3Activities and Applications
This chapter shows what is possible in DeFi, in view of TradFi's tried‐and‐tested financial activities. As we leave familiar territory, you'll gain a new vocabulary. Case studies will illustrate novel mechanisms and innovations in the various categories. Once again, they do not represent the end‐point of innovation by any means and many of the principles might change in the future. Nonetheless, these examples are some of the oldest and well‐established DeFi protocols, so they are a good starting point.
From an implementation perspective, many of these protocols connect directly to the user's wallet, such as MetaMask or Coinbase Wallet, or use connecting protocols such as WalletConnect to connect to the user's wallet.
3.1 Trading / DEXs
3.1.1 Automated Market Makers (AMMs)
If you hadn't noticed by now, a lot of crypto and DeFi centers around the trading of tokens. A big breakthrough in facilitating trading of tokens was with decentralized exchanges, or DEXs. How are DEXs different from centralized exchanges? First, unlike centralized exchanges, DEXs do not require customers to identify themselves. This enables a private, frictionless, and permissionless trading experience. It enables DEXs to be composable and to allow for other platforms like aggregators to be integrated with many DEXs.
Second, many DEXs utilize what is known as an Automated Market Maker (AMM) model. Ethereum founder Vitalik Buterin first proposed AMMs in 20161 and they were subsequently ...
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