DeFi Stack: Understanding the DeFi Ecosystem

Decentralized finance apps are popular because they eliminate the need for intermediaries and offer a variety of transaction choices. Usually, DeFi could be more obvious. In October, a heinous act cost the Solana Beach-based company Mango $100 million. Due to these instances, many consumers are concerned about their decentralized exchanges’ safety. Gather as much information as possible before deploying decentralized applications. DeFi is a good place to begin.

What is DeFi stack?

Each layer of the DeFi development company ecosystem influences the layers above and below it. The system is referred to as a “stack” because the levels are organized hierarchically and stacked upon one another. They are typically called:

  • Settlement
  • Asset
  • Protocol
  • Application
  • Aggregation
1. Settlement

The settlement layer describes the technology underlying distributed ledgers. Ethereum’s settlement layer comprises the Ethereum blockchain and the ETH token, while Hedera’s consists of the Hedera Hashgraph and HBAR.

The settlement layer settles transactions at the application layer. This is the responsibility of the settlement layer. The settlement layer, which serves as the foundation for later layers, is responsible for monitoring state changes and ensuring compliance with rules.

2. Asset

The native asset of a chain exists in both the asset and settlement layers. Secondary assets created on the same blockchain as the parent asset are also stored in the asset layer.

Shiba Inu is a popular ERC-20-compliant meme coin. Since Shiba Inu is part of Ethereum’s asset layer, it is an Ethereum token.

Each asset is a unique form of currency. Each asset’s value is affected by the frequent trading of digital assets via decentralized applications (dApps) at the stack’s application layer.

However, the protocols that connect Tether and DAI to other assets are. The interplay between the layers above and below each layer indicates the function of that layer.

Multiple networks support the generation of non-fungible tokens (NFTs) at the asset layer by combining fungible and non-fungible token standards at their protocol layers.

3. Protocols

Several smart contracts assist operations at the protocol layer. Contracts at the protocol layer include decentralized exchanges, lending platforms, and other DeFi protocols.

This layer gives the stack an air of intrigue. The asset layer has synthetic assets, while the protocol layer stores the smart contracts that generate them.

Protocols are required for a thriving DeFi development company ecosystem because they provide users access to functional code. Using the rules and regulations of these protocols, developers can design applications and use cases.

A developer can create a decentralized ICO-compatible program using the protocol’s pre-built code. Protocol codes facilitate the development of decentralized applications and boost user safety.

4. Application

The application layer is the most prevalent. The apps in this layer can communicate with the available resources and protocols. You will likely need a browser-based application to connect with a lending protocol if you trade bitcoin through flash loans.

Similar to computer protocol, the back-end layer is a network layer. The application layer is commonly understood by DeFi users.

Since it makes the system more accessible, the application layer is accountable for DeFi’s robust economic system.

Individuals and corporations use decentralized web-based exchanges for financial transactions. Without them, there would be fewer blockchain transactions.

5. Aggregation

In DeFi development company systems, the aggregation layer permits the consolidation of multiple decentralized applications (dApps) into a single, easily accessible area.

On the same website, aggregate end users may be able to lend money, buy assets, produce new assets, and monitor prices.

The aggregating layer is at the very top of the DeFi stack since aggregators frequently utilize applications, protocols, and assets.

In use, the DeFi stack

Let’s examine several real-world instances of how DeFi development company networks interact with the DeFi stack.

  • NFTS

In the DLT protocol layer, immutable NFTs use code. Diverse DLTs and NFTs use distinct token schemes. ERC-721 is the most popular NFT protocol built on Ethereum.

When many NFTs are traded in a single transaction, the ERC-1155 standard is implemented. dApps have been developed to simplify the creation and trading of NFTs.

Integration of trading, minting, and price tracking into decentralized applications.

  • DEXs

Decentralized exchanges are a good illustration of how the DeFi stack’s many components interact.

These exchanges often trade vast assets and rely on protocols designed to facilitate asset trading via decentralized intermediaries.

Numerous exchanges employ decentralized applications (dApps) that enable lending, derivatives trading, and other processes. On the chain, settlement-relevant transactions are conducted.

  • Stablecoins

Stablecoins are digital currencies whose values are based on other assets or are maintained by algorithms that issue new tokens or destroy old ones.

Using protocols, algorithm-generated stablecoins limit price fluctuation. Using other cryptocurrencies as collateral, users can borrow DAI from MakerDAO.

To safeguard DAI tokens from a market collapse, customers must deposit more cryptocurrency than they borrow.

A secure DeFi stack

At least one level of the DeFi stack contains each decentralized application, virtual currency, and smart contract. A DLT must be constructed atop a trustworthy DeFi stack to be trusted as a secure storage medium.

On the open Hedera proof-of-stake network, decentralized apps (dApps) are built using Solidity-written smart contracts and Hedera’s consensus and token services.