Top 5 Defi protocols you must know

Blockchain technology is growing rapidly in different sectors. But the finance sector is one of the reasons why blockchain space is growing so fast, so let’s see why people are so much interested in Finance on blockchain and what factors making the graph go up and up. The launch of bitcoin has been one of the leading events in shifting people or the internet from centralized systems to decentralized ones. The use of decentralized systems and defi protocols came to the mainstream with the concept of smart contracts in Ethereum, which expanded blockchain technology outside the crypto world.

What is DeFi?

Decentralized Finance is the financial services offered on the public blockchain, which are powered by smart contracts. It involves lending, borrowing, yield farming, earning interest, buying insurance, trading assets or derivatives, etc. Defi protocols eliminate the headache of paperwork for offering these services using blockchain technology. Decentralized finance does not involve any third party in between, like governments or banks.

Now we have an understanding of what Decentralised Finance is, let’s take an overview of some of the leading DeFi protocols in the blockchain space.

Defi Protocols

In this article, we will take an overview of the “Top 5 Defi protocols” in the blockchain finance industry but before that let’s take a brief look at what is Defi protocols and how it is different from traditional finance.

MakerDao

MakerDao is one of the earliest Defi protocols in the Decentralised finance ecosystem. It is a Decentralized Autonomous organization that replaces the central banks and evidently illustrates the strengths and power of the blockchain and decentralized finance.

MakerDao is a series of smart contracts or programs running on ethereum. MakerDao is comprised of stablecoin DAI, governance token MAKER, and collateral. MakerDao allows anyone to deposit ethereum as collateral into maker vaults and lends stablecoin DAI. MakerDao has a stablecoin called DAI which is a decentralized stablecoin used for lending in exchange for collateral and a governance token called MAKER which is used for voting in the MakerDao ecosystem. One has to repay a loan with DAI and the interest amount called a stability fee with MAKER tokens.

Lido

Lido is the liquid staking protocol that allows users to stake their ETH without locking them for earning yield. For participating in lido staking user first has to deposit ethers to the lido smart contract and it will generate copies of staked ethers with a 1:1 ratio in the form of staked eth(stETH), so the user can use the stETH for other onchain activities.

Users will be given stETH, an ERC20 token that is exactly equivalent to the amount of ETH they have invested. Users produce and destroy stETH tokens when they withdraw their eth tokens after staking them when funds are deposited into the lido staking pool smart contract. Users’ stake ETH will be provided to the validators and operators of the Lido network nodes and added to the Ethereum beacon chain for validation. The funds are safeguarded under smart contracts, making them inaccessible to validators.

Aave

Aave is a decentralized financial platform where users can lend and borrow cryptocurrencies anonymously. Since Aave is a decentralized application working on a blockchain, no central or governing body has control over the network.

Aave works through lending pools in which investors or lenders deposit tokens in a pool containing the same tokens. The borrower can borrow tokens from these pools and must pay back the loan with an interest amount. The interest rate is confined by supply and demand for the number of tokens available in the lending pool. The interest amount will be issued to the lenders as an earned interest for lending tokens into the pool. To borrow tokens from the pool borrower has to deposit tokens worth more than the borrowing amount. This is known as overcollateralized loans.

Aave allows the borrower to get loans without providing any personal information. Aave has no time limit for repaying the loan as long as your position is safe. If you get liquidated you may lose your deposited collateral. All of these processes are powered by smart contracts, which enable all Aave transactions to be executed automatically when pre-set conditions are met.

Curve 

Curve Finance is an Automated Market Maker( AMM ) known for exchanging stable coins with very small amounts of slippage through the liquidity pools.

Automated Market Maker is a tool that connects traders with investors, traders can swap their tokens for other tokens or coins. In exchange for a swap of tokens, traders have to pay a small amount of fee which will be distributed among investors as a reward for providing or lending their tokens in the pool. AMM is an alternative to the Order Book method used in traditional or centralized finance where they connect the buyer and seller.

Curve Finance started as a decentralized exchange of stablecoins with low slippage. Slippage is the amount you lose because of the minute value difference in stablecoins while trading them. Curve finance is optimized explicitly to reduce slippage.

Uniswap 

Uniswap is one of the earliest and most popular decentralized exchanges in the ecosystem. Uniswap allows users to trade or exchange any erc20 tokens from the pool without the interference of a third party. Traditional exchanges are dependent on the order book method for liquidity. Uniswap is trying to solve the issue of liquidity using an alternative method.

The foundation of Uniswap is the idea of automated market makers and liquidity pools. Uniswap uses a constant product market maker model at its core as a pricing model which makes it unique. The Constant Product Market Maker model is based on the equation x*y = k. Where k is the constant value, x is the number of ETH and y is the number of erc20 tokens that are available in the liquidity pool. If you take a look at the equation you will realize to maintain the constant product, x and y has to balance each other.

Summary

Decentralized finance is one of the booming sectors and why the blockchain space is growing so fast. In this article, we took an overview of some of the leading defi protocols in blockchain and finance. Each of these applications is solving unique issues that we faced in a centralized governing system and that’s why they are leading the market. I hope you enjoyed reading the article and got the outline of the DeFi applications, for a more detailed study and understanding of these DeFi applications I highly recommend checkout their official documentation.