This article explains what DeFi is and takes a close look at some of the best blockchain DeFi projects out there today.
The finance market as we know it is largely centralized. Those responsible for issuing the regular currency that drives our economy are central authorities. Every trade, like the government and banks, uses this currency on the regular. The power of managing and overseeing the flow and supply of these currencies is in their hands. What’s more, we give control over our assets to an array of financial organizations. We do so because we believe this will result in receiving higher returns.
Over time, we would start to see an issue with centralization. The main problem stems from the fact that there are notable risks with all the control and fund being centralized. Suppose the central bodies suddenly decide to print more currencies to solve a financial crisis. What if it instead backfires? Central bodies consist of humans, thus it is possible for errors to occur in their judgment.
This is where cryptocurrency comes in. Its promise to the world is to make money and payments universally accessible. It will be available to anyone, no matter where in the world they are.
The ever-growing ‘Decentralized Finance’ (DeFi) movement is taking that promise a step further. Its goal is to create a global, open alternative to every financial service you use today. These include savings, trading, loans, and insurance, among many others. This alternative aims to be accessible to anyone with a smartphone and Internet connection in the world.
What does it mean?
In essence, DeFi is simply conventional financial tools whose construction derives from a blockchain. That particular blockchain being Ethereum. Their affirmation is primarily on open-source protocols or modular frameworks for the creation and issuance of digital assets. Moreover, their design is mainly to grant certain advantages of operating on a public blockchain. Such benefits include censorship-resistance and much better access to financial services.
The decentralization of everything is not what you would call a “wise move.” Many DeFi applications realize this and keep it in mind by offering services that are digital asset/traditional hybrids. An example of this is BlockFi, which is a platform that we will go over later.
An alternative term that encompasses more of the continuous focus on financial products is ‘open finance’. This is where an ecosystem of integrated factors are ingratiating themselves with conventional financial structures. These factors include digital assets, blockchains, and open protocols.
Taking the Ethereum platform’s flexibility and amount of development into account, it is no wonder that it’s the primary choice for the DeFi application. However, it is important to note that it does not mean that it is the sole blockchain platform. DeFi is basically an open financial ecosystem that allows you to build various small financial tools and services. All of which are in a decentralized manner. These are applications built on a specific blockchain, therefore their modifications and integrations draw heavily from your needs.
What does it offer you?
Overall, what DeFi is offering its users is total control of their own assets. It places you in the position of power when it comes to your assets’ well-being.
Admittedly, there are a lot of new-age banks and fintech firms that promise to provide more control to the users. However, realistically speaking, you are still entrusting them with the management of your funds. The main intent of DeFi is to grant you full control of your assets. This is possible courtesy of decentralization and blockchain technology. In addition, there are plenty of financial app developers who are adopting open-source protocols. Specifically, for trading by way of decentralized exchanges.
The very fact that protocols are always open-source permits basically anyone to build new financial products on top of them. Developers all over the world are able to collaborate with each other to create new products. This ultimately results in considerably faster innovation, as well as a secure network.
Everyone is able to store, trade, and invest their assets in blockchain securely. What’s more, they can earn a comparatively higher return than from the traditional financial system. There are no intermediaries handling your assets, so you have complete control over what happens to your investments.
We can now start looking into some of the best blockchain projects pertaining to DeFi. The first category we will take a look at is infrastructure. Those in this class are primarily the framework and protocols that support brand new decentralized finance applications. These projects are in the process of building the foundation for future generations of DeFi solutions.
1 – ChainLink
The Chainlink network provides its users with reliable tamper-proof inputs and outputs. They are primarily for complex smart contracts that exist on any blockchain. To build a truly valuable smart contract, there is a requirement for the use of multiple inputs. This is what allows for the verification of contractual performance. It also requires the use of multiple outputs to affect external systems and/or send a payment for smart contract completion.
This is why Chainlink is so beneficial. It provides your smart contract with the inputs and outputs it needs in order to reach its full potential.
