Learning Objectives:

  • Explain the mechanisms of Automated Market Makers (AMMs) and liquidity pools.

  • Understand decentralised lending and borrowing protocols.

  • Describe advanced DeFi concepts such as flash loans and impermanent loss.

6.1 Automated Market Makers (AMMs)

AMMs are a core innovation of DeFi, enabling decentralised trading without order books. The DeFi textbook covers “The idea of Automated Market Makers,” “The Mechanisms of Automated Market Makers,” and “Impermanent Loss” . An AMM uses a mathematical formula to determine the price of assets in a liquidity pool, enabling trades without a counterparty. Key concepts include:

  • Liquidity Pools: Pools of funds locked in smart contracts that facilitate trading.

  • Price Discovery: Prices are determined by the ratio of assets in the pool.

  • Impermanent Loss: The temporary loss in value experienced by liquidity providers due to price fluctuations .

6.2 Decentralised Lending and Borrowing Protocols

Lending and borrowing are core DeFi applications. Key protocols include Maker, Aave, and Compound :

  • Maker: A protocol that enables the creation of DAI, a decentralised stablecoin, through over-collateralised loans.

  • Aave: A lending protocol that enables users to lend and borrow a range of crypto assets.

  • Compound: An algorithmic money market protocol for lending and borrowing.

6.3 Advanced DeFi Concepts

The UCL module covers “consensus algorithms, specifically Proof of Work and Proof of Stake” . Advanced DeFi concepts include:

  • Flash Loans: Uncollateralised loans that must be repaid within the same transaction, enabling arbitrage and other strategies .

  • Miner Extractable Value (MEV): The value that can be extracted by miners or validators by reordering or censoring transactions .

 

PreviousNext