Traditional financial institutions are siloed and often put up barriers, both regulatory and artificial, that prevent interoperability and introduce market efficiency. DeFi on Ethereum promises to provide a shared and uncensorable network that provides financial products that are universally accessible and interoperable with applications and products across the globe. However, much of the underlying infrastructure that underpins traditional finance must be remade so that Ethereum can provide the same functionality at the same efficiency. Their “Money Legos” are primitive building blocks that more complex applications and products can build upon.
DeFi Money Lego Development: Messari Twitter
Uniswap is one of those “legos”, a liquidity pool that complex applications can use to exchange assets at a fair market value trustlessly and on demand. For example if complex contracts need a liquidation layer to execute once certain conditions are met, they can use Uniswap to execute that liquidation.
Uniswap as a liquidity pool serves fairly unique purposes in the DeFi space and has no analogous even in traditional finance. Its primary purpose is that it provides a way to exchange assets without a centralized exchange. These decentralized exchanges or “DEXs” are important and they are completely trustless, which as shown by Robinhood’s recent troubles is a fairly important safeguard. It also provides massive liquidity through unsecured loans, or “flash loans” by virtue of atomic transactions on Ethereum. This enables arbitrage opportunities that make the overall market more efficient. Finally, they can serve as a decentralized information source, or “oracle”, enabling other contracts to access price information without having to access the internet or other centralized sources. All of these abilities enable more complex contracts and serv as a building block for the DeFi space on Ethereum.
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