DeFi
Finance without a bank in the middle: smart contracts that lend and trade, pools that provide the liquidity, oracles that deliver the prices. Fifteen answers on DeFi and the technology under it, from Bitcoin and staking to wallets and keys, plus AI in trading.
In Germany BaFin supervises crypto service providers from its offices in Bonn and Frankfurt. A DeFi protocol that runs with no one in charge falls outside MiCA (recital 22).
-
What is AI in finance?
AI in finance is the use of learning computer models by banks, insurers and asset managers. Use cases, risks, the EU AI Act and the supervisors in DACH. -
What is AI in trading?
AI in trading is the use of machine learning to analyze, time and execute orders. How it works, where MiFID II Article 17 applies and what ESMA says. -
What is bitcoin?
Bitcoin is a digital currency that runs on a public ledger without a bank. How it works, proof of work, the 21 million cap and its status under MiCA. -
What is decentralized finance?
Decentralized finance (DeFi) runs financial services such as loans and trades through smart contracts on public blockchains. How it works, its risks and MiCA. -
DeFi vs CeFi vs TradFi: how do they differ?
TradFi runs through banks, CeFi through crypto companies, DeFi through smart contracts. A comparison of records, leverage, protection and EU rules. -
What is a blockchain oracle?
A blockchain oracle delivers outside data such as prices or a fund's net asset value to a smart contract. How oracles work, their types and their risks. -
How do smart contracts work?
A smart contract is a program on a blockchain that executes an agreement when set conditions are met. How it works on Ethereum and what the EU Data Act asks. -
What is a liquidity pool?
A liquidity pool is a stock of two tokens in a smart contract that traders swap against. How the x*y=k formula sets prices, what impermanent loss is. -
What is staking?
Staking locks crypto-assets at a validator of a proof-of-stake blockchain. How staking works, which rewards and risks it has, what MiCA and FINMA say. -
Yield farming vs staking: how do they differ?
Yield farming moves crypto-assets between DeFi pools to earn fees; staking locks a proof-of-stake asset for block rewards. Returns, risks and EU law compared. -
What is a layer 2 blockchain?
A layer 2 blockchain processes transactions off the main chain and settles them there. Rollups on Ethereum, the Lightning Network on Bitcoin, and EU law. -
DEX vs CEX: what is the difference?
A DEX is a crypto exchange run by smart contracts; a CEX is run by a company that holds client assets. Trading, custody, volume, risks and MiCA compared. -
What is a crypto wallet?
A crypto wallet stores the private keys to crypto-assets and signs transactions. Custodial vs non-custodial, hot vs cold, and what MiCA asks of custodians. -
What is a private key vs a seed phrase?
A private key signs transactions for one address; a seed phrase of 12 to 24 words creates all keys of a wallet. How BIP-39 and BIP-32 work, and custody rules. -
What is a hardware wallet?
A hardware wallet keeps private keys offline and signs crypto transactions inside the device. How signing and the secure element work, and what it cannot stop.
Where to start
Start with decentralized finance, then read how DeFi, CeFi and TradFi differ. A bank that uses AI or a blockchain stays under its supervisor, so every answer names the rule that applies.