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Tools in DeFi: Stablecoins

· 4 min read

In this lesson, I will explain the main tools in the DeFi ecosystem — the fundamental components on which the entire system is built. These elements form the base layer of decentralized finance. As a reminder, everything works exclusively through smart contracts. Smart contracts are the mechanism that allows DeFi to function without trust in third parties or dependence on centralized authorities.

Smart contracts ensure security and decentralization within DeFi. They operate using cryptography and are stored on the blockchain. This gives them immutability: once deployed, a smart contract cannot be deleted or altered. For this reason, nearly all decentralized services exist as smart contracts and operate without the need for trust in any intermediary. There is no verification, no account registration — you simply connect your wallet and interact directly with the contract.

As mentioned earlier, all interaction in DeFi happens between users. There are no central organizations or administrative bodies. Users interact with each other through smart contracts.

In centralized finance, the interaction model is client → organization, and everything is formalized through legal agreements. The difference is enormous.
In centralized systems, you must sign documents, complete verification, purchase insurance, and place your trust in a company that may or may not fulfill its obligations.

In decentralized finance, all conditions are written directly into the smart contract. And you can be certain they will be executed exactly as defined, because the blockchain enforces the rules automatically.

Core Components of DeFi​

The foundation of DeFi consists of four elements:

  1. Stablecoins
  2. Decentralized Exchanges (DEXs)
  3. Lending Markets
  4. Oracles

Oracles are a separate concept and are explained in detail in the DeFi Pro module.
In this lesson, we focus on the three core components: stablecoins, lending markets, and decentralized exchanges.

Stablecoins — the First Foundational Element​

Stablecoins are tokenized dollars (or other fiat currencies) that can be used on the blockchain.
Why are they needed?

Stablecoins are essential because:

  • they allow you to manage your finances in a decentralized system,
  • they are the base currency for trading,
  • they act as a settlement asset across all protocols,
  • they enable stable storage without converting back to fiat.

Stablecoins form the primary layer on which the entire DeFi ecosystem operates.
Users exchange tokens, buy Ethereum or Bitcoin using stablecoins, and store part of their assets in stablecoins. This makes stablecoins an integral and permanent part of DeFi.

Types of Stablecoins​

Stablecoins are divided into centralized and decentralized.

Centralized stablecoins​

These include:

  • USDT
  • USDC

They are issued by companies, which is why they are considered centralized.
This means USDT and USDC can be frozen directly on your wallet address, even if the tokens are stored in MetaMask, Keplr, or any other self-custodial wallet.

Most likely, this will never affect an average user.
But the freezing mechanism exists.

Why can stablecoins be frozen?​

Freezing is performed by the issuing company.
The reasons usually include:

  • illegal activity,
  • prohibited transfers,
  • fraud,
  • money laundering,
  • sanctions enforcement.

If you simply use stablecoins normally, there is nothing to worry about. However, in theory, if sanctions target citizens of a specific region, centralized stablecoins could also be restricted.

This is why it is important to diversify and not keep everything in a single stablecoin.

Decentralized stablecoins​

These include:

  • DAI
  • FRAX

There are more decentralized stablecoins in existence, but DAI and FRAX are the only ones currently considered reliable.

Most other decentralized stablecoins carry major risks — poor collateral design, unstable mechanisms, or failures during volatility.
For this reason, we focus only on DAI and FRAX, since they are actively used and well established in DeFi.

Key Takeaway​

There is nothing wrong with using either centralized or decentralized stablecoins. Both types serve their role in the ecosystem. The most important principle is:

Do not store all your assets in one stablecoin. Diversify your stablecoin exposure to reduce risk.​

In the next lessons, we will examine the remaining foundational DeFi tools — decentralized exchanges and lending markets — and learn how they can be used to generate income.

These materials are created for educational purposes only and do not constitute financial advice.