Part 2. DeFi Ecosystem: Core Infrastructure

      Introduction to the Ecosystem

      In the previous chapter we looked at why is Decentralized Finance (DeFi) important. DeFi is currently the most adopted application of blockchain and smart contract platforms like Ethereum. The topic of DeFi is not possible to exhaustively cover in any blog series, but for the scope of this series we would take a high-level view on the DeFi space today, discuss our view on the stack and highlight leading projects in each layer and category.

      “DeFi is a new stack of financial services built on top of blockchains that embraces the core values of the open internet, including 1) open access to anyone in the world; 2) commitment to open source code; 3) permissionless extensibility by third-party developers; 4) minimal-to-no fees; and 5) encryption-backed security and privacy.” – a16z Crypto

      Without further adieu, below you can find our take on the DeFi ecosystem:

      Note: a lot of categories might be overlapping with one another, we tried to picture the project in its most representative box, absolutes rarely exist in such a composable space. DeFi ecosystem is extremely diverse, thus not all protocols, companies and projects could fit into the chart. If you feel like we omitted your project, let us know! 

      In this chapter we will cover the first and arguably the most important layer of the stack – Core Infrastructure.

      Getting the obvious question out of the way

      First of all let’s talk about the tension that came up when we posted the first version of our DeFi stack. We got a lot of valuable feedback and everyone seemed to appreciate us modelling the DeFi world to get a better sense of the current implications. At the same time, some people in the Ethereum community felt Bitcoin was displaced in our graphic and has no role in DeFi. We have made some adjustments to the chart since then.

      In this article we will in detail explain the reasons for the structure and position we took in modelling the DeFi ecosystem. Let’s begin however with a quote by Andreas Antonopoulos, who addressed the debate of whether or not Ethereum is the only viable store of value that is needed for a healthy and stable DeFi ecosystem:

      When you tell people in Ethereum that they need Bitcoin, they don’t believe you. They are like “we can do everything Bitcoin does… except security… just as well with smart contracts.” There are some fundamental trade-offs. The flexibility you need in order to do smart contracts does not go well with building robust secure nation state resistant sound money. Which is why on the other hand, when Bitcoin people say “we can do smart contracts too”, we are like “No, don’t. Even if you could, you don’t want to.” The compromises you will need to make, the flexibility you’ll need to introduce will undermine all things which make Bitcoin secure robust sound money.

      … Bitcoin provides the foundation for Ethereum people to be freaky. And I love freaky, as there is a lot of innovation and creativity there. BTC is like a big brother who says “You can dress the way you want kid, and if anyone gives you any trouble, I’ll show them”.

      … I don’t want this space to close up, to round up the wagons and go “Nobody else will succeed, there can be only one. There is only one leader, there is only one doctrine, there is only one true faith!” That’s not science, that’s religion. I don’t do religion. – Andreas Antonopoulos

      We at Staking Rewards are thriving to support the evolution of an overall healthy DeFi and Staking ecosystem. We believe it is important to compete and group in stacks, but at the same time we want to acknowledge the network-agnostic composability and open-concourse that is the base-layer of Crypto as a whole. Ethereum ecosystem deserves a great deal of credit for the persistent building which it facilitated. Current DeFi applications and usage is almost exclusively happening on Ethereum. But remembering the roots is important and bridging assets like tBTC and wBTC is starting to bring actual stability into the volatile markets. In the middle of the Black Thursday events in March (link) MakerDAO added USDC as collateral to stabilize markets. We believe there is no need to add any centralized stablecoins, but Bitcoin will be sufficient to close this gap for a stable system. Bitcoin is to date the most secure and stable Store of Value and we believe it will play a crucial role in the overall development of DeFi.

      Let’s now deep-dive into the individual components of the stack and explain why Ethereum is imminent to DeFi and is the real driver of innovation here.

      Core Infrastructure – Layer 1

      The core infrastructure or protocol layer is what provides the solid and secure foundation for the application layer and everything above it in the stack. 

      Participating in these protocols involves staking, where this (if applicable) can be considered as risk-free return, acting as benchmark and acting as floor for the yields higher in the stack (more on this in future chapters).

      We see Bitcoin as a true Store-of-Value (SoV), being custodied on a platform like Ethereum, tapping into the ecosystem, its flexibility and innovation and collateralizing stablecoins, being connected to a high-speed side-chain or Layer 2. This would be similar to the way the internet works today where various protocols are layered on top of each other, with each doing what it’s best suited for. We see blockchains evolving along the similar path. Now let’s find out what each protocol is best at.

      Store of Value 

      We believe Bitcoin to be a vital component of the DeFi ecosystem and the strongest store of value (SoV) in the ecosystem and is a contender for becoming digital gold. We believe the stack is about each piece doing its job and focusing on it. Just like Andreas Antonopolous said, we believe the hallmark of Bitcoin to be its security (closely tied to not being very flexible or composable) and SoV characteristics due to its capped issuance schedule. In addition to that, it is the most liquid digital asset out there. 

      To make it clear, Bitcoin is not mandatory for DeFi, ETH is currently the main form of collateral for DeFi. However we would see Bitcoin gradually playing a more noticeable role in DeFi with tBTC and WBTC, as seen with recent value locked in WBTC, it being accepted as a form of collateral for DAI as well as recent tBTC launch.

