Foundational Concepts of DeFi Libraries and Asset Types

Before the lunch bell rings, I often find myself scrolling through my portfolio app on my phone, fingers grazing a row of symbols that feel like unfamiliar constellations. I remember the first time I dove into DeFi and felt like I’d stepped into a room full of strangers wearing the same lab coat: everyone was using the same language, but every word seemed to mean a different thing. That moment of bewilderment is a familiar flicker of anxiety for many who look beyond traditional markets into the wild, fast‑moving world of decentralized finance.

It’s exactly this mix of hope, uncertainty, and a little fear that we’ll unpack today. Instead of jumping straight into how to trade perpetual swaps, let’s zoom out and look at what makes DeFi tick: token standards, asset types, and libraries that let us interact with them. Once the foundation is clear, the mechanics of perpetual swaps—those perpetual contracts that let you bet on the future price of an asset without a real expiration—will feel less cryptic.

Token Standards: The DNA of Decentralized Assets

Think of token standards as the genetic code that tells a blockchain how to treat a piece of value. They’re like the user manuals for every possible token you might hold: they outline what operations are possible, how the token interacts with other smart contracts, and how the data is stored.

ERC‑20 – The “Common Stock” of Tokens

ERC‑20 is the most popular fungible token standard on Ethereum. It’s simple: every token is identical, interchangeable, and can be split down to ten‑to‑one‑millionth (or even millionth) divisions. If you bought ETH in 2018, you’re holding an ERC‑20 token. Everyday exchanges use ERC‑20 for their native coins because the standard exposes a minimal set of functions:

• totalSupply()
• balanceOf(address)
• transfer(to, amount)
• approve(spender, amount)
• allowance(owner, spender)

These are the building blocks for anything that will let you move or use the token. Most DeFi protocols rely on this simple syntax to deposit tokens for liquidity pools, to stake, or to use as collateral.

ERC‑721 – The “Collectible” Standard

If ERC‑20 is the common stock, ERC‑721 is a unique piece of art. Each token has a unique ID and is not interchangeable with any other. That’s why every NFT in CryptoPunks or Bored Ape has its own distinct attributes. No two ERC‑721 tokens can be swapped one‑for‑one because the standard enforces uniqueness. Applications that need to handle exclusive rights—like ownership of a virtual land plot or a one‑off artwork—use ERC‑721.

ERC‑1155 – The “Hybrid” of Tokens

ERC‑1155 brings the best of both worlds: it can hold fungible, semi‑fungible, and non‑fungible items within a single contract. This reduces the number of contracts needed on the blockchain and makes batch transfers efficient. Game developers love it because it lets a single contract handle all in‑game items without bloating the chain with separate assets.

Other Standards Worth Noting

• ERC‑1400 is a compliance‑friendly standard that adds on‑chain regulations for token holders.
• ERC‑777 enhances ERC‑20 with hooks that let contracts react to token movements in real time.
• ERC‑4626 standardizes yield‑bearing vaults—so if you’re familiar with a DeFi savings protocol that gives you interest, you’re probably using ERC‑4626.

Libraries: The Kitchen Tools that Turn Standards Into Usable Food

Imagine stepping into a kitchen with all the ingredients lined up. The standards are your pantry. But to cook, you need knives, pans, and instructions. In the DeFi world, the “kitchen tools” are libraries that let developers write smart contracts or blockchain‑aware applications quickly and safely.

Web3.js vs. Ethers.js – The Two Mainstays

• Web3.js has been around longer. It’s a versatile library that communicates with an Ethereum node via JSON‑RPC. Its API mirrors the Ethereum JSON‑RPC spec, which can be a bit raw but you get direct access to almost every feature.
• Ethers.js is newer, smaller, and arguably more developer‑friendly. Its API abstracts some repetitive patterns, so you can focus more on logic than on plumbing.

