The building blocks of permissionless finance
In 2022, Canadian authorities froze the bank accounts of trucker protesters. In 2013, Cypriot banks seized up to 47.5% of uninsured deposits overnight. In Venezuela, a lifetime of savings can evaporate in months through hyperinflation.
These aren't edge cases. They're reminders that the financial system most people trust implicitly is built on a foundation of permission—permission that can be revoked.
DeFi offers a different architecture: financial services that run on code, not committees. No account freezes. No bank holidays. No permission required.
This article breaks down the essential components that make permissionless finance possible—the building blocks that any DeFi ecosystem needs to function.
It may sound counterintuitive, but ideally you wouldn't have to trust that a financial institution will honor your balance.
In developed economies, trust in banks is often taken for granted. But recent history shows no system is immune:
Developing economies face:
Developed economies experience:
A blockchain backed by cryptographic certainty—where applications operate without asking permission—offers an alternative. Not because institutions are evil, but because removing the need for trust removes the possibility of its violation.
Bitcoin (2009) proved you could move value without intermediaries. But Bitcoin's scripting language is deliberately limited—it settles transactions, not much else.
Ethereum (2015) changed the game by introducing smart contracts: self-executing programs that enable any financial logic to run on-chain. Suddenly you could build a lending market, an exchange, or a stablecoin as code.
The early experiments—MakerDAO (2014), Compound (2018)—remained niche. Then came "DeFi Summer" 2020.
In a few months, total value locked (TVL) exploded from $1 billion to over $15 billion. Uniswap proved automated market makers (AMMs) could replace order books. Yield farming and liquidity mining created new incentive structures. An entire financial system began assembling itself from open-source components.
As Balaji put it: YouTube is not TV.
DeFi is not finance with a blockchain attached. It's a fundamentally different architecture—permissionless, composable, 24/7, and global by default.
Before diving into protocols, a useful distinction:
| Type | What It Is |
|---|---|
| Coins | Native currencies of blockchains (ETH, SOL, BTC). Earned by validators, used to pay transaction fees. The "fuel" for the network. |
| Tokens | Smart contracts deployed on blockchains. Can be fungible (ERC-20) or non-fungible (NFTs). Programmable and infinitely customizable. |
This distinction isn't universal, but it clarifies where assets originate and how they function.
Every DeFi ecosystem, regardless of the underlying blockchain, needs the same foundational components:
| Component | What It Does | Why It Matters |
|---|---|---|
| Layer 1 | The base blockchain—handles settlement and hosts applications | Everything else builds on top of this |
| Smart Contracts | Self-executing programs triggered by predefined conditions | The primitive that makes everything possible |
| Blockchain Explorers | Index and display all on-chain transactions | Transparency—anyone can verify anything |
| Component | What It Does | Why It Matters |
|---|---|---|
| Stablecoins | Tokens pegged to stable assets (usually USD) | Bridge between volatile crypto and stable value |
| DEXes | Decentralized exchanges for token trading | Permissionless trading, 24/7, no KYC |
| Liquidity Pools | Smart contracts holding paired assets for swaps | Enable trading without order books or market makers |
| Lending & Borrowing | Deposit assets to earn yield, borrow against collateral | Capital efficiency without credit checks |
| Component | What It Does | Why It Matters |
|---|---|---|
| Liquid Staking | Tradeable tokens representing staked assets | Earn staking yield while maintaining liquidity |
| DEX Aggregators | Route trades across multiple DEXes for best prices | Optimization layer that improves execution |
| Yield Aggregators | Auto-compound and optimize yield farming | Automate complex strategies |
| Bridges | Connect different blockchains for asset transfers | Enable cross-chain liquidity |
| Synthetics | Track external asset prices using oracles | Bring any market on-chain |
| Flash Loans | Uncollateralized loans repaid within one transaction | Enable arbitrage and complex DeFi operations |
Stablecoins are the connective tissue of DeFi—and the highest-priority target for regulators. USDT and USDC alone represent roughly $100 billion in combined value.
