DeFi or Decentralized Finance is financial infrastructure built on blockchain. It is based on open protocols and decentralized applications. Smart contracts serve as the backbone of DeFi. Overall, it is much more open and transparent than traditional financial services. DeFi offers financial instruments without relying on central financial institutions such as banks and brokerages.

DeFi

Smart contracts are self-executing programs that are coded with the terms of agreement between a buyer and a seller. They run when predetermined conditions are fulfilled. Smart contracts automate transactions to meet two main goals: reducing time loss and participant involvement. 


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- Blocks and blockchain networks
- Distributed ledgers
- Participants
- Assets, transactions, and channels
- Consensus
- Smart contracts and chaincode
- Peer-to-peer replication
- Digital signatures
- Cryptographic hashes
- Wallet

Blockchain Key Terms

* User-facing application
* Smart contract
* Ledger

Three interdependent components of blockchain applications

* Cardano Settlement Layer
* Cardano Computational Layer
* Proof of Stake Protocol
* Ouroboros
* Social Elements of Cryptocurrencies
* Simon Scripting Language
* KMZ Sidechains
* User Issued Assets
* Plutus
* Smart Contracts

Key Cardano Terms

- No Need for Third-Party Verification
- Costless Verification
- Smart Contracts
- Unbundling of Services
- Lowering Costs
- Self-Contained Transactions

Advantages of Cost Verification on the Blockchain

IBM Developer Staff. (2020). Get started with blockchain. IBM Developer. https://developer.ibm.com/learningpaths/get-started-blockchain/

Groopman, J. (2021, June 1). Permissioned vs. permissionless blockchains: Key differences. SearchCIO. Retrieved February 9, 2022, from https://www.techtarget.com/searchcio/tip/Permissioned-vs-permissionless-blockchains-Key-differences#:~:text=Permissionless%20blockchains%2C%20also%20known%20as,fully%20decentralized%20across%20unknown%20parties. 

Frankenfield, J. (2022, February 8). Smart contracts: What you need to know. Investopedia. Retrieved February 9, 2022, from https://www.investopedia.com/terms/s/smart-contracts.asp 

Get started with blockchain: Explore the basics of blockchain and get started building a solid foundation

There are two types of blockchain networks: 
- Permissionless networks are open networks that are available to anyone
- Permissioned networks are closed, private networks 

Blockchain networks

Every participant on blockchain acts as a publisher and subscriber. Each node
can receive or send transactions to other nodes, and the data is synchronized across the network as it is transferred.

Peer-to-peer replication

Smart contracts

Written in Go, the chaincode defines the terms of the smart contract. When a transaction occurs, chaincode functions read and write the appropriate values into the ledger.


Chaincode

Blocks are files that store data on the blockchain by recording the updated data of transactions and storing that data on a digital ledger. Blocks hold encrypted data, and in order to identity a particular block the information from previous blocks as well as data from transactions are used. 

Blocks

Consensus is what ensures that the shared blockchain ledgers are exact copies of each other. Consensus is defined as 50% + 1 of the mining community which is comprised of enough members that it is extremely difficult to create fraudulent transactions.

Consensus

Distributed Ledgers (also known as DLTs) are databases that are shared and collaborated across websites, firms, institutions and so on. Distributed Ledgers utilize the technology that Bitcoin uses, which is blockchain. Distributed Ledgers exist in several locations and can be accessed by various individuals. 

Distributed Ledgers

Cryptographic Hashes are computational algorithms that ensure any alteration to a transaction input, which result in a different hash value being computed. This process guarantees that changes to the ledger must once again be reviewed by all miners and go through the consensus process.

Cryptographic Hashes

Digital signatures are unique keys to each blockchain user that ensures transactions originated from the correct senders. Digital signatures function to  mitigate the risk of fraud by serving as an additional layer of security.

Digital Signatures

Software that stores one's private key, public key, and blockchain address. It is used to communicate with the blockchain network. One can use the wallet to send and receive tokens.

Wallet (blockchain)

The program that users interact with to access the blockchain network

User-facing application

Cardano separates the accounting of value from the story behind why a value was moved. This is to avoid bias in execution order.

Cardano Settlement Layer

Contains the information on why transactions have occurred. This layer supports smart contracts.

Cardano Computation Layer

This consensus mechanism depends on selecting validators by their proportion of holdings. Cardano is an example of a blockchain that uses Proof of Stake.

Proof of Stake Protocol

Ouroboros is Cardano's specific proof of stake protocol.
Cardano tested the protocol Ouroboros by having expert developers implement and test the protocol. More work was needed, leading to protocol Ouroboros Praos being created. Although time consuming and costly, revising protocols like this is important to make sure it will last for decades. 

Ouroboros

Different cryptocurrencies each have their own following and market capitalizations, yet they are built from the technologies. This points to how a large part of the value of a cryptocurrency is derived from its community. For a cryptocurrency to change in a productive way, its users should understand the social contract behind their protocol.

Social Elements of Cryptocurrencies

This is the scripting language used by Cardano. It was inspired by ideas from Simon Peyton Jones.

Simon Scripting Language

KMZ Sidechains allow for secure and non-interactive movement of funds from the Cardano Settlement Layer to any Cardano Computation Layer or any other blockchain that supports KMZ Sidechains.

KMZ Sidechains

Assets created by users that piggyback off the protocol of the blockchain

User Issued Assets

A programming platform used for writing functional smart contracts on the Cardano blockchain. Based on the Haskell programming language.

Plutus

Staking allows user to earn passive income on their Cardano while verifying the blockchain. Moreover, the low gas fees is why Cardano is an attractive blockchain currency compared to others.

Staking Cardano and Gas Fees

Transactions are self-contained within a shared ledger that dictates how tokens can be created and earned. This allows those involved in these transactions to dictate the true state of ownership over time. 

Self-Contained Transactions on the Blockchain

Due to the ledger becoming the means of verification for transactions the costs of verification by third parties no longer applies.


Low Costs of Transactions on the Blockchain

Financial service fees that are usually bundled such as credit card use fees and credit verification fees would be unbundled and replaced by the ledger which would serve as the verification for the transaction.


Unbundling of Services on the Blockchain

Blockchain allows the verification of transaction attributes and enforcement of contracts without the need for third-party involvement due to its use of a public ledger. 

No Need For Third Party Verification on the Blockchain

All transaction information including the participants involved and the goods exchanged are stored on a public distributed ledger. This public ledger can be verified very cheaply in real-time by all market participants. 


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