DeFi and Tokens

Decentralised Finance (DeFi) is a financial ecosystem built on blockchain that aims to recreate and improve upon traditional financial services — lending, borrowing, trading, insurance — without intermediaries. Tokens are the building blocks of DeFi.

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What is DeFi?

DeFi replaces traditional financial intermediaries (banks, brokers, exchanges) with smart contracts:

Traditional Finance	DeFi Equivalent	Example
Bank savings account	Lending protocol	Aave, Compound
Stock exchange	Decentralised exchange (DEX)	Uniswap, SushiSwap
Loan officer	Collateralised lending	MakerDAO
Insurance company	Decentralised insurance	Nexus Mutual
Asset manager	Yield aggregator	Yearn Finance
Derivatives exchange	Decentralised derivatives	dYdX, GMX

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Token Standards

Ethereum token standards define how tokens behave and interact with wallets and protocols.

ERC-20: Fungible Tokens

ERC-20 is the standard for fungible (interchangeable) tokens:

// SPDX-License-Identifier: MIT
pragma solidity ^0.8.20;

import "@openzeppelin/contracts/token/ERC20/ERC20.sol";

contract MyToken is ERC20 {
    constructor() ERC20("MyToken", "MTK") {
        _mint(msg.sender, 1000000 * 10 ** decimals());
    }
}

Core ERC-20 Functions

Function	Description
totalSupply()	Returns the total token supply
balanceOf(address)	Returns the token balance of an address
transfer(to, amount)	Transfers tokens to an address
approve(spender, amount)	Authorises a spender to transfer tokens on your behalf
transferFrom(from, to, amount)	Transfers tokens using an allowance
allowance(owner, spender)	Returns the remaining allowance

ERC-721: Non-Fungible Tokens (NFTs)

ERC-721 is the standard for unique, non-fungible tokens:

// SPDX-License-Identifier: MIT
pragma solidity ^0.8.20;

import "@openzeppelin/contracts/token/ERC721/ERC721.sol";

contract MyNFT is ERC721 {
    uint256 private _nextTokenId;

    constructor() ERC721("MyNFT", "MNFT") {}

    function mint(address to) public {
        uint256 tokenId = _nextTokenId++;
        _safeMint(to, tokenId);
    }
}

ERC-721 vs ERC-20

Feature	ERC-20	ERC-721
Fungibility	Fungible (1 token = 1 token)	Non-fungible (each token is unique)
Divisibility	Divisible (e.g. 0.5 tokens)	Indivisible (whole tokens only)
Use cases	Currencies, governance tokens	Digital art, collectibles, game items
Identification	Identified by amount	Identified by unique token ID

ERC-1155: Multi-Token Standard

ERC-1155 combines fungible and non-fungible tokens in a single contract:

Feature	Description
Batch operations	Transfer multiple token types in one transaction
Gas efficiency	Significantly cheaper than deploying separate ERC-20 and ERC-721 contracts
Semi-fungible	Tokens can be fungible, non-fungible, or semi-fungible
Use cases	Gaming items, event tickets, mixed asset portfolios

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Automated Market Makers (AMMs)

Traditional exchanges use order books. DeFi introduced Automated Market Makers — smart contracts that hold liquidity pools and price assets algorithmically.

Constant Product Formula (Uniswap)

x * y = k

Where:
  x = amount of Token A in the pool
  y = amount of Token B in the pool
  k = constant (invariant)

Example:
  Pool: 1000 ETH * 2,000,000 USDC = 2,000,000,000 (k)

  Swap 10 ETH for USDC:
  New x = 1010 ETH
  New y = k / 1010 = 1,980,198 USDC
  USDC received = 2,000,000 - 1,980,198 = 19,802 USDC
  Effective price: ~1,980 USDC per ETH (with slippage)

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