<s>
Decentralized	B-Protocol
finance	I-Protocol
(	O
often	O
stylized	O
as	O
DeFi	B-Protocol
)	O
offers	O
financial	O
instruments	O
without	O
relying	O
on	O
intermediaries	O
such	O
as	O
brokerages	O
,	O
exchanges	O
,	O
or	O
banks	O
by	O
using	O
smart	B-Application
contracts	I-Application
on	O
a	O
blockchain	B-Application
.	O
</s>
<s>
DeFi	B-Protocol
platforms	O
allow	O
people	O
to	O
lend	O
or	O
borrow	O
funds	O
from	O
others	O
,	O
speculate	O
on	O
price	O
movements	O
on	O
assets	O
using	O
derivatives	O
,	O
trade	O
cryptocurrencies	O
,	O
insure	O
against	O
risks	O
,	O
and	O
earn	O
interest	O
in	O
savings-like	O
accounts	O
.	O
</s>
<s>
DeFi	B-Protocol
uses	O
a	O
layered	O
architecture	O
and	O
highly	O
composable	O
building	O
blocks	O
.	O
</s>
<s>
Coding	O
errors	O
and	O
hacks	O
have	O
been	O
common	O
in	O
DeFi	B-Protocol
.	O
</s>
<s>
Decentralized	O
exchanges	O
(	O
abbreviated	O
DEXs	O
)	O
are	O
alternative	O
payment	O
ecosystems	O
with	O
new	O
protocols	O
for	O
financial	O
transactions	O
that	O
emerged	O
within	O
the	O
framework	O
of	O
decentralized	B-Protocol
finance	I-Protocol
,	O
which	O
is	O
part	O
of	O
blockchain	B-Application
technology	I-Application
and	O
FinTech	O
.	O
</s>
<s>
CEXs	O
,	O
DEXs	O
and	O
DEX	O
aggregators	O
are	O
all	O
built	O
on	O
the	O
multi-layered	O
DeFi	B-Protocol
architecture	O
or	O
components	O
,	O
where	O
each	O
layer	O
serves	O
a	O
well-defined	O
purpose	O
.	O
</s>
<s>
(	O
See	O
Figure	O
:	O
Multi-layered	O
Architecture	O
of	O
the	O
DeFi	B-Protocol
Stack	O
)	O
.	O
</s>
<s>
While	O
they	O
share	O
common	O
components	O
of	O
the	O
first	O
four	O
layers	O
,	O
such	O
as	O
Settlement	O
layer	O
,	O
Asset	O
layer	O
,	O
Protocol	O
layer	O
and	O
Application	O
layer	O
,	O
DEX	O
aggregators	O
have	O
an	O
additional	O
component	O
or	O
Aggregator	O
layer	O
,	O
which	O
allows	O
them	O
to	O
connect	O
and	O
interact	O
with	O
other	O
DEXs	O
via	O
smart	B-Application
contracts	I-Application
.	O
</s>
<s>
The	O
Ethereum	B-Application
blockchain	B-Application
popularized	O
smart	B-Application
contracts	I-Application
,	O
which	O
are	O
the	O
basis	O
of	O
DeFi	B-Protocol
,	O
in	O
2017	O
.	O
</s>
<s>
Other	O
blockchains	B-Application
have	O
since	O
implemented	O
smart	B-Application
contracts	I-Application
.	O
</s>
<s>
MakerDAO	B-Protocol
is	O
a	O
prominent	O
lending	O
DeFi	B-Protocol
platform	O
based	O
on	O
a	O
stablecoin	B-Protocol
that	O
was	O
established	O
in	O
2017	O
.	O
</s>
<s>
It	O
allows	O
users	O
to	O
borrow	O
DAI	B-Protocol
,	O
a	O
token	O
pegged	O
to	O
the	O
US	O
dollar	O
.	O
</s>
<s>
Through	O
a	O
set	O
of	O
smart	B-Application
contracts	I-Application
that	O
govern	O
the	O
loan	O
,	O
repayment	O
,	O
and	O
liquidation	O
processes	O
,	O
MakerDAO	B-Protocol
aims	O
to	O
maintain	O
the	O
stable	O
value	O
of	O
DAI	B-Protocol
in	O
a	O
decentralized	O
and	O
autonomous	O
manner	O
.	O
</s>
<s>
Other	O
platforms	O
followed	O
suit	O
,	O
leading	O
to	O
stacked	O
investment	O
opportunities	O
known	O
as	O
"	O
yield	B-Protocol
farming	I-Protocol
"	O
or	O
"	O
liquidity	O