This project is working to create a specific method of connection. One that links data and dApps on the blockchains with data and applications that are currently beyond the blockchains. This connection of smart contracts data with real-world data is what many consider to be a crucial component in making blockchains achieve widespread adoption.
2 – 0x
0x is an open protocol that facilitates the peer-to-peer exchange of assets on the Ethereum blockchain. Anyone in the world is able to use 0x as a means to service a wide variety of markets. These range from gaming items to financial instruments to even assets that cease to exist beforehand. It is a vital infrastructure for the emerging crypto economy. What’s more, it allows for the creation of markets that were previously non-existent.
One of their core values is focusing on long-term impact. Concerning this goal, they say the following:
“We anticipate that over time, awareness of the fundamentally disruptive nature of frictionless global exchange will cause some to see this technology as a threat. There will be setbacks, some will claim that this technology is too disruptive, and we will face adversity. Persistence and a healthy long-term focus will see us through these battles.”
Overall, 0x is building the foundation. They want more than anything to attract other users and developers to start building out from the 0x protocol.
DeFi payments apps, protocols, and solutions concentrate on creating an open finance ecosystem. One that caters mainly to the needs of institutions, as well as populations that are underbanked and unbanked. In this particular category of DeFi projects, there are a couple of interesting projects in the works that have great potential. Hopefully, they can continue to grow and go on to be widely used across the globe.
1 – OmiseGO
OmiseGO is a network from Thailand. It enables businesses and individuals to securely offer and access a variety of financial services. Moreover, invest, exchange, and spend digital assets at any point in time at any location. Their objective is to facilitate instant, peer-to-peer transactions in real-time. Doing so will effectively enable financial services across different locations, asset classes, and applications.
It doesn’t matter which industry you are in. OmiseGO’s solutions are applicable to a range of problems that one can tailor to their individual business needs. The network has collaborated with major companies in an array of industries. These include finances and banking, as well as food, beverages, and video games.
They were successful in creating a range of products that aim to help support their principal vision. The OmiseGO network is at the core of each and every one of them. It has a 4,000 TPS blockchain that is primarily for fast and inexpensive transactions.
2 – Request Network
Request is a decentralized network that is built on top of Ethereum. It allows anyone anywhere in the world to request, verify, and eventually execute payments. It completely eliminates the need for a third party, thus providing a cheaper and more secure payment solution. Moreover, it is a solution that works with all existing global currencies.
In the midst of the heights of 2017 and 2018, this decentralized ecosystem of payments would garner lots of attention. In the case of several other projects, they would instead experience a considerably hard drop from the heights. Furthermore, both investors of the REQ token and supporters of the DeFi vision were losing faith. Jump forward to 2019 and the team is hard at work on a particular vision. They aim to “allow anyone to create, store and access invoices and receipts in a universal, decentralized network.”
Stablecoins are gradually engulfing the cryptocurrency markets thanks to new models. These models are specifically for token issuance, auditing their reserves, and price peg management. In essence, stablecoins are coins that are pegged to a fiat currency, including the USD, GBP, EUR, or commodities. The assets typically maintain stability in price and attract users who wish to completely avoid any sense of unpredictability. A notable example of a stablecoin is Facebook’s Libra coin.
Stablecoins usually fall into the following three categories:
- Crypto-collateralized: These decentralized stablecoins receive backing from crypto assets as collateral. They rely heavily on trustless issuance and preserve their 1:1 peg against assets through various methods. Such methods of this type include incentives and over-collateralization.
- Fiat-Collateralized: By far the most popular type of stablecoin. These coins store their value in fiat currencies like the US dollar or Euro. For the most part, they are redeemable at a 1:1 ratio with the pegged currency. They rely on their users’ trust by providing transparent audits that their USD reserves can support the current circulating supply of the token. Doing so will help maintain the price peg.
- Non-Collateralized: These stablecoins are neither centralized nor over-collateralized with crypto assets. Instead, they rely on contractions and expansions of the supply drawing from an algorithm to preserve a stable peg. The system provides more tokens with an increase in demand. At the same time, the price of each token lowers, and vice versa. This is what ultimately maintains a stable peg.
