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BLOCKCHAIN

DeFi & Web3: Real Applications

DeFi replaces financial intermediaries with smart contracts. AMMs eliminate order books; lending protocols eliminate credit officers; DAOs eliminate boards.

1DeFi: Decentralised Finance

Decentralised Finance (DeFi) is the category of financial services built on public blockchains. Unlike traditional finance, DeFi protocols are open-source, permissionless, and non-custodial — users interact directly with contracts without handing over control of their funds. By 2024 the ecosystem had locked over $100B in value across lending, trading, and yield protocols.

DeFi is composable: Uniswap liquidity can be used as collateral in Aave, which can be used to borrow stablecoins on MakerDAO, which can be re-deposited in a yield strategy on Yearn. This money lego property creates complexity — and systemic risk — that traditional finance lacks.

DEX
Decentralised Exchange. Swaps tokens via AMM formula with no order book, no counterparty, and no account required (Uniswap, Curve).

Lending
Deposit tokens to earn yield; borrow others against over-collateralised positions. If collateral drops below threshold, position is liquidated (Aave, Compound).

Stablecoin
Token pegged to USD. Algorithmic (DAI — collateral backed), centralised (USDC — 1:1 fiat reserves), or hybrid. Backbone of DeFi liquidity.

2Automated Market Makers: x·y = k

Traditional exchanges use order books: buyers post bids, sellers post asks, and a matching engine fills orders. Uniswap (2018) replaced this with a mathematical formula: x·y = k. Two tokens form a liquidity pool. The product of their reserves must remain constant. This means: the more you buy of token X, the more expensive each additional unit becomes — a built-in price impact mechanism.

Pool: 1000 ETH, 2,000,000 USDC → k = 2,000,000,000. You want to buy 10 ETH. New ETH reserve = 990. New USDC reserve = k / 990 = 2,020,202. You paid 20,202 USDC for 10 ETH → effective price $2,020.2/ETH vs. spot $2,000. The 1% difference is price impact — larger trades create larger slippage.

✓ AMM advantages

✓ Always has liquidity — any size trade executes immediately
✓ No order matching infrastructure required
✓ Liquidity providers earn fees passively
✓ Permissionless — list any token pair without approval

✗ AMM risks

✗ Impermanent loss: LPs lose vs. just holding if prices diverge significantly
✗ High price impact on large trades
✗ MEV (Maximal Extractable Value): bots front-run large swaps

3NFTs: Non-Fungible Tokens

An NFT is a token whose on-chain record is unique. While 1 ETH is identical to any other ETH (fungible), each NFT has a distinct ID. The ERC-721 standard defines this: a contract maps token IDs to owner addresses, and ownership is transferred by calling transferFrom. NFTs prove provenance and ownership of digital (or physical) assets on-chain.

✓ Legitimate NFT use cases

✓ Event tickets — prevents duplication, enables secondary market royalties
✓ In-game assets — provable ownership, cross-game portability
✓ Real estate tokenisation — fractional ownership on-chain
✓ Art royalties — creators earn % on every secondary sale automatically

✗ NFT limitations

✗ The token is on-chain; the art usually isn't — IPFS links rot
✗ Owning an NFT doesn't convey copyright by default
✗ High speculation often divorced from underlying utility

4DAOs and On-Chain Governance

A DAO (Decentralised Autonomous Organisation) is an organisation whose rules are encoded in smart contracts. Token holders vote on proposals; if a proposal passes, the contract executes its effects automatically — no CEO can veto, no board can delay. MakerDAO governs the DAI stablecoin; Uniswap DAO controls a $3B treasury and protocol parameters.

$100B+ TVL
Total Value Locked in DeFi protocols at peak (2021). Even after the bear market, $50B+ remained (2024).

Flash Loan
Borrow unlimited funds, use them, and repay in a single transaction. If repayment fails, everything reverts. Enabled by atomic composability.

Governance Token
Token granting voting rights in a DAO. Holders vote on protocol upgrades, fee parameters, treasury allocation. Often also confers economic rights.

Constant product AMM: simulate a Uniswap-style pool

class AMM:
    """Constant product market maker: x * y = k"""

    def __init__(self, reserve_x, reserve_y, fee=0.003):
        self.x = reserve_x
        self.y = reserve_y
        self.k = reserve_x * reserve_y
        self.fee = fee  # 0.3% like Uniswap v2

    def price(self):
        return self.y / self.x

    def swap_x_for_y(self, dx):
        """Buy token Y by selling token X."""
        dx_after_fee = dx * (1 - self.fee)
        new_x = self.x + dx_after_fee
        new_y = self.k / new_x
        dy = self.y - new_y
        self.x += dx
        self.y -= dy
        return dy

pool = AMM(reserve_x=1000, reserve_y=2_000_000)  # 1000 ETH, 2M USDC

print("Initial state:")
print(f"  ETH reserve:  {pool.x:,.0f}")
print(f"  USDC reserve: {pool.y:,.0f}")
print("  Spot price:   " + f"{pool.price():,.2f}" + " USDC/ETH")
print()

header = f"{'Swap (ETH)':<12} {'Received (USDC)':<18} {'Eff. price':<14} {'Price impact'}"
print(header)
print("-" * 62)
for eth_in in [1, 5, 10, 50, 100]:
    p0 = pool.price()
    usdc_out = pool.swap_x_for_y(eth_in)
    eff_price = usdc_out / eth_in
    impact = (p0 - eff_price) / p0 * 100
    row = f"{eth_in:<12} {usdc_out:>14,.2f}   {eff_price:>10,.2f}    -{impact:.2f}%"
    print(row)

print()
print("Final spot price: " + f"{pool.price():,.2f}" + " USDC/ETH")
print("Larger trades = more slippage = higher price impact.")