This is Post 3 in the Blockchain Series. The previous post covered smart contracts and the EVM.

AMMs: Market Making in Code

The canonical constant-product AMM uses:

x * y = k

Where x and y are token reserves. A swap changes reserves and implied price. Deeper liquidity means lower slippage.

Lending Protocol Basics

Lending markets depend on over-collateralization:

  • Supply collateral.
  • Borrow below collateral factor.
  • Liquidation triggers if health factor drops.

Critical parameters:

  • Loan-to-value (LTV)
  • Liquidation threshold
  • Liquidation bonus
  • Oracle heartbeat/staleness checks

Risk Surfaces

Top failure modes in DeFi:

  1. Smart contract bugs
  2. Oracle manipulation
  3. Liquidity crunches
  4. Governance capture

Engineering mitigations:

  • Timelocks + multi-sig for upgrades
  • Circuit breakers / pause guardians
  • Formal verification for core math
  • Real-time risk monitoring dashboards

References

  • Uniswap v2 whitepaper: https://uniswap.org/whitepaper.pdf
  • Aave docs: https://docs.aave.com/
  • Chainlink docs (oracle architecture): https://docs.chain.link/

Best Books

  • Campbell R. Harvey, Ashwin Ramachandran, Joey Santoro, DeFi and the Future of Finance.
  • Andreas M. Antonopoulos, Mastering Bitcoin (for transaction and security foundations).
  • Linda Xie et al., DeFi Developer Road Map (community resource/book-length guide).

Updated:

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