Three models have emerged:
| Type | How It Works | Examples | Risk |
|---|---|---|---|
| Asset-backed | Each token backed by $1 (or equivalent) in reserves | USDT, USDC | Counterparty risk—trust the issuer |
| Over-collateralized | Deposit $150+ of crypto to mint $100 of stablecoin | DAI | Smart contract risk, liquidation risk |
| Algorithmic | Uses incentives and arbitrage to maintain peg, no direct backing | UST (failed) | High—several have collapsed |
Most stablecoins peg to USD at 1:1, though EUR and other currency pegs exist. The dominance of USD stablecoins reflects dollar demand globally—even in "decentralized" finance.
The difference isn't just technical—it's philosophical:
| Dimension | Traditional Brokerage | DEX |
|---|---|---|
| Access | Application, verification, approval | Connect wallet |
| Timeline | Days to weeks | Immediate |
| Hours | Market hours only | 24/7/365 |
| Custody | They hold your assets | You hold your keys |
| Market Making | Payment for order flow (PFOF) | Automated market makers (AMMs) |
| Transparency | Opaque | Every transaction visible on-chain |
DEXes trade the protections of regulated brokerages (insurance, dispute resolution) for the freedom of permissionless access. Neither is objectively "better"—they serve different needs and risk tolerances.
DeFi is powerful, but it's still maturing. The rapid evolution since 2020 demonstrates potential; the hacks, exploits, and failures demonstrate risk.
What can go wrong:
Open-source development means more eyes on code, but it also means attackers can study vulnerabilities. Many protocols are poorly documented. Some are outright scams.
The mantra "DYOR" (Do Your Own Research) isn't just culture—it's survival advice. In a permissionless system, there's no customer support to call when things go wrong.
DeFi isn't trying to put a blockchain wrapper on existing finance. It's rebuilding financial infrastructure from first principles: transparent, composable, and permissionless.
The building blocks described here—stablecoins, DEXes, lending protocols, liquid staking—form the foundation that any DeFi ecosystem needs. Understanding them is prerequisite to understanding everything built on top.
Whether this architecture ultimately complements or competes with traditional finance remains an open question. But the components exist, they work, and they're being used by millions of people who either can't access traditional finance or choose not to trust it.
That's not nothing.
The building blocks of permissionless finance
In 2022, Canadian authorities froze the bank accounts of trucker protesters. In 2013, Cypriot banks seized up to 47.5% of uninsured deposits overnight. In Venezuela, a lifetime of savings can evaporate in months through hyperinflation.
These aren't edge cases. They're reminders that the financial system most people trust implicitly is built on a foundation of permission—permission that can be revoked.
DeFi offers a different architecture: financial services that run on code, not committees. No account freezes. No bank holidays. No permission required.
This article breaks down the essential components that make permissionless finance possible—the building blocks that any DeFi ecosystem needs to function.
It may sound counterintuitive, but ideally you wouldn't have to trust that a financial institution will honor your balance.
In developed economies, trust in banks is often taken for granted. But recent history shows no system is immune:
Developing economies face:
Developed economies experience:
A blockchain backed by cryptographic certainty—where applications operate without asking permission—offers an alternative. Not because institutions are evil, but because removing the need for trust removes the possibility of its violation.
Bitcoin (2009) proved you could move value without intermediaries. But Bitcoin's scripting language is deliberately limited—it settles transactions, not much else.
Ethereum (2015) changed the game by introducing smart contracts: self-executing programs that enable any financial logic to run on-chain. Suddenly you could build a lending market, an exchange, or a stablecoin as code.
The early experiments—MakerDAO (2014), Compound (2018)—remained niche. Then came "DeFi Summer" 2020.
In a few months, total value locked (TVL) exploded from $1 billion to over $15 billion. Uniswap proved automated market makers (AMMs) could replace order books. Yield farming and liquidity mining created new incentive structures. An entire financial system began assembling itself from open-source components.
As Balaji put it: YouTube is not TV.
DeFi is not finance with a blockchain attached. It's a fundamentally different architecture—permissionless, composable, 24/7, and global by default.
Before diving into protocols, a useful distinction:
| Type | What It Is |
|---|---|
| Coins | Native currencies of blockchains (ETH, SOL, BTC). Earned by validators, used to pay transaction fees. The "fuel" for the network. |
| Tokens | Smart contracts deployed on blockchains. Can be fungible (ERC-20) or non-fungible (NFTs). Programmable and infinitely customizable. |
This distinction isn't universal, but it clarifies where assets originate and how they function.
