions to store our money and perform any financial services. Throughout history, individuals didn't really have full control over their own finances; they had to use these third parties to manage their money. This is no longer the case. Cryptocurrency has built in features that allow for you to have sole ownership of your coins. As we discussed in a previous course, if you, and only you, have your private key, you have sole control over your cryptocurrency. If you want to seek a loan, some might choose to utilize DeFi in order to provide the financial services provided by centralized institutions.

Cryptocurrency gives people unprecedented control over their assets. The potential for these blockchain based technologies to affect traditional finance is great, especially when it comes to cryptographic-based security.

New Innovations

A lightbulb representing a new idea
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The modular nature of DeFi dapps allows developers to pick and choose different components or tools to form new innovations.

DeFi's modular nature makes it more of a sandbox than a set concept; people are constantly innovating, sharing tools to make a better decentralized application or to improve an existing one. The culture is one of open-source collaboration, where every project wins if some find success, proving the usefulness of decentralized finance.

So what are some of these innovations that people are creating? We'll take a deep dive into the different types of DeFi dApps that have already proven their concept and found some popularity. In the next section, we'll explore the different types of decentralized finance applications that are being created. We will also examine some successful projects in the DeFi space.

DeFi’s Applications

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Now that we learned about what DeFi is all about, let’s explore what people are doing with these tools.

dApp’s and DeFi

applications working together to form an ecosystem
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Explain the transition from the first dApps to ones focused on finance. DeFi describes a wide range of applications; it is a category, not a single dApp. This section is dedicated to exploring the different types of DeFi apps that we are seeing emerge.

What do you get when you mix decentralized technology, stablecoins, and advanced smart contracts with innovative open-source tools?

You get a robust DeFi ecosystem - one that gives individuals true control over their own financial services for the first time.

The modular nature of these dApps allow for a wide variety of uses, from providing loans without a bank to the creation of an advanced prediction market.

This section examines some innovative DeFi applications that have already gained some popularity, many of them utilizing some of the same tools.


A network of people forming nodes
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Introduce decentralized exchanges and how they are different from traditional exchanges.

A decentralized cryptocurrency exchange (DEX) cuts out the centralized middleman by facilitating deals via smart contracts and chain to chain swaps. The cryptocurrency is never in the possession of an escrow service; the only individuals that will have access to the cryptocurrency are the buyer and seller. Since there is no middleman, fees are lower compared to the ones incurred on centralized exchanges. The platform merely connects the participants using a decentralized peer-to-peer network, allowing them to trade directly.

Decentralized exchanges are not controlled by any person or group. Because there is no central authority to hack or shut down, DEX development will likely be the focus as crypto gains popularity. Decentralized exchanges also largely do not have any identity verification, as there is no central entity to maintain such a process. DEX platforms offer more anonymity, but the trade-off is that the platforms are often harder to use. Also, there is very little chance of a user error being reversed, since there is no central entity that can do so. Because decentralized exchanges are harder to use, they do not have the same liquidity that you find in centralized platforms. Additionally, if you lose your private key, there is no central entity to help you recover it. With these exchanges, you have sole control over your cryptocurrency but have little chance of recovering your funds if your private key is lost.

There are several options when it comes to decentralized exchanges. Currently, the most popular decentralized exchange is Uniswap. Uniswap is a liquidity pool, but more specifically it is a liquidity platform, allowing users the ability to directly make trades, all without the use of a centralized order book used by other exchanges. Just like other DeFi dApps, Uniswap is not governed by people or an organization but rather by smart contracts. Users can utilize the network of smart contracts to swap most ERC-20 tokens, all without the use of a central administrator.

Removing Liquidity

Removing provided liquidity from Uniswap
Play Video
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To remove your provided liquidity to claim your rewards, select the pool option from Uniswap’s home page and select the “your liquidity” option.

Select remove liquidity.

