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SoK: Decentralized Finance (DeFi) -- Fundamentals, Taxonomy and Risks

Krzysztof Gogol, Christian Killer, Malte Schlosser, Thomas Bocek, Burkhard Stiller, Claudio Tessone

TL;DR

This paper addresses the challenge of understanding DeFi by presenting a data-driven SoK that classifies major protocols into three core categories—liquidity pools, pegged/synthetic tokens, and aggregators—covering over 90% of TVL. It introduces a two-axis taxonomy separating algorithm design from network architecture, and pairs this with token taxonomy to map risk exposure to DeFi stakeholders and underlying assets. A novel DeFi risk framework assigns risk factors to protocol categories, stakeholders, and token types, highlighting pitfalls such as rug pulls, de-pegging, impermanent loss, and MEV. The study underscores TVL limitations as a success metric, discusses current trends like concentrated liquidity AMMs and DeFi asset management, and outlines future challenges including bridges, synthetic asset de-pegging, and on-chain CeFi hybrids. Overall, the work provides a practical roadmap for researchers and practitioners to assess DeFi risk and design more resilient, cross-chain financial primitives.

Abstract

Decentralized Finance (DeFi) refers to financial services that are not necessarily related to crypto-currencies. By employing blockchain for security and integrity, DeFi creates new possibilities that attract retail and institution users, including central banks. Given its novel applications and sophisticated designs, the distinction between DeFi services and understanding the risk involved is often complex. This work systematically presents the major categories of DeFi protocols that cover over 90\% of total value locked (TVL) in DeFi. It establishes a structured methodology to differentiate between DeFi protocols based on their design and architecture. Every DeFi protocol is classified into one of three groups: liquidity pools, pegged and synthetic tokens, and aggregator protocols, followed by risk analysis. In particular, we classify stablecoins, liquid staking tokens, and bridged (wrapped) assets as pegged tokens resembling similar risks. The full risk exposure of DeFi users is derived not only from the DeFi protocol design but also from how it is used and with which tokens.

SoK: Decentralized Finance (DeFi) -- Fundamentals, Taxonomy and Risks

TL;DR

This paper addresses the challenge of understanding DeFi by presenting a data-driven SoK that classifies major protocols into three core categories—liquidity pools, pegged/synthetic tokens, and aggregators—covering over 90% of TVL. It introduces a two-axis taxonomy separating algorithm design from network architecture, and pairs this with token taxonomy to map risk exposure to DeFi stakeholders and underlying assets. A novel DeFi risk framework assigns risk factors to protocol categories, stakeholders, and token types, highlighting pitfalls such as rug pulls, de-pegging, impermanent loss, and MEV. The study underscores TVL limitations as a success metric, discusses current trends like concentrated liquidity AMMs and DeFi asset management, and outlines future challenges including bridges, synthetic asset de-pegging, and on-chain CeFi hybrids. Overall, the work provides a practical roadmap for researchers and practitioners to assess DeFi risk and design more resilient, cross-chain financial primitives.

Abstract

Decentralized Finance (DeFi) refers to financial services that are not necessarily related to crypto-currencies. By employing blockchain for security and integrity, DeFi creates new possibilities that attract retail and institution users, including central banks. Given its novel applications and sophisticated designs, the distinction between DeFi services and understanding the risk involved is often complex. This work systematically presents the major categories of DeFi protocols that cover over 90\% of total value locked (TVL) in DeFi. It establishes a structured methodology to differentiate between DeFi protocols based on their design and architecture. Every DeFi protocol is classified into one of three groups: liquidity pools, pegged and synthetic tokens, and aggregator protocols, followed by risk analysis. In particular, we classify stablecoins, liquid staking tokens, and bridged (wrapped) assets as pegged tokens resembling similar risks. The full risk exposure of DeFi users is derived not only from the DeFi protocol design but also from how it is used and with which tokens.
Paper Structure (93 sections, 11 equations, 6 figures, 6 tables, 9 algorithms)

This paper contains 93 sections, 11 equations, 6 figures, 6 tables, 9 algorithms.

Table of Contents

  1. Introduction
  2. Methodology and Contribution
  3. Related Works
  4. Background
  5. Layer-1 and Layer-2 Blockchains
  6. Layer-1 vs Layer-2
  7. Centralized Finance
  8. DeFi Taxonomy
  9. Application
  10. Trading
  11. Lending
  12. Asset Management
  13. Blockchain Interoperability
  14. Design
  15. Synthetic (Pegged) Tokens
  16. ...and 78 more sections

Figures (6)

  • Figure 1: Value Proposition and Design of DeFi Protocols
  • Figure 2: Taxonomy of blockchain-based financial application
  • Figure 3: Taxonomy of DeFi Network Architecture
  • Figure 4: Taxonomy of Tokens
  • Figure 5: Graphical representation of the AMM conservation functions for two tokens with CMMM weights $w_x =1, w_y=2$ and a stableswap leverage coefficient of $A=10$
  • ...and 1 more figures