Most popular DeFi projects.

Most popular DeFi projects.

It's been four years since the inception of decentralized finance. The DeFi sector has been on the rise, with more than 15 DeFi projects surging into the top 100 cryptocurrencies based on market capitalization, according to CoinMarketCap.

With the lure of no central body or mediator to facilitate trading, the DeFi sector offers crypto users a decentralized trading platform to perform transactions without fear of losing their trading accounts or portfolio.

As the DeFi ecosystem keeps rising, more investors are interested in what the sector offers, with a total locked value at $101.02 billion. There are well over 450 DeFi tokens listed on CoinMarketCap, and it can be a tedious task skimming through all projects. This article highlights the top 5 popular DeFi projects to watch out for.

Definition of Decentralized Finance or DeFi

Decentralized finance (DeFi) is a financial system that makes financial products available through a decentralized public network for everyone without the need for a centralized body to facilitate trading. With the help of smart contracts, DeFi has opened up a whole new ecosystem for traders as buyers, sellers, lenders, and borrowers can now make financial transactions on automated agreements. Because of its absolute decentralized nature, regulation and oversight in the DeFi sector are minimal or absent.

The idea of DeFi goes back to a Telegram chat in 2018 where a group of software developers was thinking of the perfect name for the next generation of financial services built on the blockchain ecosystem that can topple the traditional financial system.

Three years later, the volume of trading tokens and money locked in smart contracts in its ecosystem has been growing steadily. The next section highlights the components of decentralized finance (DeFi).

Components of Decentralized Finance

Developers created decentralized finance to replace the traditional finance system on the blockchain. It's no surprise that the components of the DeFi sector bear some similarities to existing financial ecosystems. However, unlike the traditional financial system, smart contracts create the framework for DeFi applications because they contain the codes needed for the smooth functioning of these applications.

Each component of the DeFi system belongs to a software stack and is required to perform specific functions to ensure the system functions properly. Four layers constitute a DeFi stack, and they include;  

  • Settlement Layer: This is often referred to as Layer 0. It is the base later where DeFi transactions are built. It is made up of a public blockchain and the native currency of the platforms. The native token is used for transactions on the DeFi application that may or may not be traded in public markets.
  • Protocol Layer: This layer sets the rules and guidelines for smart contracts in the DeFi application.
  • Application Layer: This layer houses consumer-facing applications. All DeFi applications are found on this layer.  
  • Aggregation Layer: This layer comprises aggregators that connect the application layer to services needed by users.

Top Five Popular DeFi Projects

There are hundreds of DeFi projects in the crypto ecosystem. Let's highlight the top five popular DeFi projects in the crypto ecosystem.

Uniswap (Uni)

Uniswap is an open-source, decentralized crypto exchange built on the Ethereum blockchain. This makes it possible with all ERC-20 tokens and infrastructure such as wallet services like MetaMask.

Uniswap is an automated liquidity protocol that allows traders to make transactions without intermediaries. Most crypto users use centralized exchanges because of liquidity. Uniswap solves this problem through an automated liquidity pool. Crypto users trade on the exchange to become liquidity providers. Users pool their money together to create a fund to execute trades on the exchange platform. Tokens listed on the exchange have a pool that users can contribute to.

This procedure allows buyers and sellers to complete trades without waiting for the other party. Crypto transactions can be executed instantly, provided there's enough liquidity in the pool to facilitate that transaction.

Uniswap allows users to list tokens on the platform for free, unlike centralized exchanges, which charge high fees to list new coins.

As a decentralized platform, users have total control over their funds. There is no order book or any centralized party required. Currently, Uniswap is regarded as the second largest decentralized crypto exchange with a total locked value of $8.29 billion.

PancakeSwap (CAKE)

PancakeSwap is another popular DeFi protocol based on the Binance Smart Chain. It is a decentralized crypto exchange, just like Uniswap.

Users can trade tokens and crypto assets without intermediaries. PancakeSwap uses an automated money maker that depends on liquidity from traders on the platform. Users can deposit their funds in the pool in exchange for LP tokens. Users can reclaim their share of trading fees or earn more rewards with the LP tokens.