Confirm the transaction using your metamask wallet. You will get your original tokens back plus the interest gained from providing your pair to the liquidity pool.


Stacks of money
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Savings accounts have traditionally provided modest yields. How exactly do savings accounts work? Banks get to use your money and you only receive a small interest rate for allowing them to do so. People had crypto just sitting in wallets. DeFi allows individuals to offer banking services, allowing a growth rate on crypto locked into a smart contract.

In order to understand the relationship between savings accounts and bank loans, let's take a look at the existing centralized financial system. Besides investments, the main way that banks make their revenue is through loaning out available capital. In order to maximize revenue, they have to have as much capital as possible to loan out. In order to attract capital, banks offer an extremely low interest rate on whatever money you allow them to hold and use via your savings account.

That's right, your money doesn't stay locked in a vault. No, banks use that money to make even more. They loan out your savings at rates such as 10%, while giving you just a fraction of that rate. Banks are very much facilitators or middlemen. Remember, DeFi is about democratizing the role of the banks. As a result, we're seeing users bypass the typical savings-loan model now that there is a system in place that allows them to directly loan out their own funds. By circumventing the banks via DeFi, users can charge a lower interest rate than what a bank normally charges, but receive more than the minuscule amount that banks currently offer as incentive for savings.


Money being exchanged from one hand to another
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Like savings, lending is a great way to leverage your cryptocurrency into more crypto! Savings provides modest returns with little risk. Loans can default, but provide a higher return.

  • How do collateralized loans work?
  • Borrowers perspective
  • Lenders perspective
  • Popular DeFi lending applications

DeFi is all about eliminating the role of the banks as financial gatekeepers. Part of that includes the bypassing of the restrictions and lack of infrastructure that have previously kept people from providing loans. Outside of investing, the only viable way to grow your money was through minuscule interest rates. The banks turned around and would loan out this money at much higher rate. DeFi offers both lenders and those taking out a loan better terms by cutting out the third party in the transaction. Using liquidity pools or direct peer-to-peer loans, capital providers can get a better return than through traditional savings accounts. Those seeking loans are able to receive a better interest rate than those offered by the banks.

Through the power of smart contracts, funds can be locked up and only released upon repayment of a loan. Compound Finance is an example of a decentralized finance app that allows users to loan and borrow cryptocurrency without the use of a centralized service. That means no bank. Instead, the rules are ingrained in the open protocol. Instead of matching up lenders and borrowers for peer-to-peer loans, Compound Finance instead utilizes smart contract-based liquidity pools in order to maximize efficiency. Matching up individual users and amounts for loans takes a lot of time. Liquidity pools act as a middleman, but they are simply smart contracts supported by no central organization. That means less exorbitant interest rates and a higher rate of return than a simple savings account. You're essentially making your cryptocurrency available to be loaned out by putting money in your savings account. Why not lock up those funds in a liquidity pool and earn a higher rate of return? More and more users are asking themselves this question. If this trend continues, we can expect to see the DeFi user base grow.


The Coinbase wallet and brave logos next to each other
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Reiterate the purpose of a cryptocurrency wallet:

  • Why decentralize wallets?
  • Custodial vs non-custodial wallets
  • How are decentralized wallets different from their counterparts?
  • Introduce Coinbase Wallet and Brave Browser.

Utilizing decentralized applications requires at least one transaction of data between your node and a blockchain. This could be as simple as having your wallet automatically paired with a decentralized browser, or it could involve multiple transactions depending on what type of dApp you're using and what you're trying to accomplish. Executing a simple decentralized swap takes one transaction. Playing a game that has to sync with a blockchain constantly takes many transactions. ethereum has limited resources, so the scaling issue must be solved for the latter category of dApps to function smoothly.

