Author: Kokou Adzo Translation: Huohuo/Baihua Blockchain
In the past decade, blockchain technology has disrupted the financial sector as we know it, leading to the introduction of new applications and innovative concepts. These innovations include DeFi protocols, which have grown in popularity and adoption at an astonishing rate.
1. What is DeFi?
DeFi is short for Decentralized Finance, referring to financial applications created using smart contracts, which are automated and legally binding contracts that can be executed without the need for third-party assistance. Anyone with an internet connection can use smart contracts for financial transactions and perform various other tasks.
Like cryptocurrencies, DeFi is built on top of blockchain technology and consists of peer-to-peer protocols and applications created on blockchain networks. It is designed as an alternative solution to minimize the reliance on centralized institutions or third parties, allowing everyone to access the financial system.
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In traditional financial systems, banks and third-party providers enable and control the flow of funds. Therefore, DeFi is born to enable secure financial transfers without interference from central authorities or other third parties, avoiding related costs, privacy issues, and occasional longer processing times.
Over the past few years, DeFi has evolved into a fully functional ecosystem with useful applications and protocols, benefiting millions of people.
2. Explaining DeFi Protocols
DeFi protocols are autonomous programs consisting of standards, code, and procedures used to manage decentralized financial applications and improve the processes used in traditional finance. DeFi protocols can also be referred to as a set of smart contracts and decentralized applications (DApps) built on blockchain technology, typically Ethereum.
These protocols offer various financial services, including asset borrowing and lending, decentralized exchange platforms (DEX), stablecoins, liquidity mining, asset management, insurance, and more. These protocols use smart contracts to facilitate transactions, enforce contracts, and distribute rewards in a decentralized manner. They are designed to operate autonomously. DeFi not only provides lending options but also facilitates liquidity between different blockchains and generates on-chain assets such as stocks to promote the use of cryptocurrencies.
3. Top 8 DeFi Protocols in 2023
1. AAVE
Aave is one of the leading DeFi protocols in 2023 and is one of the largest lending protocols in Web3. Through this protocol, cryptocurrency holders can choose to deposit various tokens from various major blockchains as collateral in exchange for passive income or as collateral for borrowing other digital assets.
For those who have accumulated and held cryptocurrencies for the long term, Aave offers a service where investors can not only earn returns but also borrow money for daily expenses or reinvestment.
On Aave, all loans are overcollateralized due to the highly secure nature of the platform.
2. Uniswap
Users can exchange Ethereum tokens and create markets for any ERC20 token through Uniswap, a decentralized protocol based on the Ethereum blockchain. Since its launch in November 2018, Uniswap has become one of the most well-known decentralized trading platforms in the DeFi market.
Uniswap is one of the oldest Ethereum DEXs and one of the first to challenge financial institutions by introducing and using the automated market maker (AMM) method, which allows users to trade tokens, earn rewards, and add their own tokens. This method enables frictionless trading, and the concept of AMM as a whole relies on users contributing tokens to liquidity pools. In return, these market makers receive a portion of the protocol fees as compensation for their liquidity provision.
As of September 2020, Uniswap introduced a “universal basic income” program, offering 15% of the supply to previous users, further providing liquidity to certain pools, and allowing users to earn the native token UNI.
3. SaucerSwap
SaucerSwap is a decentralized trading platform that integrates Solidity smart contracts with Hedera Token Service (HTS) using Hedera smart contract service (HSCS). The smart contracts are based on the automated market maker protocol.
Participants using this protocol are rewarded for contributing (staking) their tokens to increase the project’s liquidity and incentives.
4. Curve
Curve is a blockchain technology that operates an automated market maker service, with a focus on stablecoins.
The protocol is built on the Ethereum blockchain and, as a trading platform, does not use a central order book but allows cryptocurrency users to earn fees on their assets while enabling traders to buy and sell these assets at potentially better prices.
Curve stands out from other protocols as its main focus is to serve as a market for stablecoins such as Maker and USDT, which track the value of the US dollar, as well as wBTC and renBTC, which track the value of Bitcoin.
5. Optimism
Optimism is a layer 2 protocol designed to enable Ethereum users to complete transactions on the Ethereum network faster and at a lower cost. This is achieved by Optimism through a mechanism called “optimistic rollup”. Additionally, OP tokens, which can be purchased or sold on Coinbase and other exchanges, are used for governance.
The main feature of this protocol is that it provides the same level of security as Ethereum layer 1 but is able to process a large volume of transactions at the lowest cost. With over 30 existing protocols in the ecosystem, OP token holders also have access to various use cases.
NFT tools, DEX, cross-chain bridges, and a range of trading tools are examples of dApps in the Optimism ecosystem. The protocol has been recognized by digital finance experts (https://7bitcoins.com/) as one of the top existing DeFi projects, as it allows DeFi users to make the most of their cryptocurrencies.
6. LianGuaiXG
The Proof of Work (PoW) mechanism is used to secure the LianGuaiXG protocol, which is fully built on the Ethereum blockchain. However, LianGuaiXG is not limited to Ethereum and can also be introduced to other blockchains.
LianGuaix Gold is an ERC-20 Token running on the Ethereum blockchain, which can be traded on various trading platforms and has become a convenient choice for traders to start investing in gold.
The creation of this currency and protocol is to allow investors to purchase small amounts of gold through cryptocurrencies, eliminating the minimum purchase limit of commodities.
7. 0x Protocol
The 0x protocol enables peer-to-peer (P2P) trading of Ethereum-based assets. Created by 0x Labs, this protocol is a crucial DeFi building component and an open standard for any developer needing exchange functionality. 0x provides a decentralized global P2P order book (0x Mesh), secure and audited smart contracts, developer tools designed for the 0x ecosystem, and an API for easy access to aggregated liquidity generated by an increasing number of trading networks.
The protocol itself is not a decentralized trading platform, but it facilitates the development of decentralized trading platforms that can be applied to various markets, such as gaming and finance, allowing users to trade tokens and assets.
The primary goal of 0x Labs is to build the infrastructure needed for the evolving cryptocurrency economy and establish markets that were previously inaccessible.
8. Compound
With Compound, a blockchain-based decentralized protocol, you can lend and borrow cryptocurrencies and participate in the governance of the protocol by purchasing its native COMP Token.
The Compound protocol has some similarities to other decentralized lending protocols that borrow additional cryptocurrencies using encrypted assets as collateral. However, it also has a unique feature or function that allows the tokenization of locked assets in the system using COMP Tokens.
Essentially, COMP Tokens or cTokens are ERC-20 Tokens that represent users’ funds on the Compound blockchain. You receive an equivalent amount of cTokens in exchange for your ETH or any other ERC-20 Token, such as USDC. As a result, you automatically receive token interest.
9. Summary
DeFi protocols are an incredible tool that helps decentralize finance as an industry. Through DeFi, various financial markets have been established, including decentralized lending, asset management, liquidity mining, and almost all other aspects of the DeFi market.
As the industry develops, we will inevitably witness financial applications running in a secure, trustless, and decentralized manner taking over and competing with traditional financial systems.
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