mining	O
,	O
"	O
where	O
speculators	O
shift	O
cryptocurrency	O
assets	O
between	O
pools	O
in	O
a	O
platform	O
and	O
between	O
platforms	O
to	O
maximize	O
their	O
total	O
yield	O
,	O
which	O
includes	O
not	O
only	O
interest	O
and	O
fees	O
but	O
also	O
the	O
value	O
of	O
additional	O
tokens	O
received	O
as	O
rewards	O
.	O
</s>
<s>
In	O
July	O
2020	O
,	O
The	O
Washington	O
Post	O
described	O
decentralized	B-Protocol
finance	I-Protocol
techniques	O
and	O
the	O
risks	O
involved	O
.	O
</s>
<s>
In	O
September	O
2020	O
,	O
Bloomberg	O
said	O
that	O
DeFi	B-Protocol
made	O
up	O
two-thirds	O
of	O
the	O
cryptocurrency	O
market	O
in	O
terms	O
of	O
price	O
changes	O
and	O
that	O
DeFi	B-Protocol
collateral	O
levels	O
had	O
reached	O
$9	O
billion	O
.	O
</s>
<s>
Ethereum	B-Application
saw	O
a	O
rise	O
in	O
developers	O
during	O
2020	O
due	O
to	O
the	O
increased	O
interest	O
in	O
DeFi	B-Protocol
.	O
</s>
<s>
DeFi	B-Protocol
has	O
attracted	O
venture	O
capitalists	O
such	O
as	O
Andreessen	O
Horowitz	O
and	O
Michael	O
Novogratz	O
.	O
</s>
<s>
The	O
Economist	O
regarded	O
the	O
future	O
of	O
digital	O
finance	O
in	O
2022	O
as	O
a	O
"	O
three-way	O
fight	O
"	O
between	O
:	O
Big	O
Tech	O
,	O
such	O
as	O
Facebook	B-Application
with	O
its	O
digital	O
wallet	O
;	O
"	O
big	O
rich	O
countries	O
"	O
that	O
have	O
been	O
testing	O
their	O
own	O
digital	O
currencies	O
;	O
and	O
software	O
developers	O
"	O
building	O
all	O
sorts	O
of	O
applications	O
"	O
to	O
decentralize	O
finance	O
.	O
</s>
<s>
DeFi	B-Protocol
revolves	O
around	O
decentralized	B-Application
applications	I-Application
,	O
also	O
known	O
as	O
DApps	B-Application
,	O
that	O
perform	O
financial	O
functions	O
on	O
distributed	O
ledgers	O
called	O
blockchains	B-Application
,	O
a	O
technology	O
that	O
was	O
made	O
popular	O
by	O
Bitcoin	B-Protocol
and	O
has	O
since	O
been	O
adapted	O
more	O
broadly	O
.	O
</s>
<s>
Rather	O
than	O
transactions	O
being	O
made	O
through	O
a	O
centralized	O
intermediary	O
such	O
as	O
a	O
cryptocurrency	O
exchange	O
or	O
a	O
traditional	O
securities	O
exchange	O
,	O
transactions	O
are	O
directly	O
made	O
between	O
participants	O
,	O
mediated	O
by	O
smart	B-Application
contract	I-Application
programs	O
.	O
</s>
<s>
These	O
smart	B-Application
contracts	I-Application
,	O
or	O
DeFi	B-Protocol
protocols	O
,	O
typically	O
run	O
using	O
open-source	B-Application
software	I-Application
that	O
is	O
built	O
and	O
maintained	O
by	O
a	O
community	O
of	O
developers	O
.	O
</s>
<s>
DApps	B-Application
are	O
typically	O
accessed	O
through	O
a	O
browser	O
extension	O
or	O
application	O
.	O
</s>
<s>
For	O
example	O
,	O
MetaMask	B-Protocol
allows	O
users	O
to	O
directly	O
interact	O
with	O
Ethereum	B-Application
through	O
a	O
digital	O
wallet	O
.	O
</s>
<s>
Many	O
of	O
these	O
DApps	B-Application
can	O
be	O
linked	O
to	O
create	O
complex	O
financial	O
services	O
.	O
</s>
<s>
For	O
example	O
,	O
stablecoin	B-Protocol
holders	O
can	O
lend	O
assets	O
like	O
USD	B-Protocol
Coin	I-Protocol
or	O
DAI	B-Protocol
to	O
a	O
liquidity	O