When you’re writing a dApp that needs to read the balance of an ERC‑20 token, you’d import a library, create a contract instance with the ERC‑20 ABI (Application Binary Interface), and call balanceOf. The library handles all the low‑level transaction signing, gas estimation, and error handling. That means you spend less time troubleshooting and more time building utility.

Third‑Party SDKs: Alchemy, Infura, Moralis

Even though Web3‑style libraries can directly talk to a node, many developers use node‑hosting services to avoid running their own full node:

• Alchemy and Infura offer high‑availability endpoints with built‑in monitoring, indexing, and analytics. They let you focus on business logic rather than network uptime.
• Moralis goes a step further by indexing transactions, tokens, and NFTs, delivering them via websocket to your front end. If you’re building “real‑time” features—like a watch‑list that updates as trades happen—Moralis can save you a lot of headaches.

Interoperability Libraries: WalletConnect, MetaMask

Handling wallet connections is a critical step. MetaMask is the most widely used browser extension, making it the de facto gateway to Ethereum. WalletConnect opens the possibility for mobile wallets to interact with your dApp through a QR‑code link, expanding accessibility.

In short, these libraries are the translation layer between the raw blockchain and the UI that users actually see. They are not “magic”; they’re just reliable recipes for encoding and decoding the language the network understands.

Asset Types: From Physical to Virtual—What You Hold

In traditional finance, assets come in a handful of categories: cash, stocks, bonds, real estate. DeFi blurs those lines, creating new forms of value that can be fungible, non‑fungible, or something in between.

Fungible Tokens – The “Cash of the Web3 World”

An ETH or USDC token can be treated the same as any other equivalent unit. You trade it for anything that accepts that standard, no matter who you’re dealing with. The standardised interface simplifies swaps, lending, and staking across protocols.

Non‑fungible Tokens (NFTs) – The “Collectibles”

As mentioned earlier, NFTs are unique. They encode proof of ownership of a digital art piece, a virtual land plot, or a tokenized share of an online art gallery. Since each NFT is distinct, it carries a unique value that can fluctuate wildly depending on scarcity and desirability.

Semi‑fungible Tokens – The “Utility Bundles”

Some protocols issue assets that are part‑fungible and part‑unique. For example, in a gaming ecosystem, a weapon could be fungible within a limited edition series, but each weapon also has a unique ID giving it a rarity score. ERC‑1155 handles this elegantly.

Wrapped Tokens – Porting Value Across Chains

Think of “wrapping” as putting an asset in a safe that can be transported between different blockchains. Wrapped BTC (WBTC) is an ERC‑20 representation of Bitcoin on Ethereum. Its value is held back by custodians who lock the original BTC; the Ethereum contract mints an equivalent amount of WBTC. This allows you to use Bitcoin in DeFi protocols that run on Ethereum, such as adding it to a liquidity pool or using it as collateral.

Synthetic Assets – The “Replicators”

Synthetic tokens (e.g., Synthetix’s sUSD or the Perpetual Protocol’s perpetuals) replicate the price of an underlying asset, often fiat currencies, commodities, or stocks, without actually owning them. You pay a small fee to a protocol that holds collateral, and the synthetic token’s price is pegged by a price oracle. If the oracle says USD is $1.00, the synthetic token’s value follows suit.

The key advantage: you can get exposure to an asset that is otherwise inaccessible on a particular blockchain or without going through a traditional exchange.

Perpetual Swaps: The “Never‑Ending” Stakes

If you’ve ever watched a futures trade at a regulated exchange, you know that contracts expire on a set schedule—March, June, etc.—and traders roll over positions or let them settle. Perpetual swaps change that game: they technically have no expiration, yet they still converge toward an index price, ensuring no runaway gains or losses.

How Does It Work?

1. Funding Rate – This is the heart of the perpetual mechanism. The protocol calculates a funding rate based on the difference between the perpetual price and the spot price of the underlying asset. If the perpetual is trading above the spot, long positions pay short positions. If the opposite, short positions pay longs. The funding rate is usually capped (e.g., ±0.05%) to prevent extreme swings.

