There are many new projects and apps that make the concept of DeFi very interesting. There are three main areas in which DeFi operates: the exchange of values (decentralised exchanges), deposit/loan activities and risk investments (margin trading).
Top 5 of the best DeFi apps and projects
Maker is an organisation based in Santa Cruz, California. The CEO is Rune Christensen, who studied at Copenhagen Business School before setting up the company, while the CTO, Andy Milenius, has already worked for Amazon.
This is the most important DeFi project and with the highest value in dollars locked up: over 260 million are tied to the smart contract.
MKR is the utility token of the smart contract platform that supports Dai (DAI), a well-known decentralised stablecoin. Whilst the price of DAI is always about $1, that of Maker (MKR) is volatile and depends on market trends, due to the unique supply mechanics and its role in the MakerDAO platform. The intriguing aspect lies in the continuous reduction of the token supply over time.
As a utility token, Maker (MKR) is needed to pay the fees accrued on collateralised debt positions (CDPs). CDPs are designed to generate Dai in the MakerDAO system. Accrued fees can only be paid through Maker (MKR). Makers (MKR) used to pay fees are burned, reducing the total supply.
This means that if the adoption of and demand for Dai and CDP increases, as is currently the case, there will be an additional demand for Maker (MKR), used by users to pay fees. As the adoption of the DAI system increases, the supply of the Maker (MKR) is reduced, and the token will have to be burned to free the CDPs. It will, therefore, be increasingly scarce and valuable.
Mike McDonald tweeted on November 13th that almost 1% of Ethereum’s total supply is contained in the smart contract developed by the MakerDAO project team.
- Compound Finance
Another very interesting project, founded by Coinbase together with Andreessen Horowitz, is Compound Finance. Together with dYdX, the project is about to receive 1 million USDC from Coinbase.
Compound Finance is a DeFi project, considering that the markets it creates are decentralised and without intermediaries. It acts as an intermediary itself, but being public and an open-source IT protocol, it is neither controlled nor managed by anyone.
It allows developers to create a transparent and autonomous money market, which allows users and applications to obtain loans or earn interest without relying on counterparties.
The real innovation lies in having eliminated intermediaries by replacing them with an open-source protocol and having overcome the limits of one-to-one loans by creating real liquidity markets in which there is no direct relationship between debtor and creditor, but only between these two and the protocol itself.
The protocol is based on Ethereum and operates through various interfaces created by the community, including the Coinbase and Huobi wallets. In this way, Compound becomes a liquidity pool that allows more than simple direct loans to other individual users but instead provides liquidity to an entire market within which users can obtain loans from the market itself or earn interest by providing liquidity.
In each market, interest rates are algorithmically determined, based on supply and demand, and interest matures with each new Ethereum block. In addition, there are no predefined durations or terms: users can use the compound protocol even just for the duration of a single new block, or indefinitely, remaining free to withdraw or repay at any time.
Interest rates are calculated according to the liquidity available in each market and fluctuate in real-time according to supply and demand. When the liquidity is abundant, interest rates fall, while if it were to become scarce, they would increase, encouraging the new supply and repayment of loans.
They are displayed as annual interest rates, but in reality, interest accrues with each new Ethereum block, approximately every 15 seconds.
Uniswap is a token exchange protocol that relies on the Ethereum blockchain and was developed by Hayden Adams, one of the first-ever to take an interest in smart contracts.
It facilitates the conversion from ETH to ERC20 token and has become very popular for its ease of use as well as for the transparency that sets it apart. The protocol is completely onchain and is used through MetaMask. It is a DeFi project because there are no intermediaries in the conversion process.
It consists of two different smart contracts written in the Vyper language:
- An exchange contract;
- A factory contract.
In place of the order book, Uniswap uses the so-called liquidity pools; it does not have a native token and the fees are set at 0.3% for each trade.
- Dharma Protocol
Dharma Protocol, like Compound, is a suite of smart contracts and developer tools that allows users to borrow and lend crypto-assets on the Ethereum blockchain (or similar). Currently, Dharma supports Ether, DAI and USD Coin.
The protocol is based on 0x, a modular system for decentralised exchanges also based on the Ethereum blockchain. Dharma is developed by Dharma Labs, founded by Nadav Hollander (former engineer of Coinbase and Google) and is subsidised by Y Combinator and Polychain Capital.
The aim of the project is to provide an alternative to the traditional lending mechanism using the blockchain as a transparency tool.
A fundamental difference between Dharma and Compound is that Dharma facilitates peer-to-peer lending, while Compound uses liquidity pools.
In the top 5 of the DeFi apps, it is impossible not to mention dYdX, a project very similar to Compound. However, its smart contract relies on a liquidity pool instead of peer-to-peer loans with algorithmically set interest rates. There is a very competent team behind the project and the software is completely open-source.
The main difference with Compound is that dYdX focuses on a specific use-case. Margin trading allows traders to gain from an asset’s decline in value (short selling) or growth (leveraged long position). dYdX supports ETH, DAI and USD Coin.
A trader activates the process by sending a loan offer, a buy order and the purchase amount to one of dYdX’s smart contracts. The smart contract accepts the deposit and sends it to a decentralised exchange, usually 0x, to sell the asset at the price specified by the trader.
The smart contract holds the deposit until the trader decides to close the position. At that moment the trader receives back the amount lent and the related profit. This is a rather complicated process, but it allows for decentralised margin trading without leaving the dYdX platform.