Since 2017, the sector has increased in market cap from around $27 Million (INR2.1 Billion) to a staggering all-time high of $200 Billion (INR 15.9 Trillion) in November last year. The idea of a decentralized banking system where users can lend, borrow, store and build a full-blown community-run spot and derivatives exchange can be fascinating.
Money and capital are the primary sources to get by in this world. DeFi is infiltrating all such sectors possible, meaning, DeFi is upscaling itself to be used by retailers and businesses, just like traditional finance. Thus, DeFi has evolved into one of the most affluent fields in the blockchain space.
Currently, DeFi is changing multiple sectors. Some of them are :
With the introduction of GameFi, DeFi is bringing a revolution in the gaming space by rewarding users with cryptocurrencies that hold a particular value. Such games are known as play -2-earn and are very popular among gamers, for example, Axie Infinity and Sandbox.
DeFi is dedicated to solving problems that the current international trading circuit faces. For example, it can streamline the payment process, hold payments into immutable smart contracts, and creates a trustless system within the vendors. Cardano's smart contracts are a great example for the same which are built on the Plutus smart contract platform.
Another significant industry that DeFi can potentially impact is insurance companies losing around $40 billion (INR 31 Trillion) due to small and large-scale insurance frauds. DeFi-based infrastructure can significantly decrease frauds and forgeries, thus saving money.
Real estate is another sector that is due for a change. The tedious bureaucracy and unawareness have given rise to inefficient middlemen, increasing costs for all buyers, sellers, and renters. The concept of tokenization and smart contracts can help eliminate the middleman.
These are some of the use cases in which DeFi is used. As you can see, this is a vast sector with more potential use cases than any other field in the blockchain.
To understand the functioning of DeFi, let us look at the top ten DeFi projects, what they offer, and how they function.
Dai is an Ethereum-based stablecoin project pegged to the US dollar that means the DAI token's value will always remain equivalent to one dollar. The MakerDAO maintains and regulates the DAI project. While the MakerDAO was created in 2014, DAI came into existence in 2017.
The market started trusting the project during its early days when the only collateralized asset for the project was Ethereum, which fell to around 80%. The stablecoin managed to keep the peg stable. Being an incredible feat this was, DAI became one of the most trusted backend stablecoins there is on the Ethereum network. What makes MakerDAO's DAI an evolutionary feet in the finance space is its decentralized nature, which its rivals like Tether fail to provide.
Chainlink is another project trusted by almost everyone in the space, what started as an oracle is now a full-blown ecosystem. An oracle acts as a pipeline connecting smart contracts with real-world data systems. These are vital for real-world blockchain and crypto applications.
Chainlink provides a range of smart contract services, including the primary Request smart contract and other service levels agreement contracts like reputation, Order matching, and Aggregating contracts. In addition, LINK, the platform's native coin, is used to pay the fees on the platform.
Uniswap is the world's biggest decentralized crypto exchange, or DEX. Launched in 2018, Uniswap was one of the first of its kind and was followed by many other such exchanges on other blockchain networks.
Uniswap is primarily used for transactions on the Ethereum blockchain and, at times, had weekly volumes of more than $10 Billion (INR 790 Billion). To further decentralize the project after years of operation, Uniswap introduced UNI tokens to promote community ownership of the project.
Uniswap's commitment to staying a decentralized liquid exchange has proven to be very valuable for DEX promoters and investors over the years. This also aligns with the Cardano community commitments.
The transitioning process of Ethereum 2.0 from the current Ethereum network means the need for validators to keep the network running. Citing the problems for potential validators interested in earning passive income, including lack of accessibility, a high minimum cap for staking, and nonflexible solutions, Lido came up with a solution so that everyone can be included in the ETH 2.0 staking solutions. Since then, the Lido has expanded its infrastructures to other protocols and ecosystems like Solana and Moonbeam.