2. Mark Price – Perpetual contracts use an oracle-based mark price to avoid price manipulation. Rather than using the spot market directly (which can be volatile), they use an algorithm that compiles multiple price feeds. This gives traders a fair baseline for liquidation and margin calculations.

3. Fee Structure – There are two main fees:

   • Trade fee: a small percentage taken on each entry or exit.
   • Funding fee: the actual payment between longs and shorts that recirculates within the protocol.

4. Collateral & Leverage – Unlike a simple spot trade, a perpetual position requires collateral—often a less volatile asset like USDC or a wrapped token. If the margin falls below a maintenance threshold, the position is liquidated. Because you can borrow up to 10x or more, you can amplify gains—or losses—quickly.

5. Settlement – Since the contract never truly ends, you have to manually close your position when you’re ready. Some protocols allow “auto‑liquidation” if the margin falls below the threshold, but it’s always a good idea to monitor the health of your position.

Why Traders Love Perpetuals

• Flexibility: you’re not forced to roll over a contract that’s about to expire.
• Leverage: you can trade much larger volumes with a smaller bankroll.
• Liquidity: many protocols have deeply liquid markets for major pairs (ETH/USDC, BTC/USDC).

A Gentle Warning

The same leverage that can amplify profits also magnifies losses. Suppose you were long on a perpetual that tracks BTC/USDC, and the funding rate suddenly flips because the market becomes bearish. Your longs will start paying, draining your collateral. If the price swing is significant, the protocol may liquidate you before you can exit. That’s why it’s essential to monitor both price changes and the funding rate.

Putting It All Together: A Personal Lens

After a long morning in the Lisbon kitchen, a sudden notification buzzed on my phone: “Your position in ETH/USDC perpetual just paid 0.02 % to your short partner. Market volatility spike tomorrow.” The notification didn't feel like a piece of data—it felt like a tiny, invisible hand guiding me. It was a clear sign of one of the most powerful aspects of DeFi: transparency. You can see the flow of funds, the real-time impact of funding rates, and nothing is hidden behind a wall of proprietary algorithms.

When I first learned how to build a simple dApp that reads a token balance using Ethers.js, I felt like I’d finally understood how the raw code translates to something you could click on your phone. That sense of control—having the ability to read, write, and orchestrate transactions from your own device—was transformative. It made the intimidating world of DeFi feel like an ecosystem you could tend.

Actionable Takeaway

Below are a few practical steps you can take today to ground your understanding of DeFi libraries, token standards, and perpetual swaps:

1. Explore a Token Standard – Pick an ERC‑20 token that you already own (e.g., USDC) and use Remix IDE or Hardhat to read its balanceOf function. Don’t just run the code—write a comment telling yourself what each line does.

2. Wrap a Token – If you have a small amount of ETH and want to practice with WBTC, use a bridge like the MakerDAO Bridge or an official WBTC service. Notice how the contract mints a wrapped token that you can trade on a DEX.

3. Open a Perpetual Position – On a demo or small amount of collateral, open a long or short on a popular perpetual pair (e.g., BTC/USDC). Observe the funding rate, calculate how much you’re paying or receiving, and simulate a market drop to see a liquidation happen.

4. Check a Funding Rate Source – Go to the perpetual protocol’s API or website and pull the funding rate. Use an RSS reader or create a simple script that alerts you if the rate moves above a threshold you’re comfortable with.

By integrating these three activities, you’ll slowly convert abstract concepts into real experience. Remember, knowledge isn’t just about reading words; it’s about doing. The best way to survive the noisy market is to be a little disciplined, stay curious, and keep the emotional temperature as low as the funding rate.

Let’s keep this conversation going. Drop a comment or DM if you want a walk‑through on setting up a local environment or a deeper dive into the mechanics of a specific library. Markets test patience before rewarding it, and we’ll get there together, step by step.