Introduction to the diverse world of DeFi
We’ve seen many flavours of the month in the past, going back to the early days of the Bitcoin forks, where a whole batch of new coins forking from BTC calling themselves the new bitcoin - trying to take away momentum from the original Bitcoin. Then came the ICO craze which played a major role in the 2017 bull market and then pretty much died in 2019.
Amongst the 2017 bull run and then the subsequent 2018 crypto winter, was the bid to become the next Ethereum. A whole wave of potential smart contract platforms emerged and created a mass wave of speculation of who can do it better than Ethereum with Buzzwords like ‘1 million transactions per second’ commonly used. Last year was the year of the IEO. A new token launching format which saw a lot of interest initially but then soon died down quickly.
There are so many more trends that have come and gone, but they all failed for a reason. That reason is utility. Among the thousands of projects that have launched, most of them provide very little usability. There is nothing for the investor to hold on to apart from empty promises and failed targets.
Why DeFi will not be a short-lived fad
This is not the case in the DeFi sector where a long list of products exists and are fully functioning. It’s not loads of projects aiming to do the same thing either. All the DeFi projects out there compliment each other and can be used simultaneously as part of your trading strategy. And more and more people are getting into DeFi everyday, as you can see by checking out how much ETH is currently locked in various DeFi applications.
You now can open tokenised CDP’s, take out loans or lend out your assets, create arbitrage opportunities, hedge your position with tokenised assets such as gold or silver, take a position on prediction markets, get paid or pay contract workers in a streaming fashion, and the list goes on.
In a recent Cointelegraph interview, Campbell R. Harvey the creator of the yield curve highlighted how disruptive the future of crypto can be:
“When I look at the cryptocurrencies as a whole, I’m much more optimistic about the future of crypto. I see the possibility that all assets are going to be tokenised. It is a completely different world where I got a wallet, I got some Bitcoin in my wallet, I got some Ethereum in my wallet, I got some stablecoins, I got some gold! I got some securities like a piece of IBM stock, that’s tokenised! I go and pay for my groceries and I can choose from my wallet, say I want to pay in gold. I can actually do that.”
Tokenised assets are already available today, if you go to Synthetix you can purchase tokenised assets like gold and silver, and with more assets becoming available like TESLA and AAPL, you can see that the value in the DeFi space has a lot more potential coming into fruition this year.
Here’s a quick overview of some of the most promising projects in the DeFi space today.
A non-custodial money managing platform, Aave opens the doors for users to create their own decentralised CDP. Traders can borrow and lend on the platform to provide for their needs, whether it’s for freeing up capital without selling out of their holdings or taking advantage of an arbitrage opportunity that they don’t want to miss out on.
With the introduction of flash loans and rate switching, the control that traders have on their investments only increases. Flash loans gives traders the ability to take out loans to re-adjust their positions e.g. settle a CDP elsewhere, and then re-pay the loan in one single block. The potential for this feature is huge and we can see many developers creating apps and tools to make this feature more user-friendly.
Rate-Switching gives traders the choice to switch between variable and stable interest rates anytime they wish, this gives them the opportunity to take advantage of more favourable rates when they are available to them.
The Loopring 3.0 protocol offers a service for people to create their own DEX (decentralised exchange) with security and fast usability in mind. The protocol takes advantage of some of Ethereum’s advanced features like ZKP (Zero Knowledge Proof) and Vitalik Buterin’s proposed zkRollup.
Using these features means that exchanges using the Loopring protocol can create a very efficient environment which is not something associated with the current DEXs available today. The protocol can handle 1,400 trades per second at a very cost efficient $0.005 USD.
Holders of the LRC token can also stake their token holdings and earn a percentage of trading fees paid on the DEXs that use the 3.0 protocol.
Imagine playing the lottery for free. Well, only in the world of DeFi can this be made possible. PoolTogether offers a revolutionary idea of creating a decentralised Lottery pool where users can buy lottery tickets through Dai, at a rate of 1 Dai equals one ticket and the Dai then gets sent to a staking pool. One winner gets selected every week and all the winnings are paid out not by the funds used to pay for the tickets but by the Dai rewards earned from the Dai staking pool. The Dai used to purchase the tickets are then sent back to the users if they did not win, meaning a free no-risk lottery.
Liquidity pools are becoming a necessity for DEXs, with low liquidity being one of the big hurdles for usability. With Kyber and Uniswap occupying the ERC20 sector, Thorchain is soon to release liquidity pools for the Binance chain in the form of BEPSwap. BEPSwap allows users to instantly swap between BEP tokens instantly. The RUNE token will soon be able to be staked on the liquidity pools to earn liquidity fees.
Other features from Thorchain include BIFRÖST PROTOCOL enabling users to swap assets cross chain, FLASH NETWORK which is a layer 2 network for cross-network instant asset exchange and ASGARDEX which is a all in one application allowing access to all the apps in the Thorchain ecosystem.
Nicknamed the ‘God Protocol’, The decentralised Oracle service will play a major for anything blockchain related. Chainlink makes it possible for off-chain services to interact with on-chain services in a trust-less manner. This is a vital feature where DeFi projects rely on price feeds for their platform, using Chainlinks decentralised network of oracles, services can offer price data from an aggregated total of price-feeds off chain and use them on-chain.
This process improves the security as it lowers the attack surface for attackers who want to manipulate the price data for their own gain. This is going to be a very real problem for DeFi services using their own oracle to provide price data. Already adopted by Aave and working with projects like Synthetix and Loopring, Chainlink is becoming the industry standard when it comes to providing reliable price data.