Decentralized Finance has been taking shape for years. The goal is to decentralize finance into a peer to peer financial ecosystem consisting of digital assets, smart contracts, protocols and various dApps (decentralized applications) that would allow a user to build financial ecosystems and tools, as well as participate. Most of these are currently being built on the Ethereum Blockchain. This all goes back to the original vision of “Peer to Peer” finance, and it while most of the users are Crypto centric, it could one day be adopted by more traditional institutions and the mainstream. Currently, there is nearly $1 Billion USD value participating or “locked” in the DeFi ecosystem. In late 2017, there was less than $1,000 USD. The current value locked only demonstrates the popularity of these networks.
One may wonder what the incentives are to use such a system. The most evident reason is access to traditional financial institutions are limited to those able to open a bank account for the most part. This means a large user base in developing countries could participate in a DeFi ecosystem through the use of their phone. Many of these users are located in places that do not have the same access as those in modern more developed countries. There are also obvious incentives such as being able to lend currency, and collect interest, as well as “Stake” to earn interest. Decentralized exchanges also known as a “DEX” will enable a user to trade these various digital currencies or Tokens. They emulate traditional finance, however they are enabling Peer to Peer networks in a decentralized way, and cut out the middle man (banks). This always reminds me of the late 1990’s and the emergence of e-commerce. While traditional financial institutions may not be enthusiastic about this, the technology is inevitable just like the dawn of computers as described by Apple pioneer Steve Jobs in a 1981 Nightline interview:
While this illustrates the emergence of computers, it can be correlated to how DeFi/Blockchain/Crypto have been emerging over the past decade. What matters is the network effect and as the users grow, traditional institutions will begin adopting this new way of conducting financial operations. Currently, most of the users are Crypto enthusiasts mixed with some modern Wall Street pioneers who are trying to embrace these new systems. Many young entrepreneurs coming from traditional finance backgrounds have attempted to launch their own funds focused strictly digital assets. They believe the future is in DeFi.
Maker is one of the early pioneers in DeFi and one of the most popular. It includes a Stable Coin called the “DAI” which has a multitude of uses and describes itself as being “soft pegged to the US Dollar”. Through its “Oasis” feature a user can trade on their marketplace, borrow by locking Tokens and earn interest by saving which is also described as “Non Custodial” furthering the aim of decentralization of finance. The platform currently works in conjunction with 10 Tokens: DAI, Ethereum, BAT, USDC, WBTC, Augur, ZRX, LINK, PAX and TUSD. The popular exchange Coinbase described MakerDAOs long term ambition to become a sort decentralized reserve bank.
Maker also has a built a governance system which allows a user to vote on changes in its network. These votes are issued through the use of their own token called the MKR. What is also interesting is the fact that DAI works on dozens of blockchain applications such as wallets, exchanges and games. Some of the notable ones are Coinbase, MyEtherWallet, Origin Protocol, Wirex, Ledger, MyCrypto, Trezor, MetaMask, OpenSea, KickBack, Compound, DYDX, Uniswap, and many others.
Compound enables a user to lend out and borrow Cryptocurrency such as Ethereum (currently over $66M worth) and earn interest. Not limited to just Ethereum it also allows for DAI (Maker DAOs stablecoin), USDC, Augur, Wrapped Bitcoin, Basic Attention Token, ZRX, Tether, and SAI. To set the interest rates on these loans, Compound enables an algorithmic system which analyzes the supply and demand on the token being used. Unlike Maker DAO, the project had not originally issued a Token or participated in the Initial Coin Offering craze of 2017, they had raised capital through more traditional Silicon Valley venture funds. Fast forward to 2020, Compound currently has its own governance token called the “COMP” which is to be used for voting on changes to the protocol. According to their own data, Polychain Capital has issued the most votes, next an anonymous address and Third one of its original co founders. While that does certainly seem quite centralized a far as voting goes, there is no doubt that Compound has gained much popularity with DeFi enthusiasts.
It has been said by many in the Cryptocurrency world that ultimately to gain mass adoption everything will have to become centralized. For example, if a random country adopted Bitcoin as a national currency and it became highly regulated, then the price would probably sky rocket over $1M in value per coin. Many of the participants in the Crypto ecosystem, if not most of the participants care about one thing – the price going up.
DYDX & Uniswap
Many of the DeFi projects act as a location to park your digital assets and earn interest through mechanisms like loaning and staking. Exchanges serve as a critical component in the decentralized ecosystem. DYDX currently has nearly $30M in volume. It allows a user to open short or leveraged trading positions up to 10x. Just like MakerDAO and compound, users can also borrow any supported asset as well as lend out tokens. DYDX has an advanced clean user interface and operates on the Ethereum protocol in a trustless way. Similar to Compound, DYDX was funded by venture firms in Silicon Valley.
With over $30M in volume, Uniswap is another token exchange powered by smart contracts on the Ethereum network. They have their own method of automatically settling trades near the market price. While DYDX and Uniswap are not the only players in this game, they have higher liquidity and remain popular. The difference is some of the mechanisms and UI.
A slightly different exchange than DYDX and Uniswap, Synthetix focuses on Synthetic assets which provide exposure to an asset without holding the underlying resource. As they describe: Synths are synthetic assets that track the price of the underlying asset. They allow holders to gain exposure on Ethereum to various asset classes without holding the underlying assets themselves or trusting a custodian. If a custodian was needed, it would certainly be centralized mechanism defying what DeFi is supposed to be.
The platform has 3 main features: an exchange with infinite liquidity, peer to peer contract lending, and a distributed collateral pool. Second it has “Mintr” which is a dApp enabling their own token called the “Synth” and offers the ability to collect fees on the network and mint new tokens. Lastly it has a clean user friendly dashboard for viewing data based on volume and other details relevant to the participant.
DeFi is definitely still the buzzword in the Crypto world in 2020, and will continue to be proliferate. These projects described above are just a few of hundreds of attempts globally at building competing applications.