Currently, there is a $7.5 Billion(INR 599 Billion) total value locked in the ecosystem. $7.35 Billion, of which is staked on the Ethereum blockchain. What makes Lido attractive is the decentralized infrastructure it provides with a DAO for further project management; other staking platforms like Binance fail to provide such infrastructure.
Aave is another DeFi protocol with a diverse community and a vast user base. Aave is a decentralized lending protocol that lets users and institutions borrow cryptocurrencies without the need for intermediaries. Aave primarily acts as a traditional bank but with high transparency and low cost that lets users deposit their cryptos in the liquidity pool which is then used to lend out capital to other users.
Aave is built on top of the Ethereum blockchain and supports over 30 liquidity pools of Ethereum projects, including various cryptocurrencies and stablecoins. In July 2022, the community approved the issuing of a native stablecoin. Apart from being a lending platform for individuals and exchanges, Aave also provides pools for real-world projects like real estate, freight, and cargo invoices and payment advances.
The Graph protocol is a unique but essential indexing protocol that users can use to scour through the blockchain. The Graph can be considered a search engine like Google for indexing through the blockchain. The Graph is the only decentralized project of its kind and has the potential to contribute to the DeFi and Web3 space.
The Graph has a native token with its ticker 'GRT' that is primarily to ensure the economic security of the project; apart from that, it is a work token that indexers, curators, and delegators lock to provide indexing and curating services.
Synthetix is a protocol built on the Ethereum mainnet for allocating synthetic assets. Synthetic assets are financial instruments representing derivatives in the form of ERC-20 smart contracts known as 'Synths.'These Synths are tradable with many cryptocurrencies, indexes, and real-world assets like gold.
Synthetix also has a decentralized exchange - Kwenta, where Synthetix's native token SNX comes into the picture. SNX tokens are used to provide collateral against derivatives or Synths. Synths use oracles to obtain real-world information to keep on with the market's volatility and are one of the most sophisticated decentralized exchanges for derivatives. In addition, Kwenta uses peer two peer contract trading, unlike other exchanges that utilize order books.
Thorchain is a Layer1 network that earns yield on blockchains like CosmosSDK, Bitcoin, and Litecoin. Thorchain reduces the need for centralized exchanges by enabling cross-chain transactions, enhancing blockchain interoperability for decentralized exchanges and other entities in the DeFi space.
Thorchain network offers exchanges wherein users can swap their assets for assets of different blockchains. So naturally, various liquidity pools support the exchange liquidity, with node operators securing the network. Rune, the native crypto in the ecosystem, has four significant use cases:
2) Incentives and rewards
3) Asset settlement
PancakeSwap is the busiest decentralized exchange on the Binance Smart Chain; it is a cost-effective retailer-friendly exchange that requires BNB tokens on the BSC chain for gas fees. Its workings are similar to the Uniswap exchange with a significant difference in the supporting chain. PaincakeSwap is not just for traders. It is in constant need of liquidity providers that could support the exchange.
PancakeSwaap also has its native cryptocurrency known as CAKE. Users can stake it for yield returns with a very compelling APY. Users can also participate in the PCS lottery, where if they get the winning numbers, they get 50% of all the tickets bought. Other users who lost may also get a range of rewards.
AMP is an open-source platform on the Ethereum blockchain with an ERC 20 token that acts as a collateral asset for taking up quick and secure positions in the real world. Amp is a smart contract specifically made for collateralization and assisting users in decentralization. It is a unique but much-needed concept.
Amp is compatible with several blockchain networks, including Bitcoin and Ethereum. Furthermore. Since AMP tokens are kept as collateral in a transaction after the promised period ends, AMP tokens are liquidated, and the receiver gets the amount. Hence, AMP help build a trustless environment around the DeFi world where the trust is put on codes and algorithms instead of a centralized entity.
DeFi has several real-world applications, and eliminating centralized exchanges is one of them; the current top DeFi projects are very niche, but we anticipate many other projects will rise from various walks of life.
DeFi has the power to address problems that the current TradFi infrastructure faces. With the amount of traction it is getting, the future of finance seems bright, and DeFi will be the major player in it.