Hitchhiker's Guide to DeFi πŸ‘‡ An illustrated tour of the world of decentralized finance... [1/x] 🧡

@0x_illuminati Welcome to DeFi. The goal is open access to decentralized financial services for everyone in the world.

@0x_illuminati Smart Contracts ----- DeFi is possible because of smart contracts, which allow us to write code to program money. A smart contract is a self-executing piece of code that can interact with the blockchain, send, and receive funds based on criteria written in the code.

@0x_illuminati Check out @0x_illuminati's video thread explaining smart contracts πŸ‘‡

@0x_illuminati What can we do with programmable money? I've written previously about some of the real world applications of crypto.

@0x_illuminati L1 Blockchains ----- Smart Contracts are deployed on smart contract blockchains or "L1s". L1s are primarily competing across 3 factors: β€’ Scalability β€’ Decentralization β€’ Security An L1 can only pick 2 out of 3. This is called the blockchain trilemma.

@0x_illuminati Ethereum has always been the dominant L1. But ETH is congested, and slow. You can see this network congestion visualized by @txstreetCom at

@0x_illuminati @txstreetCom ETH compromises scalability for decentralization and security. So, the solutions are: 1. Alternative L1s like BSC, AVAX, FTM, etc 2. L2 solutions like @arbitrum, @OptimismPBC, etc

@0x_illuminati @txstreetCom @arbitrum @optimismPBC Layer-2s ----- L2s help the Ethereum blockchain scale without compromising on security. Here's a thread explaining L2s πŸ‘‡

@0x_illuminati @txstreetCom @arbitrum @optimismPBC DeFi is becoming increasingly multichain. Whether its L1s or L2s, you're going to need a way to hop around between chains if you're going to be part of the DeFi world. For this, we have Bridges.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC Bridges ----- Bridges allow you to transfer funds from one blockchain to another. In exchange, they take a small fee.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC Because of the way most bridges work, they need to store lots of assets in their contracts. Which means their contracts are giant honeypots for attackers.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC For example, you can see that there is $137M+ worth of tokens on this wormhole bridge contract.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC Wallets ----- To get started with DeFi, you first need a wallet. Wallets hold your crypto, and give you a way to interact with the blockchain, send and receive funds and use dapps.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC More accurately, Wallets hold the private keys that let you access your crypto. Most wallets will give you a recovery phrase in case you lose access to your wallet. Keep this seed phrase very safe. If you lose this, you cannot recover your funds.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC Wallets let you interact with a blockchain and with dapps deployed on a blockchain. Most popular wallets can interact with multiple chains. Dapps may be deployed on one or multiple chains.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC Wallets come in many shapes and sizes. For example, some wallets are actually just a smart contract under the hood.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC More wallets are becoming modular, allowing developers to integrate apps directly into the wallets. ...kind of like the iOS/Android App Store model.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC For institutions, associations, DAOs, or security buffs, there are multisig wallets. These can be configured to require signatures from multiple parties to authorize a transaction. Example: only transfer funds if 3 out of 4 people sign a tx.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC DApps ----- Dapps are decentralized applications deployed on blockchains.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC Typically, they just require you to connect your wallet. No sign up needed.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC See my thread on web2 apps vs web3 dapps

@0x_illuminati @txstreetCom @arbitrum @optimismPBC Here are some common dapps you'll find on most chains: β€’ Lending and Borrowing Examples: @AaveAave, @compoundfinance, @HundredFinance

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance β€’ Decentralized Exchanges (DEX) DEXes let you trade or swap coins without using a centralized exchange. Examples: @Uniswap, @SushiSwap, @Spirit_Swap, @traderjoe_xyz

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz Decentralized Exchanges use an "Automated Market Maker" to facilitate trades. Here's a guide explaining AMMs & Liquidity Pools.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz β€’ DEX Aggregators, which aggregate liquidity across various DEX-es. Example: @1inch, @paraswap, @OpenOceanGlobal