pool	O
in	O
a	O
borrow/lending	O
protocol	O
like	O
Aave	O
,	O
and	O
allow	O
others	O
to	O
borrow	O
those	O
digital	O
assets	O
by	O
depositing	O
their	O
own	O
collateral	O
.	O
</s>
<s>
Some	O
DApps	B-Application
source	O
external	O
(	O
off-chain	O
)	O
data	O
,	O
such	O
as	O
the	O
price	O
of	O
an	O
asset	O
,	O
through	O
blockchain	B-Application
oracles	I-Application
.	O
</s>
<s>
Additionally	O
,	O
Aave	O
introduced	O
"	O
flash	B-Protocol
loans	I-Protocol
"	O
,	O
which	O
are	O
uncollateralized	O
loans	O
of	O
an	O
arbitrary	O
amount	O
that	O
are	O
taken	O
out	O
and	O
paid	O
back	O
within	O
a	O
single	O
blockchain	B-Application
transaction	O
.	O
</s>
<s>
Many	O
exploits	O
of	O
DeFi	B-Protocol
platforms	O
have	O
used	O
flash	B-Protocol
loans	I-Protocol
to	O
manipulate	O
cryptocurrency	O
spot	O
prices	O
.	O
</s>
<s>
Another	O
DeFi	B-Protocol
protocol	O
is	O
Uniswap	B-Protocol
,	O
which	O
is	O
a	O
decentralized	O
exchange	O
(	O
DEX	O
)	O
set	O
up	O
to	O
trade	O
tokens	O
issued	O
on	O
Ethereum	B-Application
.	O
</s>
<s>
Rather	O
than	O
using	O
a	O
centralized	O
exchange	O
to	O
fill	O
orders	O
,	O
Uniswap	B-Protocol
pays	O
users	O
to	O
form	O
liquidity	O
pools	O
in	O
exchange	O
for	O
a	O
percentage	O
of	O
the	O
fees	O
collected	O
from	O
traders	O
swapping	O
tokens	O
in	O
and	O
out	O
of	O
the	O
liquidity	O
pools	O
.	O
</s>
<s>
Because	O
no	O
centralized	O
party	O
runs	O
Uniswap	B-Protocol
(	O
the	O
platform	O
is	O
governed	O
by	O
its	O
users	O
)	O
,	O
and	O
any	O
development	O
team	O
can	O
use	O
the	O
open-source	B-Application
software	I-Application
,	O
there	O
is	O
no	O
entity	O
to	O
check	O
the	O
identities	O
of	O
the	O
people	O
using	O
the	O
platform	O
and	O
meet	O
KYC/AML	O
regulations	O
.	O
</s>
<s>
are	O
substituted	O
by	O
a	O
blockchain	B-Application
or	O
distributed	O
ledger	O
.	O
</s>
<s>
Some	O
common	O
methods	O
of	O
operation	O
include	O
the	O
use	O
of	O
smart	B-Application
contracts	I-Application
or	O
order	O
book	O
relaying	O
,	O
although	O
many	O
other	O
variations	O
are	O
possible	O
and	O
with	O
differing	O
degrees	O
of	O
decentralization	O
.	O
</s>
<s>
Because	O
traders	O
on	O
a	O
decentralized	O
exchange	O
often	O
do	O
not	O
need	O
to	O
transfer	O
their	O
assets	O
to	O
the	O
exchange	O
before	O
executing	O
a	O
trade	O
,	O
decentralized	O
exchanges	O
reduce	O
the	O
risk	O
of	O
theft	O
from	O
hacking	B-Architecture
of	I-Architecture
exchanges	I-Architecture
,	O
but	O
liquidity	O
providers	O
do	O
need	O
to	O
transfer	O
tokens	O
to	O
the	O
decentralized	O
exchange	O
.	O
</s>
<s>
Due	O
to	O
a	O
lack	O
of	O
KYC	O
processes	O
,	O
and	O
no	O
way	O
to	O
revert	O
a	O
transaction	O
,	O
users	O
are	O
at	O
a	O
loss	O
if	O
they	O
are	O
ever	O
hacked	O
for	O
their	O
passwords	O
or	O
private	O
keys.Additionally	O
,	O
users	O
staking	O
in	O
DeFi	B-Protocol
protocols	O
can	O
suffer	O
what	O
is	O
called	O
an	O
impermanent	O
loss	O
.	O
</s>
<s>
Front	O
running	O
is	O
a	O
special	O
type	O
of	O
attack	O
in	O
public	O
blockchains	B-Application
when	O
some	O
participant	O
(	O
usually	O
