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The DeFi ecosystem has expanded from decentralized exchanges (DEXs) to lending and borrowing facilities, synthetic assets, derivatives, and payment systems.
If you have been in the cryptocurrency field in the past two or three years, you must have heard about decentralized finance, or popular as DeFi. Despite the volatility in the markets, the DeFi ecosystem has continuously outperformed traditional markets, giving investors a channel to disrupt the finance system as we know it.
The DeFi industry arose from the rise of Ethereum blockchain and its DApps, after a long period of blockchains focusing exclusively on their communities. Simply, users could now tokenize and use smart contract functionalities on Ethereum to change the trajectory of traditional finance. As such, DeFi has opened up the world of finance to over a billion people across the world who were previously unbanked or under banked due to the challenges arising in traditional finance.
In this piece, we explain the intricacies of the decentralized financial system, its benefits, challenges, and some of the top projects that users should look out for like the first quarter of the year closes out.
What Is Decentralized Finance (DeFi)?
Decentralized finance, or DeFi, is a blockchain-based financial technology that leverages public blockchains to remove the control that banks, financial institutions, and centralized lending facilities have on money, financial instruments, products, and services, Investopedia reads. These platforms remove the need for middlemen in the finance industry allowing participants in the system to transact, lend and borrow funds in a peer-to-peer network with enhanced security, and fast connectivity.
Anyone with an internet connection can participate in DeFi and the transaction records are verified and stored immutably on a public blockchain such as Ethereum. Users can trade, lend, stake, save, and borrow funds via the use of smart contracts, which automate the whole process. Over the past few years, the DeFi ecosystem has grown into a massive network with integrated financial instruments and protocols.
With the DeFi landscape ballooning to a $75 billion market, from a mere $1 million in September 2017, the ecosystem only shows a potential to grow larger as more people are welcomed to a previously closed financial system. Today, the ecosystem has expanded from decentralized exchanges (DEXs) to lending and borrowing facilities, synthetic assets, derivatives, and payment systems.
DeFi Uplifting the Unbanked
Before looking at some of the top DeFi protocols, we need to understand the role of the ecosystem in the finance world. Unlike the traditional financial system, DeFi is built with the goal to include every person within the system, whether poor or rich. Hence the question: “Does DeFi hold a promise for the unbanked, underbanked, and financially inadequate investors?”
Without a doubt, the massive growth of DeFi shows the impact it is having in replacing the banks and the financial institutions as we see them. The top advantage is giving the owners control over their own funds. DeFi protocols use secure non-custodial wallets to hold their funds instead of keeping them in bank accounts. This saves the investor huge amounts in fees usually charged by the banks.
DeFi also eliminates the steep fees levied by banks and other financial institutions, as explained above. Additionally, it gives the unbanked leeway and a channel to access financial products and services without securing approval from a central authority as protocols are permissionless.
Finally, DeFi protocols reduce the transaction times with users able to transfer funds in seconds compared to the three to five business days required in the traditional finance system.
The Top DeFi Protocols in the Ecosystem
Having learned the intricacies of decentralized finance, its advantages, and its connection to the unbanked it is important to learn the best protocols available today and what they offer to users. Notwithstanding, DeFi participants need to check for features such as liquidity, interoperability, security, and ease-of-use to select the best platforms and protocols that satisfy their financial needs.
Remember, every financial service and product in the traditional finance world can be transformed into a DeFi product, making it more open to every investor. In this section, we look at the three largest sectors of DeFi – DEXs, borrowing & lending, and privacy – and the projects making a name for themselves.
Borrowing and Lending (Venus Protocol)
First on our list are borrowing and lending projects, which have a total market capitalization of $34.51 billion, with Maker dominating the field with over 44% of the total market cap, data on DeFi Pulse show. While Maker has dominated the field since the launch of its governance token, $MKR, in 2019, better, safer, and cheaper protocols have launched, Venus Protocol leading the race to replace Maker.
Venus ranks as the second-largest platform on BNB Chain (former Binance Smart Chain) offering an algorithmic-based money market system designed to bring a complete decentralized finance-based lending and credit system for its users. Venus enables users to utilize their cryptocurrencies by supplying collateral to the network that may be borrowed by pledging over-collateralized cryptocurrencies. This creates a secure lending environment where the lender receives a compounded interest rate annually (APY) paid per block, while the borrower pays interest on the cryptocurrency borrowed.
Decentralized Exchanges (Primex DEX)
Second on our list is the decentralized exchanges, or DEXs, which currently dominate the DeFi space, with almost a third of the total market capitalization ($24.05 billion). While Ethereum-based Uniswap, Balancer, and Sushiswap still rank as three of the largest DEXs in crypto, newer projects are emerging to solve the scalability problem and high gas costs on Ethereum.
One of the leading DEX protocols, Primex, is a liquidity protocol for DEX-agnostic cross-margin trading with scoring mechanisms. In Primex, lenders provide liquidity to pools (buckets) where traders can use it for leveraged trading. Some of the main features include cross-DEX cross-margin trading, risk management system for assets, trading pairs, and traders, yield farming, cross-chain leveraged trading, under deposited margin trading, and interoperability with other DEXs.
These days are the most horrifying for Ukrainians still in the country and those living across the world. The Primex team is continuing our work and we thank everyone for their ongoing support.#StandWithUkraine #NoWarInUkraine #UkraineUnderAttack pic.twitter.com/cMOYuxUGks
— Primex Finance (@primex_official) March 1, 2022
Privatizing Crypto Assets (Manta Network)
Binance Labs-funded project, Manta Network also made the list as one of the futuristic DeFi projects. Manta Network is a layer 1 network that leverages zero-knowledge proofs (ZKP) technology to privatize cryptocurrency assets. Manta Network aims to build a scalable, unique, and secure infrastructure that preserves the privacy of all on-chain interactions within the Polkadot ecosystem.
Built with the Substrate framework, Manta’s privacy technology interoperates with other parachain assets within the Polkadot and Kusama ecosystem. It previously secured one of the first ten parachains on Kusama for its canary network, Calamari Network, after crowd loaning 218,000 KSM from the community, according to a statement from Binance Labs.
The list above is in no way exhaustive with thousands of DeFi projects available today. However, DeFi seems to lie within privatization, lending, and trading, meaning these three sectors could witness the biggest growth within the next year. One thing remains sure, DeFi is opening up the world for those locked out by traditional finance, giving every investor an opportunity to save, invest, and earn from their money without excessive fees or control over their funds.