Traders on PancakeSwap can also farm additional tokens such as CAKE and SYRUP. CAKE is the first reward users get after locking LP tokens in the liquidity providers pool. Users can then stake CAKE tokens to receive SYRUP tokens. SYRUP tokens allow users to get more functionality like governance tokens.

PancakeSwap also gives users a chance to wager. Users can speculate whether the price of a crypto asset will rise or fall within a specific period. The lottery feature allows traders to buy tickets with the hope of winning a major CAKE windfall.

Aave (AAVE)

Aave is an open-source, decentralized, non-custodial liquidity protocol built on the Ethereum blockchain. Users can lend and borrow cryptocurrencies and earn rewards on assets provided to the liquidity. It enables peer-to-peer lending with the help of smart contracts.

Users can borrow assets on the platform as long as they have enough collateral. One of the most popular loans Aave offers is flash loans. Flash loans do not require collateral which is its enticing feature. However, users have to borrow and repay the loan in the same block, usually within seconds. If a user doesn't repay within the same block, the transaction is reversed.

Aave has two different DeFi tokens. The first is AAVE, the native governance token of the Aave protocol. Buying AAVE tokens is the same as buying shares in a company. Hence, users can vote on improvements that may change the direction of the agreement.

The second Aave token is ATokens. ATokens are interest-bearing tokens issued to lenders to collect deposit interest. The interest is generated directly in the user's wallet, and the ratio of these tokens to the value of the assets deposited is 1:1.

Avalanche (Avax)

Launched by the Ava Labs team in 2020, AVAX is a DeFi blockchain platform focused on creating a platform that allows users to make transactions at low cost and fast transaction speed. With its total locked value worth more than $3 billion, Avalanche has risen to the top since its inception.

The Avalanche network comprises three core blockchains, each created and optimized for certain tasks across the network. Distributing tasks across different chains helps maintain the agility of the Avalanche platform and enables it to achieve the golden trinity of blockchain functions - decentralization, security, and scalability. These blockchains include;

  • Exchange Chain (X-Chain): The X-Chain is responsible for creating and transacting AVAX assets. Every transaction on the X-Chain generates fees paid in AVAX no matter what tokens are used in each transaction.
  • Contract Chain (C-Chain): The C-Chain is responsible for the smart contracts that run the Avalanche network and is EVM compatible. This means that any user can deploy Ethereum smart contracts on the Avalanche network. Developers can build decentralized applications on the Avalanche network leveraging its scalability function and tight security.  
  • Platform Chain (P-Chain): The P-Chain allows users to create an L1 or L2 blockchain. The P- Chain manages the geography of Avalanche subnets by keeping track of validators. However, subnets are also responsible for validating the P- Chain.

Maker (MKR)

Maker is a built-in smart contract on the Ethereum blockchain that allows for the creation and control of DAI, a stable coin pegged to the US Dollar. Any user can use the Maker protocol to open a vault, lock in collateral, and generate DAI as a debt against that collateral.

Maker also has a feature called the Dai Savings Rate (DSR). DAI holders can lock their DAI in Maker's DSR contract and earn rewards in DAI generated by the stability fee.

Holders of MKR vote on the management of the system, for example, on risk parameters such as the level of stability fees. MKR holders have a say in the CDP collateralization rate and other issues. As a reward for participating, they will receive MKR fees.

Conclusion

The DeFi sector offers a lot of advantages to crypto users. Its decentralized nature makes it a better finance tool. Anyone can create DeFi and use decentralized applications for smooth financial transactions without an intermediary.

Despite its many setbacks with the hacks and exploits, the DeFi ecosystem continues to grow as more DeFi projects push the DeFi sector to a total locked value of $101.02 billion. This article scans the DeFi market to narrow it down to the five most popular DeFi projects mentioned above. Anyone looking to invest in the DeFi sector can briefly look into projects that make the DeFi sector boom.