DeFi is a movement that wants to reform the current financial system. A system that is not managed by third parties, like banks. A system that is open to everyone. And blockchain & smart contracts? Those appeared to be essential within this movement.
DeFi = Decentralized Finances
#Lending & borrowing
One of the first projects in DeFi is MakerDAO (founded in 2015), operating in lending and borrowing. MakerDAO allows customers to use their cryptocurrencies as collateral, such as ETH. Besides that, there are no KYC (know-your-customer) nor other intermediaries required to get a loan from MakerDAO.
The loan the users get is in DAI; the stablecoin pegged on USD. DAI is a great example of an algorithmic stablecoin, which means that its value is based on algorithms. Non-algorithmic stablecoins, such as USDT and USDC are still controlled by a centralized organization.
The purpose of stablecoins is to minimize volatility and to maintain a stable market price. These coins were popular already, but since the DeFi upswing, stablecoins became indispensable.
Lending & borrowing 🤝
Aave and Compound are two big DeFi projects in lending. Compound is an algorithmic autonomous interest rate protocol, that allows users to supply assets, like ETH, and 0x, and to start making interest. Supplied assets can also be used as collateral for borrowing other assets. Aave is also a decentralized finance protocol that allows people to lend and borrow crypto, using their own crypto as collateral.
So, now we shortly discussed already two great categories of DeFi: stable coins and lending/borrowing. However, DeFi aims to recreate the whole financial system, and decentralized exchanges (DEX) are also part of that.
Decentralized exchanges (DEX) 🦄
Centralized exchanges use order books, which are lists of the currently open buy and sell orders for an asset, organized by price. Utilized centralized systems match buy and sell orders with each other. For a long time, these exchanges provided the fastest and cheapest way to buy/sell crypto. But that’s changing. The decentralized exchanges use smart contracts to algorithmically match buy and sell orders. Uniswap, built on Ethereum, is a very popular DEX, or better said; an automated liquidity protocol. They don’t use an order book at all. Other DEX examples are Kyber, Bancor, and Balancer.
A lot of DeFi projects are protocols focusing on open-source software. This means that other developers can use (or improve) it. Therefore is free collaboration one of the great characteristics of DeFi. A popular project like this is 0x; a protocol that enables the exchange of ERC-20 tokens (tokens on Ethereum).
We also have open-source projects. 🔥
If you think wallets can’t be missing from this list, you’re right! The most famous one is MyEtherWallet. As its name reveals, this one is just for Ethereum tokens.
Derivatives are contracts that get their value from the performance of underlying assets. The main DeFi app in this category is Synthetix, which is a decentralized platform that provides on-chain exposure to different assets.
Margin trading 🧩
These DeFi projects provide certain guarantees of compensation in return for a payment of a premium. A common example of such protection is against smart contract failures and protection of deposits. Nexus Mutual and Opyn are two projects providing DeFi insurance.
DeFi without Fi
Besides these protocols, there are other important DeFi projects that are not focusing on just finance per sé. A project like that is FileCoin, a decentralized network storage company. And you can also think of so-called oracles; services that bring reliable data from the outside world into the smart contracts. Chainlink is such a protocol, that aims to connect blockchains and smart contracts.
Did you know that we joined the Waves Gravity Protocol, as a price oracle?
Read more about that in this blog article.
DeFi on Coinranking
Hope you got more understanding of DeFi!
And for the curious minds; find all DeFi coins in our DeFi section. 👀