Decentralizing Finance

2Infrastructure and Instruments

2.1 The Infrastructure of DeFi

What is a blockchain? What are smart contracts? In this chapter we'll unpack some of the core technologies that drive DeFi. For many of us (read: not software engineers), the deep inner workings of computer science will be less relevant and we will only need to know the basics or a high‐level understanding, in the same way most people don't really know how their car works. What's more important is to know how to drive, and what the risks are with driving. I'll be doing this in the same vein, and providing you with a high‐level understanding so at least you'll be able to appreciate how DeFi works.

Nonetheless, if you are technical, and want a full understanding of how Bitcoin and Ethereum works – I recommend you check out Mastering Bitcoin (Antonopoulos 2017) and Mastering Ethereum (Antonopoulos and Wood 2018). Both will go into the details of the computing, mathematics, and protocol architecture, using Bitcoin and Ethereum as the key examples. Those details may not be relevant to all blockchain systems, but they are a great starting point.

There have been many building blocks before DeFi, and this chapter will describe some of the background, mostly surrounding Bitcoin and Ethereum. Ethereum was the first L1 and the first smart contract platform, and many of the first DeFi applications such as Uniswap and Compound were built on them. Currently, there is an intense competition between many of the newer L1s such as ...