One of these wallets that can also function as a dApp browser is Coinbase Wallet. Formerly Toshi Wallet, the dApp was ultimately acquired by Coinbase. You might be thinking to yourself that Coinbase is a centralized exchange, but this is a stand-alone dApp that allows users to store cryptocurrency while browsing popular dApps, which the browser can help direct you to. Coinbase Wallet has shortcuts to several dApps and allows you to manually browse others. Coinbase Wallet and other dApp browsers seamlessly incorporate a wallet while you're browsing dApps.

Contrary to the Coinbase exchange, Coinbase Wallet users manage and control their private keys, assuring them complete security when storing their crypto on the dApp. This is especially useful, considering these tools previously had to be used separately. There have been other dApps that have tried to bridge the gap between wallets and the decentralized web, using innovative tools to integrate them.

Brave Browser is another way to connect to the decentralized web. When it comes to dApps, Brave is one of the most intuitive out there, mainly because it is designed to look at function like the Google Chrome Browser. The lack of a learning curve makes it a really easy way to interact with dApps. Additionally, it has a variety of cool features that make it a very attractive dApp to use.

Brave is all about preservation of privacy, allowing you to share the data you want to share and interact with an advertisement only when you want to do so. If you don’t want those pesky ads appearing, you can turn on Brave’s built-in adblocker. Like Coinbase Wallet, Brave has a cryptocurrency wallet that can be used to interact with dApps. One of the more exciting developments that Brave is currently implementing is compatibility with IPFS, a decentralized file storage protocol.

Asset Management

Various tokens representing real world assets
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What is decentralized asset management? Examine tokenized assets using ERC-721 and their impact on asset management.

One of the innovations that shaped decentralized asset management was the introduction of ERC-721 tokens. As previously mentioned, these are non-fungible tokens that represent physical assets or digital collectibles that are not split or divided, such as the deed to a home. The dApp that showed that this concept could work was the aforementioned cryptokitties. Although these digital kitties did not represent actual real world assets, they helped prove that individual assets could be represented via a token. The market for cryptokitties exploded, with many being bought and sold every hour.

If digital assets can be represented on the blockchain, then why not represent real world assets via a token? Some projects are already working on digitizing assets using non fungible-tokens, opening up all kinds of new markets and uses.

DeFi Limitations

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While DeFi is rapidly advancing, there are certain limitations that decentralized technology must overcome. Most of these hurdles have to do with the blockchain-based platform that most DeFi apps are mainly being built on, ethereum. We are going to examine some of the issues holding ethereum back and examine how these issues impact the advancement of DeFi.

We have spent this class talking about all of the potential that DeFi brings to the table. So why hasn't the technology reached mass adoption? While DeFi is rapidly advancing, there are certain limitations that decentralized technology must overcome. Most of these problems have to do with the blockchain-based platform that most DeFi apps are mainly being built on: Ethereum.

Running at Ethereum’s Pace

The Ethereum logo with legs running
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Ethereum's main limitation is that it cannot process many transactions, also known as the scaling problem. Currently the network is limited to about 12 transactions per second while Visa processes 1500 tx/s. This scaling issue must be addressed for DeFi dapps to grow to meet real world demand.

Ethereum has proven to be an interesting innovation, but there are many issues the platform must overcome in order to be a robust DeFi platform for the entire world. Its main limitation is that it cannot process many transactions. ethereum is currently limited to processing just 12 transactions per second, while Visa processes 1500tx/s. In order for ethereum to meet real world demand, it has to increase the number of transactions per second that can be processed and added to the chain. This issue is known as the scaling problem and it is one of the biggest challenges that Blockchain technology has faced.


Chain links forming a spiral
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Explain the scaling problem. DeFi dApps need the base layer they are built upon to find success, otherwise DeFi will have trouble catching up. There are a variety of possible scaling solutions that are being explored, like second layer networks and sharding.

This issue is not new. We mentioned that the ethereum network has experienced backlogs, delays, and high fees (as mentioned earlier with Cryptokitties). There are multiple projects looking to solve this problem, and they have been working in a variety of ways to address the limitations of the network. The inability to scale must be addressed for DeFi dapps to grow, but the next generation of ethereum developers are well on their way to achieving this goal.

