Protocols built on protocols: moving higher up the DeFi stack

To date, the successes in DeFi have been around the simplest and most used financial primitives. For example, the number one use case by value is stablecoins, the supply of which recently passed $100 billion. Stablecoins offer the baseline unit-of-account for denominating debt, and this is most useful in margin trading. DEX designs from AMMs to order books, or hybrid models such as Uniswap v3, facilitate the exchange of assets. Lending protocols sit on top of volatile crypto tokens and stablecoins to provide the ability to short or long a portfolio. As a fourth major category, yield aggregators have simplified participating in DeFi’s (sustainable or not) incentive schemes.

Many of the expected use cases for DeFi — i.e. financial instruments that are popular and available in traditional finance — have not yet taken off. This is most often due to lack of scalability on the Ethereum base chain, increased difficulty in building up liquidity (due to fragmentation), and simply needing basic building blocks to be reliable before more complex ideas can be built on top.