Decentralized finance (DeFi) is an umbrella terminology that describes various financial technologies built on blockchain networks. These applications are geared towards disrupting traditional monetary systems by eliminating all intermediaries. With DeFi, the focus is shifted towards transparent financial services that do not require any central authority permission with rewarding investments.
This article is an update to Top 5 DeFi Projects to keep an eye on in 2020, and interestingly, a majority of the projects have been outweighed by newer inventions.
Key Terminologies in DeFi Projects
Decentralized finance applications allow users to fully control their assets and maintain non-custodial interactions with financial systems. Decentralization in DeFi projects means that its users have relinquished absolute authority for executing transactions to smart contracts.
Smart contracts are lines of code stored in a blockchain that are automatically executable once pre-defined conditions are satisfied as programmed. A major benefit of smart contracts is their ability to enhance an agreement between parties without intermediary involvement.
A blockchain is a sharable and distributed ledger that records all transactions made in real-time. Once a transaction is completed and validated using a consensus protocol, it is digitally recorded and linked to provide a clear and distinct history.
It is worth noting that blockchain encrypts each transaction for security purposes—however, all participants in a trade hold a copy of the history of the transaction for transparency aims.
Most Popular Types of DeFi Applications
Decentralized finance operates as a true peer to peer exchange. Users can exchange their crypto assets without the need for a central authority to oversee them. Major examples of decentralized exchanges(DEX)are Uniswap, Kyber Network, Matcha, and Ox. Transactions over DeFi are instant, secure, and more reliable.
Lending and Borrowing
With Decentralized finance, users can lend and take loans more efficiently. Software programs are employed instead of paper contracts, and processes such as interest calculation and margin maintenance are automated. Major DeFi lending and borrowing projects are in the examples of Aave, yEarn, BlockFi, and compound.
These are markets where buyers and sellers exchange contracts of underlying assets such as cryptocurrencies, bonds, or stocks based on that asset’s future value. The main types of derivative contracts are forwards, futures, options, and swaps. Examples of DeFi projects in this niche are Augur, Gnosis, UMA, and Syntheyix.
A stable coin is a cryptocurrency tied to an asset out of the crypto world for price stabilization. Stablecoins measure a crypto asset’s value against a non-crypto asset such as the US dollar to keep the value under control from industry volatility. The most popular DeFi applications under stablecoins include Curve Finance, DAI, USDC,
Top DeFi Projects to watch in 2021
Uniswap is a decentralized exchange built on Ethereum’s blockchain for swapping ERC 20 tokens. It offers a user-friendly and quicker interface for ETH-ERC20 token swapping and automatic liquidity provision on Ethereum. Uniswap is relatively cheap; it is a decentralized token, thereby eliminating any party that may claim rights to transactional fees.
In September this year, Uniswap announced their token-UNI and distributed what seemed like the biggest token distributions ever to all prior Uniswap users. Although there are doubts about how much a UNI token is worth, there is a huge demand for decentralized protocols in the market. Uniswap had earlier made news after it overtook Coinbase, one of the largest centralized exchanges(1000employees), with only ten employees. Overflowing with potential, Uniswap is a DeFi project to watch out for in 2021.
The yearn platform was launched in 2020 as a liquidity aggregator. This DeFi lending protocol maximizes the rate of interest by moving the provider’s assets between similar lending protocols (Aave, Compound) to get the best possible interest rates. The protocol automatically keeps monitoring market leaders and ensure placed funds remain in the highest paying pools. YFI smart contracts- vaults, continuously shift assets between platforms in a manner designed to generate the highest annual percentage yield (APY).
As for now, YFI offers functionality and efficiency not easily available in the market. Therefore, it has higher prospects of reigning in the market, even in 2021, among the most popular DeFi applications. Furthermore, it charges a fee accessible only to YFI token holders because of its asset and network maintenance efforts.
Compound is a lending and borrowing platform that deals with more popular cryptocurrencies such as Dai, Ether, and Tether. Compound finance boomed in the market and shifted the focus off of Bitcoin for a bit because of its abundant investor earnings from yield farming. By lending assets over the compound protocol, investors keep earning compound interest continuously.
Compound recently introduced a governance token, COMP, that lets token holders and delegates vote on key functional decisions such as borrowing limits and interest rates models. Holders with more than 1% of the supply are the only users permissible to make new proposals. In June, when it launched, investors would purchase a COMP token at $65 to more than double the current value of USD 153.4. It has dutifully earned its listing on Coinbase and Binance and will likely remain a top DeFi project to invest in 2021.
It is a prediction protocol based on Ethereum. Augur lets users participate in somewhat looks like prediction games on a range of events, including sports and politics. With this prediction protocol, no limits are specified on how many people can bet, no limit on what people can bet on, and no rollover requirements. Any winnings made by a user are kept and are payable in the market’s settlement fees.
Augur’s native token is called Reputation (REP). It is a low trading token at $16.38. These low fees attract more users and keep most of their winnings than any other prediction market.
Another exciting possibility actualized by Augur is the ability to catch on to fake news quicker and counter its spread. By using blockchain technology, players are availed of financial incentives that help them distinguish real news from misinformation.
In a society where everyone is tuned in and could share any news, having a platform able to detect fake news is essential for investors when selecting a DeFi project to consider, let alone its interesting and captivating niche of sports and politics.
Curve finance is a decentralized exchange pool for stablecoin trading. After being launched in 2020, Curve finance rose to popularity from September. The stablecoin allows its users to trade with low fees and minimal slippage. Curve supports DAI, USDT, USDC, BUSD, TUSD, Susd, and BTC pairs and allows for quicker trading among their pairs. Profits are earned by swapping stablecoins and providing liquidity to their pools. Curve’s liquidity pools are provided by compound and Yearn Finance, which ensure enough supply to keep facilitating cheaper swapping for stablecoins.
Unlike Uniswap, token-to-token trades are relatively cheaper due to the elimination of two-round ETH conversions.
DeFi projects are the obvious solution to the demerits suffered by centralized financial systems like third-party risks and intermediary fees. These systems have reaped huge rewards in just their infancy years and have proved to be a worthy investment from hereon. Mentioned above are few subsets in the DeFi platform that will most probably blow up this year and reap huge profits to its investors . At mycryptoparadise.com, we shall keep a close eye on these highlighted DeFi projects and update you and their market trends.