As mentioned, a variety of solutions are being explored. This includes ways to improve the efficiency of payment processing or how smart contracts function. Many have to do with adding a "second layer" to the network that allows for the quicker processing of transactions.

Additionally, the ethereum network is undergoing a gradual transition towards what is being called Eth 2.0, which includes a move to proof-of-stake mining that when combined with a viable second layer solution could make the way nodes reach consensus more efficient. Vitalik Buterin claims that a shift to Eth 2.0 will increase transaction throughput, scaling up from 2000 to 3000tx/second in the first couple of years to 100k tx/s once the ethereum 2.0 protocol is fully installed.

Banks and Market Domination

A physical and mental divide between people and Bitcoin
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What is preventing mass adoption from occurring? People are unaware of another option outside of the existing systems. As this is a new innovation, there is bound to be some time between DeFi emergence and the availability of funds that can be dedicated to the system. How does DeFi get to a point where it can compete with traditional finance? -Competitive rates and returns -More personal financial control -Ease of use -Access to global markets -Banking the Unbanked

Another issue that is preventing DeFi from gaining massive popularity is a simple lack of awareness. Never before has an alternative financial system been an option. Now that another option exists, it is a matter of breaking the centralized banking habits we have had for centuries.

Since the beginning of civilization, we have relied on large, centralized institutions in order to store our money and conduct banking services. Ever since we started living in concentrated societies, this financial system has been the status quo. Of course, there have been technological advancements, but the concept of using a centralized bank hasn't been challenged for all of recorded history. When most children are taught about finances for the first time, they are told that you keep your money in a bank. These institutions have become ingrained as key parts of most societies.

It can be argued that the idea of centralized finance is so ingrained in our society because we went for so long without a viable alternative. Until 2009, when the technological structure of a decentralized network was created, we simply didn't have any other option than to use banks, even though they might not always have our best interest in mind (see 2008).

Historically, a bank was always needed to determine who has what funds. There was no way to track transactions in a transparent manner. Now that decentralized technology can do just that, a robust financial system is being created that is an alternative to banks. For the first time, there is another option for the average user, one that does not have to rely on these large centralized banks.

Now that this decentralized alternative exists, it is a matter of creating awareness that there is an alternative path. In order for this to occur, the DeFi ecosystem has to develop and offer more freedom and functionality to users than they would get from a bank. For the first time in history, these financial services can be carried out without a bank.

Lack of Liquidity

A red strike through over an ocean's wave
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Some financial apps need a certain amount of money in the market to make them functional. While the DeFi system is growing and the larger dapps have sufficient market liquidity, this can be an obstacle for newer dApps that depend on market economics. Examine possible solutions.

There has to be the necessary amount of capital for a market to form. Without this, the amount of financial instruments that can be used are greatly limited. Markets that lack liquidity can also be prone to volatility. It has become clear that decentralized finance apps need a certain amount of money in the market to make the ecosystem functional.

While the DeFi system is growing and the larger dapps have market liquidity, this can be an obstacle for newer dApps that depend on market economics. This has not completely prevented protocols from gaining rapid user growth, but it certainly impacts the functionality and usability of a dApp. However, we are already seeing solutions to this problem. When DeFi was new, this was a major issue. Now that the ecosystem has drawn a significant amount of capital, allowing multiple dApps to function within DeFi, this is less of an issue. Tools like Uniswap connect liquidity providers from across the world using decentralized protocols. As of authorship of this course, the DeFi ecosystem has $13.8 Billion USD locked into it.

Ease of Use

Mechanical gears on a computer screen
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The tools that make up the DeFi ecosystem are still being developed. While they are not the most intuitive applications, they are well on their way.