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal Derivatives β€’ @synthetix_io has tokenized derivatives of stocks and crypto. β€’ @lyrafinance offers decentralized call and put options on crypto. β€’ @InsurAce_io offers decentralized insurance.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io Most users in DeFi today are just looking for yields on their crypto. But a lot of yields in DeFi are unsustainable or driven by token inflation. See this thread to understand where the money is REALLY coming from πŸ‘‡

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io DeFi Yield ----- There are 3 basic ways to earn yield in DeFi: 1. Lending & Borrowing You can lend to earn interest. Borrowers pay interest to lenders. Loans are overcollateralized, so borrowers need to deposit more collateral than the borrowed amount.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io 2. Staking You can stake your crypto and run your own validator node, to help secure the network in exchange for staking rewards.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io Or do delegated staking, which means you delegate your crypto to a validator. The validator gets a commission. You get staking rewards minus commission. "Staking-as-a-Service"

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io Some staking services will give you a "receipt token" for staking. This receipt token represents your staked tokens + interest, and can then be traded, used as collateral, etc. This is called "liquid staking". Example: @staderlabs, @LidoFinance

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz wrote a great thread about this here πŸ‘‡

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz 3. Liquidity Pools Liquidity pools facilitate trading without the need for an order book exchange. Liquidity Providers supply coins into the pool and earn a % of the trading fees.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz Note: Liquidity Pools have an additional risk called "Impermanent Loss" or IL. You can read more about IL here:

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz In crypto, you also have liquidity risks. This is the risk that your assets are illiquid and you cannot get rid of them easily. This risk is low for large highly-traded coins like BTC and ETH, but becomes increasingly higher for smaller cap coins.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz NFTs are particularly vulnerable to this.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz See this thread for more common risk factors in crypto πŸ‘‡

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz Now, for a functional decentralized finance ecosystem, we also need a stablecoin. This allows you to shift your exposure in and out of crypto without needing to offramp your crypto.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz Stablecoins are pegged 1:1 to a currency like the US dollar. The only important function of a stablecoin is to maintain its peg.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz Some stablecoins are collateralized like $DAI - meaning that every stablecoin minted is backed by collateral worth more than the minted amount.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz Some stablecoins are algorithmic and rely on market forces to maintain the peg. And some stablecoins have a hybrid model.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz But when market forces work unexpectedly, it can cause the whole system to collapse.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz Currently, the largest stablecoins by market cap are: β€’ USDC (centralized) β€’ USDT (centralized) β€’ BUSD (centralized) β€’ DAI (decentralized)

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz DeFi also has wrapped assets. Wrapped assets allow you to access a coin on a blockchain other than the coin's native chain. For example: WBTC is a "wrapped" Bitcoin token on the Ethereum chain. Theoretically, its price should stay very close to $BTC's price.

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz There are many other types of synthetic or derived assets in DeFi too. For example: β€’ Fund token (basket of cryptos) β€’ Leveraged token (2x ETH) +++ Lots of possibilities...

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz There's a LOT more going on in DeFi world. This was just a quick tour. If you thought this was a good visual tour of DeFi, I'd really appreciate it if you could retweet the tweet below ♻️ πŸ‘‡

@0x_illuminati @txstreetCom @arbitrum @optimismPBC @AaveAave @compoundfinance @HundredFinance @Uniswap @SushiSwap @Spirit_Swap @traderjoe_xyz @1inch @paraswap @OpenOceanGlobal @synthetix_io @lyrafinance @InsurAce_io @staderlabs @LidoFinance @magikinvestxyz I like creating visual guides like this to simplify Crypto and DeFi. Follow me @shivsakhuja for more visual threads like this. You can view my past writings and work on @0x_illuminati

Follow us on Twitter

to be informed of the latest developments and updates!

You can easily use to @tivitikothread bot for create more readable thread!
Donate πŸ’²

You can keep this app free of charge by supporting 😊

for server charges...