Modularizing Decentralised Finance: The Defi Layered Stack Revisited (2024)

See all articles by Enrico Rossi

Enrico Rossi

Financial Conduct Authority

Abstract

As extensively discussed by the literature, decentralised finance (defi) can be understood as a stack of logical layers, where each layer represents a separate element or component of defi performing a different role and fulfilling a different function. Following on from Rossi (2022a), this work provides an alternative and novel perspective on the defi stack. In contrast to standard discussions and interpretations of the defi stack that usually include heterogeneous elements, such as protocols, assets, or services, this work reinterprets and reconstructs the defi stack from a modular point of view, in a way that is more consistent with the standard definition of layered modularity provided by the literature on modularity and system’s modularization. Consistent with the literature on layered modular architectures, this work decomposes the defi stack into functionally independent modules, each representing a set of functionally-independent (and functionally-specific) protocols. By so doing, the work identifies five main layers of the defi stack: the consensus or settlement layer (layer 1), the smart contract layer (2), the business model or service layer (3), the performance or optimization layer (4), and the governance layer (5). Each layer is characterised by a set of functionally hom*ogeneous and functionally independent protocols. The work discusses the main features and characteristics of the various layers and reinterprets the meaning of the decentralization-efficiency trade-off for each of these layers. The work then reinterprets the role played by cryptoassets (tokens) at the various layers and argues against the employment of a dedicated asset layer. A novel classification of cryptoassets is then provided by distinguishing between instrumental tokens (necessary means to an end that are valuable in that they support the operation of decentralised protocols) and tokens-as-instruments (ends in themselves that can retain value and utility independently from the operations of a decentralised protocol at any layer of the stack). Given the set of assets involved in the various layers, the paper presents a layered understanding of value in defi ecosystems, defined as “the defi pyramid of value”.

Rossi, Enrico, Modularizing Decentralised Finance: The Defi Layered Stack Revisited (January 8, 2023). Available at SSRN: https://ssrn.com/abstract=4365222 or http://dx.doi.org/10.2139/ssrn.4365222