Decentralized Finance Overview: Core Concepts, Application Scenarios, and Operational Mechanisms Analysis

Definition and Characteristics of Decentralized Finance

Decentralized Finance( utilizes blockchain smart contracts to build financial products and protocols. Compared to traditional finance, DeFi has the following characteristics:

• Transaction Transparency: All contract logic and fund flows can be publicly queried and verified.
• Automated yield distribution: Automatically distributed according to preset rules, without the need for third-party involvement.
• Low operating costs: Eliminating intermediaries significantly reduces participation costs
• Low entry threshold: Any digital wallet holder can freely participate.

The core of Decentralized Finance lies in a decentralized architecture, relying on blockchain and smart contracts for automatic execution, without the need for traditional financial institutions as intermediaries.

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Main Applications of Decentralized Finance

The DeFi ecosystem encompasses numerous applications, mainly including:

1. Staking to participate in POS consensus: Investors delegate tokens to validator nodes to share block rewards.

2. Provide loans: Deposit idle tokens into the fund pool for others to borrow, earning interest income.

3. Provide trading liquidity: offer token pairs to DEX and receive rewards such as trading fee sharing.

4. Use yield aggregators: Configure funds across multiple protocols through automated strategies to achieve optimal yields.

5. Lock tokens to participate in governance: Lock tokens to obtain project governance rights and related rewards.

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Stablecoin Overview

Stablecoins are a special type of cryptocurrency designed to maintain a stable value, usually pegged to fiat currencies or other assets. They are mainly divided into four categories:

• Fiat-backed: Such as USDT, USDC, supported 1:1 by fiat currency
• Product endorsement: such as XAUT, backed by physical assets like gold.
• Over-collateralization: For example, DAI, over-collateralized by other crypto assets
• Algorithmic: For example, UST) has collapsed (, adjusting supply and demand through algorithms to maintain price stability.

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DEX Operating Mechanism - AMM Analysis

Decentralized exchanges often use the automated market maker ) AMM ( model, mainly including:

1. Constant Product AMM ) like Uniswap (:

   • Follow the formula x * y = k
   • There are risks of price slippage and impermanent loss.

2. Hybrid AMM) like Curve(:

   • Combining constant and constant product functions
   • The curve is flat near the balance point, tilted at both ends.
   • Reduce slippage and impermanent loss risk

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Future Outlook

In 2025, the tokenization of real-world assets ) RWA ( became a hotspot in Decentralized Finance. RWA brings traditional assets on-chain, introducing incremental assets and users to DeFi, marking the expansion of DeFi into broader application scenarios. This trend is driving the deep integration of DeFi with traditional finance, constructing a new financial ecosystem.