1.26 DeFi Cryptocurrencies

 

Decentralized finance (DeFi) is one of the most important segments of the cryptocurrency market because it gives various financial utilities to digital currencies. The most prominent decentralized blockchain applications (dApps) are focused on DeFi functionalities, building an entirely new, decentralized financial market.

 

In this lesson, we will learn what DeFi is, how it works, and some of the leading DeFi coins. We’ll also check which significant benefits and risks do DeFi protocols bring and what are the most popular DeFi apps on the market.

 

What is DeFi?

DeFi is a key product of blockchain technology and cryptocurrencies that gives users quick access to a wide range of financial services. All DeFi protocols are decentralized apps that users can utilize by connecting their crypto wallets.

The most popular DeFi services are staking, liquidity providing, decentralized asset swaps, lending, and borrowing. The growing popularity of DeFi is mainly due to the fact that using a DeFi protocol doesn’t require complex paperwork and is faster than conventional institutions such as banks.

DeFi cuts out middlemen such as brokers and intermediary services like payment providers. Instead, end-users get to deal directly with financial service providers, effectively cutting service costs and speeding up financial operations. 

However, DeFi is still far from overtaking fiat currencies and the traditional banking system, and it has various safety risks because of the lack of legal regulations. 

 

The Benefits of DeFi

• Anyone can use a DeFi protocol by connecting their crypto wallet app to the platform.

• DeFi protocols are decentralized and aren’t controlled by centralized entities or government institutions.

• Taking out a DeFi loan is much easier than traditional bank loans. 

• DeFi protocols allow users to receive much higher interest rates, staking rewards, and liquidity-providing rewards compared to interest rates in banks. 

• Using a DeFi platform doesn’t require any paperwork.

 

The Risks of DeFi

• The DeFi market lacks regulations, and there aren’t any control mechanisms regarding who can operate a DeFi protocol and how.

• There are a lot of scam DeFi projects that promise unrealistic rewards. The people behind these projects sometimes suddenly shut down the protocol and steal the whole platform treasury.

• Users have little to no protection if a DeFi platform gets hacked and their assets are stolen.

 

The Leading Cryptocurrencies for launching DeFi Protocols

Let’s look at some of the most popular blockchains for launching DeFi protocols.

 

Ethereum (ETH)

Ethereum (ETH) is the most prominent blockchain for launching DeFi protocols. It’s the first blockchain to launch smart contract functionalities, which are essential for creating all types of decentralized apps. Most of the first dApps were DeFi protocols, and despite the relatively high Ethereum gas fees, ETH remains the most popular crypto for DeFi developers.

 

Avalanche (AVAX)

Avalanche is a major step up from Ethereum regarding network throughput because AVAX can process up to 4,500 transactions per second. That’s why Avalanche is a popular choice for launching DeFi dApps that aim at a massive user base. With the Avalanche network’s high processing capacity, launching a DeFi protocol with thousands of active users isn't a problem.

 

Polygon (MATIC)

Polygon is the leading solution for Ethereum scaling. It’s a Layer 2 network for Ethereum, meaning it isn’t an independent blockchain. Instead, it’s tied to Ethereum but uses considerably different operational mechanisms to process much more transactions than Ethereum and at a faster pace. It takes less than two seconds to confirm a Polygon transaction, and the network can process up to 65,000 transactions per second.

 

Polkadot (DOT)

Polkadot is a sharded multichain protocol that allows developers to launch custom blockchains with high interoperability and interconnectivity. Polkadot is often referred to as a Layer 0 metaprotocol because it allows developers to build entire blockchains on top of the Polkadot infrastructure. 

 

Cardano (ADA)

The Cardano (ADA) blockchain is one of the fastest-growing DeFi ecosystems on the crypto market. The network can process more than 1000 transactions per second and offers exceptional transaction security. All Cardano network update proposals pass through a rigorous, scientific peer-review process to ensure the safety and reliability of the network. 

 

Leading DeFi Protocols

Now let’s look at some of the largest DeFi protocols on the market.

 

Aave (AAVE)

Aave is a major DeFi lending and borrowing protocol, originally launched on the Ethereum blockchain in 2020. However, Aaave has considerably evolved over the years and is now available on Avalanche, Polygon, and various additional networks. Users can use the protocol to borrow crypto or deposit assets and earn interest as lenders. Aave is known for providing deep liquidity, and that’s why many smaller DeFi platforms use it to source liquidity for their daily operations.

 

UniSwap (UNI)

UniSwap (UNI) is among the largest and most versatile DeFi platforms. It's primarily a decentralized cryptocurrency exchange platform allowing users to swap hundreds of cryptocurrencies across eight popular blockchains, including Ethereum, Binance Smart Chain, Optimism, Avalanche, and more. Users can also utilize dozens of UniSwap liquidity pools and staking options to earn rewards by providing liquidity.

 

Compound (COMP)

Compound is another DeFi lending protocol used for yield farming. Users can deposit crypto into Compound’s liquidity pools and get liquidity provider rewards in return. Also, users can borrow crypto from Compound by depositing a certain amount of collateral assets. Once they repay the loan, they can get their collateral back.