Table 1 Overview of DeFi products
From: Detecting DeFi securities violations from token smart contract code
Decentralized exchanges | These services allow users to exchange cryptocurrencies using liquidity provided by other users, generally through Automated Market Makers, which algorithmically set prices (Xu et al. 2021). Participants can provide liquidity to liquidity pools for certain pairs of cryptocurrencies and receive a Liquidity Provider token for doing so. They can “stake” this token (i.e., lock it into the system and agree not to withdraw it for a certain period) and earn interest on it, usually paid in the decentralized exchange’s governance token (referred to as “yield farming”). The return on investment for these yield farms may range from the hundreds to even thousands of percentage points. Participants can stake governance tokens in “pools” and earn further rewards. This incentivizes users to provide liquidity to keep the exchanges running.a |
DeFi lending | Loans are issued through smart contracts rather than intermediaries and use cryptocurrencies as collateral (Bartoletti et al. 2020b). Loans are often issued in stablecoins-cryptoassets whose value is pegged to government-issued fiat currencies-and interest rates tend to be set algorithmically (Jagati 2021). Users can earn interest for providing liquidity for loans and earn fees from loans. One primary DeFi lending innovation is “flash loans”, which are issued and repaid in a single transaction, and therefore do not require collateral (Kamps et al. 2022). |
Prediction markets | These allow users to bet on real-world outcomes-such as sporting events or elections—through smart contracts (Binance Academy 2021). Prediction markets rely on blockchain oracles, which are external sources of information that determine the outcome of the prediction market (Kamps et al. 2022). Based on this information about the outcome, the smart contract releases the appropriate funds to the winners (Binance Academy 2021). |
DeFi insurance | DeFi insurance community members serve as underwriters and share in premiums paid to the protocol. Holders of the project’s governance token vote on claims payouts. DeFi insurance remains a nascent industry, but some companies are attempting to oversee claims directly through smart contracts. Thus far, DeFi insurance tends to insure only other DeFi protocols (Coinbase 2021). |
Other financial products | A range of other financial products, including those not usually available to retail investors, can be implemented within DeFi. These include derivatives trading, margin trading, and other securities (DeFi Prime 2021). |