Every DeFi ecosystem, regardless of the underlying blockchain, needs the same foundational components:
| Component | What It Does | Why It Matters |
|---|---|---|
| Layer 1 | The base blockchain—handles settlement and hosts applications | Everything else builds on top of this |
| Smart Contracts | Self-executing programs triggered by predefined conditions | The primitive that makes everything possible |
| Blockchain Explorers | Index and display all on-chain transactions | Transparency—anyone can verify anything |
| Component | What It Does | Why It Matters |
|---|---|---|
| Stablecoins | Tokens pegged to stable assets (usually USD) | Bridge between volatile crypto and stable value |
| DEXes | Decentralized exchanges for token trading | Permissionless trading, 24/7, no KYC |
| Liquidity Pools | Smart contracts holding paired assets for swaps | Enable trading without order books or market makers |
| Lending & Borrowing | Deposit assets to earn yield, borrow against collateral | Capital efficiency without credit checks |
| Component | What It Does | Why It Matters |
|---|---|---|
| Liquid Staking | Tradeable tokens representing staked assets | Earn staking yield while maintaining liquidity |
| DEX Aggregators | Route trades across multiple DEXes for best prices | Optimization layer that improves execution |
| Yield Aggregators | Auto-compound and optimize yield farming | Automate complex strategies |
| Bridges | Connect different blockchains for asset transfers | Enable cross-chain liquidity |
| Synthetics | Track external asset prices using oracles | Bring any market on-chain |
| Flash Loans | Uncollateralized loans repaid within one transaction | Enable arbitrage and complex DeFi operations |
Stablecoins are the connective tissue of DeFi—and the highest-priority target for regulators. USDT and USDC alone represent roughly $100 billion in combined value.
Three models have emerged:
| Type | How It Works | Examples | Risk |
|---|---|---|---|
| Asset-backed | Each token backed by $1 (or equivalent) in reserves | USDT, USDC | Counterparty risk—trust the issuer |
| Over-collateralized | Deposit $150+ of crypto to mint $100 of stablecoin | DAI | Smart contract risk, liquidation risk |
| Algorithmic | Uses incentives and arbitrage to maintain peg, no direct backing | UST (failed) | High—several have collapsed |
Most stablecoins peg to USD at 1:1, though EUR and other currency pegs exist. The dominance of USD stablecoins reflects dollar demand globally—even in "decentralized" finance.
The difference isn't just technical—it's philosophical:
| Dimension | Traditional Brokerage | DEX |
|---|---|---|
| Access | Application, verification, approval | Connect wallet |
| Timeline | Days to weeks | Immediate |
| Hours | Market hours only | 24/7/365 |
| Custody | They hold your assets | You hold your keys |
| Market Making | Payment for order flow (PFOF) | Automated market makers (AMMs) |
| Transparency | Opaque | Every transaction visible on-chain |
DEXes trade the protections of regulated brokerages (insurance, dispute resolution) for the freedom of permissionless access. Neither is objectively "better"—they serve different needs and risk tolerances.
DeFi is powerful, but it's still maturing. The rapid evolution since 2020 demonstrates potential; the hacks, exploits, and failures demonstrate risk.
What can go wrong:
Open-source development means more eyes on code, but it also means attackers can study vulnerabilities. Many protocols are poorly documented. Some are outright scams.
The mantra "DYOR" (Do Your Own Research) isn't just culture—it's survival advice. In a permissionless system, there's no customer support to call when things go wrong.
DeFi isn't trying to put a blockchain wrapper on existing finance. It's rebuilding financial infrastructure from first principles: transparent, composable, and permissionless.
The building blocks described here—stablecoins, DEXes, lending protocols, liquid staking—form the foundation that any DeFi ecosystem needs. Understanding them is prerequisite to understanding everything built on top.
Whether this architecture ultimately complements or competes with traditional finance remains an open question. But the components exist, they work, and they're being used by millions of people who either can't access traditional finance or choose not to trust it.
That's not nothing.