Decentralized finance, or DeFi for short, is a growing industry that uses cryptocurrency and blockchain technology to power finance-related applications. This nascent field is still in its early days, but there are already several DeFi apps worth exploring. In this article, we’ll take a look at some of the most popular DeFi apps and what makes them so unique.
This list will be equally valuable for blockchain enthusiasts and forward-looking business owners who are looking for bountiful investment opportunities.
But first, let’s dive into the basics – what is crypto DeFi?
A short primer on decentralized finance
Decentralized finance (DeFi) is a term that is growing in popularity as the world moves towards a more decentralized future. DeFi encompasses a wide range of financial products and services that are powered by blockchain technology and decentralized applications (dApps).
These products and services include peer-to-peer lending, asset management, insurance, and more. DeFi aims to provide individuals with more control over their finances and to give them access to financial products and services that were previously unavailable or too expensive.
The goal of DeFi is to leverage blockchain technology to create new financial products and services that are secure, transparent, and efficient. DeFi has the potential to revolutionize traditional banking and finance by providing more user control, increased transparency, and reduced fees.
From a technical standpoint, DeFi is more secure than traditional financial services thanks to the implementation of smart contracts. The latter is a code that is executed automatically when the agreement between the parties is met. Smart contracts eliminate the need for a third party to monitor the transactions, thus reducing the cost and time of financial operations.
Decentralized applications, in their turn, allow users to access DeFi services by providing an easy-to-use interface. Now, let’s go over to the leading dApps that are riding the wave at the moment.
Automated Market Makers (AMMs)
Historically, decentralized exchanges relied on market-making order books with traders sending buy-and-sell orders. However, these exchanges came short to ensure liquidity which resulted in slow execution. Automated market makers are designed to solve this problem. AMM protocols pool liquidity from users and price the assets within the pool using algorithms.
SushiSwap is a prominent example of an AMM. It is a decentralized exchange built on the Uniswap protocol. DEXs let users trade directly with one another without going via a centralized intermediary, such as Coinbase or Binance. This means they can provide access to a broader range of cryptocurrency tokens and financial services than typically centralized exchanges, and they enable trade without the use of a middleman or the need to disclose identifying information.
SushiSwap is based on an automated market maker (AMM), it allows liquidity providers to fill liquidity pools with their funds. This enables providers to generate passive income on the crypto assets. The total value locked in the SushiSwap protocol now stands at $3.78 billion.
Stablecoins
Cryptocurrencies such as Bitcoin and Ethereum yield many advantages. However, one of the key downsides of cryptocurrencies is their volatility. This means that their prices are unpredictable and tend to fluctuate wildly. Stablecoins are a merge between the cryptocurrency world and the world of fiat currencies. Their prices are usually tied one-to-one to less volatile assets such as the U.S. dollar or gold.
Tether (USDT), which is one of the most popular stablecoins, is backed by the US dollar at a 1:1 ratio, meaning one USDT equals one US dollar. Binance USD is another popular stable coin being pegged to the US dollar.
Non-fungible tokens
NFTs or non-fungible tokens are among other trends that overlap with decentralized finance. Although the NFT future is highly debatable, this blockchain-based application continues to gain momentum. By 2020, the NFT craze has become more pronounced with a trading volume increase of 21,000%.
As such, an NFT is a unique token that serves as a digital record in a blockchain registry. It gives you the right to own a unique object in the digital space. The NFT technology was built in 2017 based on Ethereum smart contracts. Today, the mind-boggling number of NFT art sales hits the record with over 1.5 million sales in a single month in 2021.
Within the DeFi space, NFTs represent digital assets, thus serving as proof of ownership rights for digital art. Ethereum, for example, offers ERC-20 tokens for representing digital assets. So, NFTs could easily serve as proof of ownership rights for digital art.
Derivatives
Derivatives are financial contracts that derive their value from an underlying asset. These are a key part of the DeFi ecosystem. In DeFi, derivatives are often used to hedge risk and boost returns on investment.
The use of derivatives has grown in recent years as the DeFi space has matured, and there is now a wide range of derivatives available to users. Decentralized finance provides open and automated settlements for derivative contracts. There are four main forms of derivative contracts, including futures, forwards, options, and swaps. The latter provided a versatile ground for lots of DeFi applications.
Augur is a DeFi prediction market built on Ethereum. It allows individuals to create and trade on prediction markets as well as forecast events and be rewarded for correct predictions.
Participants can bet on the outcome of any future event, creating markets for everything from the weather to the next U.S. president. According to DeFi pulse, the total value locked is around $2.6 million.
The Final Word
Decentralized finance is a growing sector of the cryptocurrency industry. Built on Ethereum technology, DeFi applications allow users to interact with smart contracts to borrow, lend, and trade cryptocurrencies and other digital assets. The DeFi market is still in its early stages and is expected to grow significantly in the coming years. While there are some risks associated with DeFi, the potential benefits make it a promising area for investment.
