Decentralized finance (DeFi) is a rapidly growing movement that leverages blockchain technology to disrupt traditional financial services. By cutting out financial intermediaries, DeFi dapps (decentralized applications) give users more control over their finances and offer a range of innovative services.
What is DeFi?
DeFi is short for Decentralized Finance, an overarching term for various financial services using cryptocurrencies on the blockchain. DeFi aims to disrupt traditional financial services by cutting out financial intermediaries. Put more simply, DeFi dapps aim to cut the middlemen out of everyday financial transactions and give people more power over their finances.
Blockchain technology and, more specifically, smart contract applications (dapps) on Ethereum made DeFi a reality. This is possible because a blockchain allows several entities to hold a copy of historical transactions, meaning that a single, centralized source doesn’t control it.
The Top DeFi Dapps
There are hundreds of DeFi dapps available today, each offering unique services and opportunities for users. Some of the most popular DeFi dapps include:
- Aave: A decentralized lending platform that allows users to lend and borrow cryptocurrencies. Aave distinguishes itself from other lending platforms through its additional flash loan feature.
- Uniswap: A decentralized exchange that allows users to swap tokens simply or provide tokens for % rewards.
- Compound: A decentralized lending platform that allows users to lend and borrow cryptocurrencies. Lenders receive their rewards in cTokens.
- MakerDAO: A decentralized stablecoin based on pawned Ethers.
- dYdX: A decentralized trading platform for margin trading, borrowing, and lending.
These dapps offer a range of services, including lending, borrowing, earning interest, and private payments – no personal data required.
Aave is a decentralized lending platform built on the Ethereum blockchain. Its users can lend their assets and earn interest in the process. To do this, they must connect their Ethereum wallet to the DApp.
Aave distinguishes itself from other lending platforms through its additional flash loan feature. This allows users to borrow funds without any collateral for the duration of one Ethereum transaction.
Aave is also an ecosystem of liquidity markets, with the second market being the Uniswap market. This market allows Uniswap Liquidity Provider (LP) token holders to leverage their LP tokens as collateral to borrow funds.
Uniswap is a decentralized exchange that allows users to swap tokens simply or provide tokens for % rewards. It is built on the Ethereum blockchain and uses an automated market maker (AMM) model to facilitate trades.
Uniswap has its own token, UNI, which has gained popularity in the DeFi space. At press time, UNI is trading at $6.31 with a market cap of over $1.09 billion.
Uniswap also has a market on the Aave protocol, allowing Uniswap LP token holders to leverage their LP tokens as collateral to borrow funds.
The Uniswap DAO has over 310,000 members that can vote over the $1.6B treasury, governance and roadmap of the DEX by holding UNI governance tokens. Any UNI holders can submit a proposal; however it must garner up to 25,000 yes-votes before it can be eligible for further deliberation.
Compound is another decentralized lending platform built on the Ethereum blockchain. Like Aave, its users can lend their assets and earn interest in the process. Lenders receive their rewards in cTokens.
Compound has its own governance token, COMP, which allows holders to participate in the governance of the protocol.
Compound is a protocol for algorithmic and efficient money markets. It has grown significantly in popularity and value locked even surpassing MakerDAO to become the single largest protocol in DeFi at one point.
MakerDAO is a decentralized stablecoin based on pawned Ethers. It allows users to generate DAI stablecoins by locking up collateral such as ETH or other ERC-20 tokens.
MakerDAO has its own governance token, MKR, which allows holders to participate in the governance of the protocol.
MakerDAO provides a collateralized cryptocurrency, or a “stablecoin”, DAI. It has the potential to become a key infrastructure for the open financial system.
dYdX is a decentralized trading platform for margin trading, borrowing, and lending. It is built on the Ethereum blockchain and offers advanced trading features such as leverage and short selling.
dYdX also offers flash loans, allowing users to borrow funds without any collateral for the duration of one Ethereum transaction.
The Benefits of DeFi
DeFi offers several benefits over traditional financial services. By cutting out centralized institutions, DeFi greatly reduces costs, making loans more affordable and increasing deposit rates. Transactions are instant and secure. Further, everyone is treated the same essentially democratizing finance and reducing the inequality of opportunity that plagues current systems.
DeFi also offers increased transparency and security through the use of blockchain technology. Users can see exactly where their funds are going and have greater control over their finances.
The Future of DeFi
The future of DeFi is exciting. As more people become aware of its unique value proposition, the DeFi ecosystem is expected to continue to grow significantly in the coming years. New innovations and developments are constantly emerging, offering even more opportunities for users.
In conclusion, DeFi represents a major shift in the world of finance. By leveraging blockchain technology and cutting out intermediaries, DeFi dapps offer users more control over their finances and a range of innovative services. The future of decentralized finance looks bright as this exciting movement continues to grow.