DeFi protocols

DeFi protocols are blockchain-based platforms that allow users to carry out financial transactions in a decentralized manner, without the need for intermediaries such as banks or financial institutions. Using smart contracts, these protocols offer services such as loans, cryptocurrency exchanges, and reward mechanisms for locking or supplying assets. DeFi is redefining the way we interact with money, offering more accessibility, transparency and autonomy.

How do DeFi protocols work?

Within these, smart contracts are used to carry out certain semi-automatic functions, making transactions more efficient. These contracts eliminate the reliance on centralized entities to manage transactions. Everything runs inside the contract, with no central entity approving each operation. That gives control over the funds, not absolute safety: if the contract has a flaw, the loss is usually irreversible and there is no complaints desk. That is why the code is audited before it moves real value.

• Technical accessibility: anyone with a connection can interact with the contract, with no branch and no opening hours. Legal accessibility is a different matter: offering crypto-assets and services on them is territorial and subject to customer identification and anti-money-laundering rules, so real access depends on the country you operate from and on the profile of the user (Regulation (EU) 2023/1114, CELEX 32023R1114; Ley 10/2010, BOE-A-2010-6737).

• Transparency and traceability: because operations run through smart contracts, they are recorded and can be verified by anyone, which narrows the margin for human error in execution and improves traceability. That is not the same as security: if the contract has a flaw, the loss is usually irreversible and there is no intermediary to answer for it.

• Financial autonomy: users keep control of their own assets and financial decisions, with no intermediary holding the funds, so they manage their resources with more autonomy. That control is over the funds, not a guarantee against loss.

• Efficiency and cost reduction: DeFi protocols eliminate brokerage costs, improving process efficiency.

1. Collateralized loans

DeFi protocols let you borrow by posting cryptocurrency as collateral. For example, depositing €1,500 in bitcoin to obtain €1,000 in a stablecoin while keeping exposure to bitcoin. If the price falls below the agreed threshold, the protocol liquidates the collateral automatically, with no prior notice and no room to negotiate: the borrower can lose everything deposited.

2. Decentralized exchanges (DEX)

Decentralized exchanges or DEXs facilitate the exchange of cryptocurrency directly between users without the need for intermediaries or custodians. They use smart contracts to execute transactions automatically and traceably, allowing users to trade assets directly. The outcome depends on the contract code and on the liquidity of the pool, and the risk sits with the user.

3. Yield Farming

Yield Farming involves providing liquidity to DeFi protocols in exchange for rewards, usually in the form of additional tokens. Users deposit their assets in liquidity pools and receive interest or tokens as compensation.

4. Staking

Locking cryptocurrencies in a proof-of-stake protocol to help validate transactions, in exchange for a variable reward. It is not a deposit or a savings product: the reward depends on the protocol and can change, the funds stay locked for a set period, the validator can be penalized in ways that cut the balance, and the value of the asset can fall to zero.

5. Synthetic derivatives

Contracts that replicate the value of a share, an index or a commodity without holding the underlying asset. In the EU that is a derivative and therefore a regulated financial product: MiCA does not apply to it, securities rules do, and anyone offering or marketing it needs prior authorization (Annex I, Section C, points 4 to 10, of Directive 2014/65/EU, CELEX 32014L0065, and art. 2(4)(a) of Regulation (EU) 2023/1114, CELEX 32023R1114). We build the technical side; the regulated activity is provided by an authorized entity.

1. Uniswap

Decentralized exchange (DEX) that allows users to exchange ERC-20 tokens directly from their wallets, without the need for intermediaries. Its automated market maker (AMM) model has facilitated liquidity and allowed anyone to create token pairs. During the decentralized finance boom of 2020 and 2021 it became one of the decentralized exchanges with the highest volume in the sector. Share, volume and user figures change daily: check them against public on-chain data sources before relying on them.

2. MakerDAO

MakerDAO is the protocol behind DAI, a decentralized stablecoin referenced to the US dollar. Through smart contracts, users lock cryptocurrencies as collateral to generate DAI. Read the case with the date in front of you: in the EU, a token that seeks to keep a stable value by referencing an official currency is an e-money token, and only an authorized credit institution or electronic money institution may offer it to the public (arts. 3(1)(7) and 48(1) of Regulation (EU) 2023/1114, CELEX 32023R1114).

3. Aave

Aave is a DeFi lending protocol that allows users to lend and borrow a variety of cryptocurrencies. It offers features such as flash loans and stable and variable interest rates.

4. Compound

It's another lending protocol that allows users to earn interest on their cryptocurrencies or borrow against them. It uses an algorithmic money market model to adjust interest rates based on supply and demand.

5. Synthetix

It's a platform that allows the creation and trading of synthetic assets, which are tokenized representations of real-world assets such as fiat currencies, commodities, and stocks. This allows users to gain exposure to a variety of assets without needing to physically own them.

This content is for general information. It is not legal, tax or investment advice, nor a recommendation on any particular protocol or crypto-asset. The products described carry a risk of losing the entire amount contributed. We build software; regulated activities are provided by an authorized entity.