Title page 1

Contents 3

Summary 2

Introduction 4

Defining Defi 4

The Building Blocks of Defi 5

Cryptocurrency 5

Smart Contracts 8

Oracles 9

Defi Applications 9

Validating and Staking 11

Mixers 11

Decentralized Exchanges 12

Lending Protocols 14

Yield Farming 15

Differences with Traditional Finance 15

Regulated vs. Permissionless Environments 15

Credit vs. Collateral 17

Intermediation 17

Use Case Differences 19

Regulatory Policy Issues 19

Regulatory Arbitrage and Innovation 19

Defi and Illicit Financial Activity 22

Grey Area: Centralized to Decentralized Transactions 24

Magnitude of Risk 25

New Solutions 25

Other Issues 26

Preparing for the Future 26

Feasibility and Legality of Potential Future Regulation 27

Author Information 27

Disclaimer 28

Figures 3

Figure 1. Transactions Between Unhosted Wallets 6

Figure 2. How Centralized Platforms Work 7

Figure 3. The Intersection of Centralized and Decentralized Activities 8

Figure 4. Example of a Smart Contract Liquidity Pool 13