DeFi is an abbreviation for “decentralized finance,” a method of conducting financial transactions that eliminates intermediaries and central oversight by utilizing peer-to-peer networks, blockchains, and other emerging technologies. Banks and various third parties, such as credit card companies, facilitate essentially every step of money movement from one person to another in a traditional financial system.
DeFi aims to enable these transfers to take place in a secure manner, but without the scrutiny – and the costs, privacy concerns, and occasional delays – that these third parties entail.
As the Ethereum network and its powerful smart contract capabilities have evolved, DeFi has emerged as a focal point among cryptocurrency enthusiasts. DeFi supporters use various systems to lend, borrow, and trade cryptocurrencies. Individual tokens, particularly stablecoins, as well as exchanges, networks, and decentralized apps, fall into this category.
Protocols for DeFi
Protocols are one of the reasons Ethereum and smart contracts have been critical to the development of DeFi. DeFi protocols are simply codes, procedures, and rules that govern the DeFi systems. Participants in the ecosystem can trade, lend, stake tokens, and do a variety of other things using DeFi protocols. These protocols must be accessible to all wallets for everyone involved in the DeFi system to follow the same set of rules.
DeFi protocols, in general, are autonomous programs encoded into smart contracts on Ethereum or a similar blockchain ecosystem. Many protocols seek to identify and improve one or more traditional financial processes. A DeFi protocol, for example, could aggregate data from various decentralized crypto exchanges in order to consolidate trading and liquidity pools and make transacting easy for users.
Many DeFi protocols, understandably, use extraordinarily complex procedures to simplify and increase accessibility. One metric that may be useful when comparing different protocols is total value locked (TVL). The total underlying supply of tokens secured by a specific application is referred to as TVL. MakerDAO has a TVL of over $7.5 billion as of mid-2022, making it the largest DeFi protocol by TVL. This protocol enables users to borrow and lend crypto tokens. Users lock their own crypto assets in exchange for tokens of a stablecoin called DAI. Participants can lend and borrow, while the MakerDAO protocol uses smart contracts to liquidate loans and sell collateral to support the stability of DAI.
DeFi protocols are astounding in their diversity. There are protocols that enable users to transfer assets from one blockchain network to another, swap various pegged assets, create their own liquidity pools, accept, and offer loans, and much more. DeFi protocols even allow users to save money in alternative savings accounts or invest in riskier, advanced investments such as derivatives.
Most Well-Known DeFi Protocols
Aside from MakerDAO, some of the most well-known and widely used DeFi protocols are:
- KXCO: KXCO, the first Chain and DeFi protocol built to manage real-world assets (RWAs) on the blockchain. KXCO also has its own token called FBX.
- AAVE: AAVE is a lending protocol which has its own native token, also called AAVE.
- UniSwap: UniSwap is a decentralized exchange operating in the DeFi space. Users can earn native UNI tokens by offering liquidity.
- Curve: Curve is a liquidity aggregator bringing together assets that have the same peg, such as stablecoins.
- 0x Protocol: 0x allows users to move assets from Ethereum to Polygon, where fees tend to be lower