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Field notes are notes I leave myself as I go through my day to day work. The hope is that other people will also find these notes useful. Note that these notes are unfiltered and unverified.

Decentralized Finance


TJ Palanca


July 31, 2022

Decentralized Finance

(“The Complete Beginner’s Guide to Decentralized Finance (Defi),” n.d.)

  • Decentralized finance refers to an ecosystem of financial applications that are built on top of blockchain networks.
  • Decentralized finance aims to cut out the middleman and return the value captured by financial intermediaries to the transacters or to a pool of providers without complete control over the system.Core features

Core features

  • No intermediaries. The code specifies the resolution every possible dispute, and the users maintain control over their funds at all times.
  • Removal of single point of failure. No central exchange and it’s instead spread across thousands of nodes, making it very difficult to interrupt the system.
  • Ease of access for the excluded. Unprofitable regions can still be served by the system as there is no profit motive for the intermediaries.

Potential applications

  • Borrowing and Lending
    • Instant transaction settlement
    • Collateralization of digital assets
    • No credit checks (is that a feature?)
    • Potential standardization
  • Monetary banking services
    • stablecoins can provide a currency or a reference to a real world asset, such as hard currency
    • mortgages can see reduced underwriting and legal fees5
    • insurance can be lower transaction costs at same quality of service6
  • Decentralized marketplaces
    • Lower trading fees than centralized exchanges
    • Derivatives, synthetic assets, prediction markets, and more


  • Poor performance. Slower than the centralized market, as they have to resolve the differences and reconcile across thousands of nodes.
  • User error. Without central control there is difficulty in reversing transactions that have already been made.
  • Bad user experience. it can be quite difficult to learn for the layperson.
  • Cluttered ecosystem. Difficult to find the most suitable application for a use case and there is difficulty in finding the best choices.

Automated Market Makers

(“What Is an Automated Market Maker (Amm)?” n.d.)

What are AMMs

  • Traditional quote prices based on an order book7. An automated market maker (AMM) uses an algorithm to determine the market price.

  • Uniswap uses x∗y=k as its algorithm where x is the amount of one token in the liquidity pool, and and y is the amount of another, and k is a fixed constant, so that total liquidity has to remain the same





  • Most trades are going to be peer-to-peer but AMMs eliminate the need for a counterparty by doing a peer-to-contract.

  • No order type, everything is a market order.

Liquidity providers

  • The market is created by users called Liquidity Providers that earn transaction fees for providing liquidity into the pool. In UniSwap you can provide 50% ETH and 50% DAI.
  • As liquidity dries up for one asset the premium increases and increases8.
  • LPs are exposed to something called impermanent loss:
    • Impermanent loss happens when the price ratio of deposited tokens changes after you deposited them in the pool.
    • Stablecoins or non-volatile asset pairs are going to be less impermanent loss.
    • Impermanent loss can be offset by transaction fees that LPs earn.
    • It’s not impermanent because they may not rever to the original price.