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DeFi Tokenomics

DeFi is a term used to describe a variety of onchain applications that are geared toward disrupting traditional financial services.

Transparent logic defines how transactions are processed while Off-chain services provide necessary data and triggers to apply those trading rules.

Schema​

Point of Difference​

The key difference with traditional finance is:

  • TradFi has transactions processed by a central authority governed by human processes.
  • DeFi automates the transaction settlement process with minimal human intervention.
  • DeFi logic is transparent, meaning everyone can see how a transaction will be processed.

Benefits​

Some of the key attractions of DeFi for many consumers are:

  • Eliminates the fees that banks and other financial companies charge for using their services
  • Control your money in a secure digital wallet instead of needing a bank
  • Anyone with an internet connection can use it without needing approval
  • You can transfer funds in seconds and minutes

Components​

Primary interacting components/service boundaries that enable DeFi protocols to function.

DeFi Ecosystem

  • Analysis
  • Wallets
  • Optimisers
  • Primitives
  • Oracles
  • Assets
  • Bridges
  • Settlement

Wallets​

User owned wallets which stores and manages the private keys of the user. These self-custodial wallets enable signing of transactions as well as user interaction with the DeFi protocols.

Optimisers​

Optimisers are a set of applications which build on top of DeFi primitives in order to maximise returns through implementing specific strategies.

DeFi Primitives​

Learn more

Oracles​

Data providers that enable DeFi protocols to ingest external data for logic processing within their smart contracts.

Assets​

The item/thing which is being traded within the DeFi ecosystem, usually represented in the form of a token(ERC20/721).

Cross-Chain Bridges​

Protocols that enable assets to be securely moved across various chains.

Transaction Settlement​

The base layer for DeFi where all transactions are finalised and secured.

Analysis Diagrams

Assets​

  • Tokenised Assets
  • Stablecoins
  • Dapp Tokens
  • Liquid Staking
  • Coins

Funding Rate Farming​

Funding Rate Arbitrage: is a strategy that involves borrowing a stablecoin and using it to buy a token that is expected to appreciate in value. The goal is to profit from the difference between the interest rate on the borrowed stablecoin and the appreciation of the token.

Prediction: - Vance Spencer

  • FR farming tokenizes the most valuable real estate in CeFi and puts it on chain (OI); this will eventually kill CeFi or force it on chain
  • New protocols/inflows will compete for OI; the cost to compete is token incentives + sub-optimal yield for a period of time, you effectively reserve your spot for when funding rates next spike/camp while FR is negative
  • FR will be farmed until APY is mid teens ~= DeFi stablecoin rates
  • Biggest risk is en-masse exit causing OI unwind slippage or underlying exchange solvency issue
  • Push for more OI will lead people to riskier venues/collateral until we see a blowup of a smaller/riskier player, causing a shift to DeFi
  • Funding rate farming is likely the catalyst for Derivs to move from CEXs to DEXs (risk mitigation, cost, incentives)
  • Stablecoin issuers (DAI) will internalize most of the yield in the end and form symbiotic alliances with funding rate protocols
  • Current FR farming iteration is the likely riskiest iteration, but still not that risky

Games​

Tools​

Products that help you invest in DeFi.