a	O
miner	O
)	O
seeing	O
an	O
upcoming	O
trading	O
transaction	O
puts	O
his	O
own	O
transaction	O
ahead	O
(	O
playing	O
with	O
a	O
transaction	O
fee	O
for	O
example	O
)	O
,	O
making	O
the	O
initial	O
transaction	O
less	O
profitable	O
or	O
even	O
reverted	O
.	O
</s>
<s>
In	O
a	O
Tweet	O
,	O
Charlie	O
Lee	O
,	O
the	O
creator	O
of	O
Litecoin	B-Protocol
spoke	O
out	O
and	O
claimed	O
an	O
exchange	O
cannot	O
be	O
decentralized	O
if	O
it	O
can	O
lose	O
or	O
freeze	O
customer	O
funds	O
.	O
</s>
<s>
Coding	O
errors	O
and	O
hacks	O
are	O
common	O
in	O
DeFi	B-Protocol
.	O
</s>
<s>
Blockchain	B-Application
transactions	O
are	O
irreversible	O
,	O
which	O
means	O
that	O
an	O
incorrect	O
or	O
fraudulent	O
DeFi	B-Protocol
transaction	O
cannot	O
be	O
corrected	O
easily	O
.	O
</s>
<s>
The	O
person	O
or	O
entity	O
behind	O
a	O
DeFi	B-Protocol
protocol	O
may	O
be	O
unknown	O
,	O
and	O
may	O
disappear	O
with	O
investors	O
 '	O
money	O
.	O
</s>
<s>
Investor	O
Michael	O
Novogratz	O
has	O
described	O
some	O
DeFi	B-Protocol
protocols	O
as	O
"	O
Ponzi-like	O
"	O
.	O
</s>
<s>
DeFi	B-Protocol
has	O
been	O
compared	O
to	O
the	O
initial	B-Application
coin	I-Application
offering	I-Application
craze	O
of	O
2017	O
,	O
part	O
of	O
a	O
cryptocurrency	O
bubble	O
.	O
</s>
<s>
Inexperienced	O
investors	O
are	O
at	O
particular	O
risk	O
of	O
losing	O
money	O
because	O
of	O
the	O
sophistication	O
required	O
to	O
interact	O
with	O
DeFi	B-Protocol
platforms	O
and	O
the	O
lack	O
of	O
any	O
intermediary	O
with	O
customer	O
support	O
.	O
</s>
<s>
On	O
the	O
other	O
hand	O
,	O
as	O
the	O
code	O
for	O
DeFi	B-Protocol
smart	B-Application
contracts	I-Application
is	O
generally	O
open-source	B-Application
software	I-Application
that	O
can	O
be	O
copied	O
to	O
set	O
up	O
competing	O
platforms	O
,	O
experienced	O
users	O
and	O
user-created	O
bots	O
might	O
create	O
instabilities	O
as	O
funds	O
shift	O
between	O
platforms	O
which	O
share	O
the	O
same	O
code	O
.	O
</s>
<s>
In	O
addition	O
,	O
DeFi	B-Protocol
platforms	O
might	O
inadvertently	O
provide	O
incentives	O
for	O
cryptocurrency	O
miners	O
to	O
destabilize	O
the	O
system	O
.	O
</s>
<s>
In	O
2021	O
,	O
half	O
of	O
cryptocurrency	O
crime	O
was	O
related	O
to	O
DeFi	B-Protocol
.	O
</s>
<s>
Theft	O
from	O
DeFi	B-Protocol
can	O
come	O
from	O
either	O
external	O
hackers	O
stealing	O
from	O
vulnerable	O
projects	O
,	O
or	O
"	O
rug	O
pulls	O
"	O
,	O
where	O
the	O
developers	O
and	O
influencers	O
promote	O
a	O
project	O
and	O
then	O
take	O
the	O
money	O
,	O
as	O
a	O
form	O
of	O
pump-and-dump	O
.	O
</s>
<s>
In	O
October	O
2021	O
,	O
the	O
FATF	O
included	O
DeFi	B-Protocol
in	O
the	O
guidance	O
for	O
crypto	O
service	O
providers	O
,	O
making	O
the	O
authority	O
's	O
aim	O
to	O
regulate	O
this	O
type	O
of	O
asset	O
.	O
</s>
<s>
They	O
are	O
expecting	O
each	O
individual	O
country	O
to	O
determine	O
if	O
individuals	O
involved	O
in	O
DeFi	B-Protocol
can	O
be	O
considered	O
a	O
virtual	O
asset	O
provider	O
and	O
be	O
subjected	O
to	O
the	O
FATF	O
's	O
guidelines	O
.	O
</s>
