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====== 2.2.3 Decentralized Finance (DeFi) Layers ======
[[dido:public:ra:1.2_views:2_tech_views|return to Technical Views]]

The [[dido:public:ra:xapend:xapend.a_glossary:d:defi]] have defined layers 0 through 3((
Rakesh Sharma,
Investopedia,
24 March 2021,
__Decentralized Finance (DeFi) Definition__,
Accessed 24 May 2021,
[[https://www.investopedia.com/decentralized-finance-defi-5113835]]
))

<figure DeFiLayers>
{{  :dido:public:ra:1.2_views:2_tech_views:screen_shot_2021-05-24_at_12.00.33_pm.png?300  |}}
<caption>The Layers used in Decentralized Finance (DeFi).</caption>
</figure>

Sharma defines the four layers as:

  * **[[dido:public:ra:xapend:xapend.a_glossary:s:settlement_layer | Settlement Layer]]** is also referred to as Layer 0 because it is the base layer upon which other DeFi transactions are built. It consists of a public [[dido:public:ra:xapend:xapend.a_glossary:b:blockchain|blockchain]] and its native digital currency or [[dido:public:ra:xapend:xapend.a_glossary:c:cryptocurrency|cryptocurrency]]. Transactions occurring on DeFi apps are settled using this currency, which may or may not be traded in public markets. One example of the settlement layer is [[dido:public:ra:xapend:xapend.a_glossary:e:ethereum|Ethereum]] and its native token [[dido:public:ra:xapend:xapend.a_glossary:e:ether|ether (ETH)]], which is traded at crypto exchanges. The settlement layer can also have tokenized versions of assets, such as the U.S. dollar, or [[dido:public:ra:xapend:xapend.a_glossary:t:tokens|tokens]] that are digital representations of real-world assets. For example, a real estate token might represent ownership of a parcel of land.  
  * **[[dido:public:ra:xapend:xapend.a_glossary:p:protocol_layer]]** are the standards and rules written to govern specific tasks or activities. In parallel with real-world institutions, this would be a set of principles and rules that all participants in a given industry have agreed to follow as a prerequisite to operating in the industry. DeFi protocols are interoperable, meaning they can be used by multiple entities at the same time to build a service or an app. The protocol layer provides [[dido:public:ra:xapend:xapend.a_glossary:l:liquidity]] to the DeFi ecosystem. One example of a DeFi protocol is Synthetix, a derivatives trading protocol on Ethereum. It is used to create synthetic versions of real-world assets.
  * **[[dido:public:ra:xapend:xapend.a_glossary:a:applayer]]**, as the name indicates, is where consumer-facing applications reside. These applications abstract underlying protocols into simple consumer-focused services. Most common applications in the cryptocurrency ecosystem, such as decentralized cryptocurrency exchanges and lending services, reside in this layer.
  * ** [[dido:public:ra:xapend:xapend.a_glossary:a:aggregation_layer]]**, is the aggregation layer where aggregators connect various applications from the previous layer in order to provide a service to investors. For example, they might enable the seamless transfer of money between different financial instruments to maximize returns. In a physical setup, such trading actions would entail considerable paperwork and coordination. But a technology-based framework should smooth out the investing rails, allowing traders to [[dido:public:ra:xapend:xapend.a_glossary:s:switch|switch]] between different services quickly. Lending and borrowing is an example of a service that exists in the aggregation layer. Banking services and crypto wallets are other examples.           

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