Below are a couple of the most notable projects pertaining to the stablecoins category.
1 – DAI
DAI is a stablecoin that does not discriminate. “Any business or individual can realize the advantages of digital money,” their website claims.
DAI is asset-backed, which basically means it receives support from digital assets. In this particular case, it is Ether the cryptocurrency. The official launch of the DAI stablecoin was by the MakerDao team, being pegged to the US dollar. Each DAI garners backing from Ether by way of a collateralized debt position. This is where users deposit their Ethers in order to properly generate DAOs.
Using a stablecoin such as DAI is ideal for certain payments. One of which is when consumers and merchants alike can accept a coin that remains stable in the price for purchases. Moreover, if they want to convert to a fiat currency. Additionally, it captivates investors that want to place some or all of their trading cryptocurrencies in secure and stable assets. This is mainly out of a desire to avoid volatility.
2 – Digix
Digix was successful in bringing traditional gold on the blockchain. What’s more, it would create a brand new cryptocurrency that is pegged to it. Therefore, DGX tokens serve as representative of physical bars of gold on the blockchain. For example, a single DGX is indicative of 1 gram of gold. As a result, digital gold is becoming more divisible, not to mention easier for a transaction, on the blockchain.
The blockchain’s transparency, security, and traceability guarantee the visibility and audit of the transaction and transfer of DGX tokens. In this sense, the immutable ledger effectively heightens security. Moreover, the smart contract platform eliminates potential human error and risk of fraud. These are factors that would otherwise be present within the supply chain of gold.
Overall, for investors wishing to diversify some of their holdings to gold, the DGC cryptocurrency lets you do just that.
Decentralized lending is becoming more and more popular as time goes by. And for good reason. It is a method that allows businesses to acquire loans to comparatively more competitive loan rates. It is also an incredibly useful option for investors to utilize their cryptocurrencies to support the loans. In return, they can receive interest on their funds.
Most options will have you rely heavily on paperwork or a middleman to ensure the creation of loans. DeFi lending, however, goes in a different direction. It instead leverages smart-contracts as a means to issue loans by employing the use of blockchain technology.
For cryptocurrency holders, DeFi lending provides a smart and safe way to secure leverage. Alternatively, it gives them a way to simply collect interest on idle digital asset holdings.
1 – BlockFi
BlockFi is one of the more popular companies that offer the possibility of receiving decentralized loans. It provides an array of wealth management products that crypto-investors typically need. All of which get their power from blockchain technology. The BlockFi allows you to put your cryptocurrency to work and earn monthly interest payments in the asset-type that you deposit.
According to their website:
“BlockFi clients using the BIA earn compound interest in crypto, significantly increasing their Bitcoin, Ether, Litecoin, USD Coin (USDC) and Gemini Dollar (GUSD) balances over time.”
It essentially functions like any other traditional lending platform out there. However, the difference comes from the fact that the assets in question are cryptocurrencies. Suppose you are simply holding your cryptocurrencies on an exchange. In this case, then you will be happy to know that BlockFi offers roughly 8.6% in annual interest rates for your cryptocurrencies.
2 – Aave
Aave is an open-source and non-custodial protocol that focuses on earning interest on deposits and borrow assets. The main goal of this platform is to successfully create a secure, transparent, and open financial ecosystem.
Recently, they initiated the launch of an array of features, including flash loans, rate-switching, and aTokens. These features have the potential to be a total game-changer within the DeFi ecosystem. Probably the most exciting feature to come from them is the defi flash loans. This will effectively solve several problems and create a variety of benefits in the DeFi ecosystem.
The rate-switching feature allows users taking out loans to alternate between variable and stable rates. With this, users have more control when it comes to their loans. It allows them to pick the best rates that are available.
The A-Token model provides quite an interesting way to garner interest on your deposited token. Rather than watch the value of your tokens increase, the Aave interest-bearing tokens are pegged 1:1 with their underlying assets. As soon as it is on the Aave platform, they will only continue to grow in balance.