DeFi offers a lot of new options, but those new options come with the typical problems that face new innovations. Once the dApp's concept has been proven, it often takes some time to enhance the user experience. Most DeFi apps were very confusing to use when they were first released. However, as the ecosystem has developed, these dApps have become gradually easier to use.

If these dApps are to reach widespread success, they are going to have to become seamless to use. Once these dApps become as simple to use as a centralized banking or money transfer app, like PayPal, users will gradually become part of the ecosystem because of all of the benefits DeFi has to offer.

Possible Solutions

The world with question marks superimposed over it
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What would a world with a strong DeFi ecosystem look like? What are the potential solutions to some of these problems?

We have all of these issues acting as hurdles that are currently impeding the mass adoption of decentralization finance. The good news? A lot of these problems are going to be solved in due time.

dApps will get easier to use as the ecosystem develops. As more people become aware of decentralized finance as an option, these dApps will gain more users. Once that happens, more liquidity will be added to the DeFi ecosystem.

The privacy issue is being tackled by multiple teams and is second only to the scaling problem. While we addressed the overall scaling issue in the prerequisite Crypto Curious Course, we mainly focused on scaling solutions geared towards Bitcoin. There are several projects researching different strategies regarding scaling as ethereum transitions to Eth 2.0.

One of the most promising solutions for ethereum payment scaling is the Plasma network. The Plasma network has the same goal as Bitcoin's Lightning Network. Plasma is a second layer solution that can create "child chains" that do not have to constantly synchronize with the main chain, relieving the chance for backlog since certain transactions are done off-chain. This technology is being paired with a solution known as rollups, which can help maintain a valid consensus while maintaining synchronicity between the main chain and child chains.

Future of DeFi

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Despite all of these issues, DeFi has shown promise. Let’s examine a future where DeFi overcomes these hurdles. What would that look like?

What’s Next?

A line that splits into multiple possibilities and becomes obscured as it moves to the right
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The more individuals involved in the ecosystem, the more it will grow. Bitcoin transcends international money transfers, DeFi can do the same for financial services. The future of DeFi can include extreme growth in terms of capital locked in the DeFi ecosystem. More liquidity amounts to more competition. A robust DeFi ecosystem with easy to use tools and widespread capital availability can also help bank the unbanked.

The lofty goal that DeFi is aiming for is to become as big as the current financial system. Again, this is the best case scenario for DeFi, but a lot needs to happen in order for the mass adoption of DeFi to become a reality. As previously mentioned, there has to be a significant amount of value and functionality offered by DeFi in order to amass enough capital to rival any traditional financial systems. If all of these challenges are met and solved, we will likely see the DeFi space continue to grow at a significant rate.

Bitcoin showed us a glimpse of what money without borders looks like. DeFi has the promise to create a semi-unified financial system that completely transcends borders. This would be a monumental step toward equality, as everyone with an internet connection, including large numbers of unbanked individuals, is allowed to participate in the same system. In the developed world, most financial activities are closed off to certified brokers and traders. DeFi shatters these barriers. For the first time, you can both function without a bank while offering your own banking services.

We touched on liquidity pools along with the growth of the money locked into DeFi contracts over time. There is already a good amount of capital available to receive as a DeFi loan. If more lenders get involved in these loans, there will be more competition among these lenders, driving down interest rates and benefiting the consumer. A large amount of capital within DeFi contracts will only make the ecosystem more resilient.

As mentioned earlier, DeFI has the ability to bring in those who have been neglected by the banks. By offering these individuals and businesses more options and access to capital, a more equitable financial system is the result. DeFi isn't magically going to solve the needs of the unbanked overnight, but with Defi, there is more innovation in areas focused on the unbanked than ever before.

Course Summary

  • The road from Bitcoin to Ethereum to DeFi
  • How traditional financial applications are being decentralized
  • The values of the DeFi ecosystem: Openness, Modularity, Decentralization
  • The new financial applications building upon blockchain technology
  • How to navigate the DeFi ecosystem using various tools
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