      Source: DeFi Pulse


      One of the main forces that has driven the rise of open-source software is composability –– the ability to remix and recombine software components. With programmable trust, scarcity, and value as new building blocks, DeFi opens t1he components of finance to the same recombination and experimentation that makes open-source software so powerful. – a16z crypto

      Ethereum is clearly the main driving force of DeFi and innovation happening around it and is the core DeFi platform. The jury is still out on whether ETH will remain as the main collateral asset for DeFi and stablecoins in the long term, especially in ETH 2.0 phase where the DeFi yield would compete with native staking yields of Ethereum.

      Ethereum is also seen by many as a base layer for DeFi due to its flexibility and composability it enables throughout the stack. 


      Blockchain interoperability and application-specific blockchain vision is an important ongoing development in the blockchain space. This again goes the line of each blockchain being fit for its purpose and what is good at, with each building on top of each other and communicating with one another, as the internet of today. 

      We believe projects like Cosmos and Polkadot to be important for the blockchain space overall as they address the issues like scalability, privacy, governance through enabling different application- or use case-specific blockchains to interoperate. Modular frameworks like Cosmos SDK and Substrate aid the composability aspect of said chains.

      Focus on a native smart contract interoperability (not just asset interoperability) is one of the leading differences between Cosmos and Polkadot. Smart contract interoperability would allow to create much more complex instruments on Polkadot or a DeFi-focused parachain (like Kava in Cosmos).

      Interoperability protocols do not directly compete with DeFi, however there is a lot of complementarity involved as these decrease cross-chain friction, which is vital for a DeFi dapps. 

      Core Infrastructure – Privacy

      It goes without saying that when we are talking about DeFi as the next step and evolution of CeFi, we need to take very seriously the topic of privacy. In the era of surveillance capitalism, having a full record of any transaction an individual made can be misused to a degree we have not seen before as not only our information, but all our payments can be now digitally and immutably recorded. In the public blockchain future, where the public nature of records and code is a feature and not a bug, we need to have the tools to be able to define what should be private or public and whether we want to preserve the privacy of said data or code.

      The topic of privacy matters not only on the individual level, but also on organizational one. We cannot expect mainstream adoption of DeFi (and any other blockchain use-case for that matter) without proper privacy tools. 

      The zero-knowledge topic has been pushed forward extremely by the projects like Z-Cash and Monero, a lot of which has also been adopted in several Ethereum projects from both public nature (Enigma, Tornado Cash, ZK Sync, Incognito) and more private enterprise context (e.g. EY Nightfall). 

      A lot of these tools can vastly improve the capabilities of DeFi by making privacy and optionality. 

      ZK Sync (L2 scaling solution for Ethereum) deserves a special mention as they use privacy and zero-knowledge proofs to achieve scalability via so-called roll-ups. In a nutshell, ZK Rollup is an L2 scaling solution in which all funds are held by a smart contract on the mainchain, while computation and storage are performed off-chain. For every Rollup block, a state transition zero-knowledge proof (SNARK) is generated and verified by the mainchain contract. This SNARK includes the proof of the validity of every single transaction in the Rollup block. 

      Core Infrastructure – Oracles

      Connecting the on-chain and off-chain worlds is one of the key challenges for many if not all applications. Oracles are making sure that the data fed into the smart contracts is reliable. The design of the oracle itself or its network also needs to make sure there is no collusion resulting in data misrepresentation or corruption is possible. As more and more economic activity and value will migrate on-chain, this problem will become ever more prominent.

      In the context of DeFi, regardless in which way different types of financial products are being traded or collateralized, all of them require a pricing oracle for settlement and more generally the DeFi economics to function properly. If one can control the oracle, the decentralized nature of the smart contract controlling the collateral does not matter and a malicious actor can still steal the funds. This mechanism has been often exploited across various inefficient markets in traditional finance in order to tweak the price of derivatives. 

      Chainlink is arguably the most famous (and meme’d) project out there, which addresses oracle centralization issue by having a decentralized network of oracles with incentives tied to reliable data provisioning, which is going to evolve after its PoS transition.

      UMA (see more in derivatives chapter) suggests a concept of an oracle with “economic guarantees” via a so-called Data Verification Mechanism. These oracles should be there for disputes and settlements, such as closing a disputed state channel that references external data. 

      Additional approaches to oracles are Tellor (PoW-based) and Band Protocol (based on community data feed curation and bonding curves). 


      In this chapter we hope to have given a high-level overview of the DeFi stack’s first layer – Core Infrastructure. This is the layer which provides the technological and economic foundation for applications to exist on top. Core infrastructure in itself is not directly DeFi, as the more exciting stuff happens on the layers above. We will cover these in the following chapter. 

      Coming up next

      In the next issue of our DeFi series we will look at the second layer in DeFi stack, namely the Core Finance and Stability. This would move us already to the application layer where we will discuss

      • Stablecoins
      • Lending and Saving
      • Market Making and Liquidity
      • Derivatives and Synthetic Assets
      • DEXs, Relayers and Aggregators
      • Decentralized Insurance
      • Payments, Fiat Bridges and Gateways


      Gleb Dudka is a strategic thinker and research analyst. He has bootstrapped the blockchain validator operations of T-Systems (Deutsche Telekom) as the first enterprise player in the staking space. At Staking Rewards he is leading Content and Research / Development.

      Mirko Schmiedl is the Co-Founder, CEO and Product Lead at Staking Rewards. He is researching Proof of Stake Networks and yield-bearing assets since 2013. Prior to Staking Rewards he has led a Bitcoin Mining Operation in Southeast Asia.

      About The Author

      Gleb Dudka

      is a strategic thinker and research analyst. He has bootstrapped the blockchain validator operations of T-Systems (Deutsche Telekom) as the first enterprise player in the space. At Staking Rewards he is leading Content and Research / Development.