LAYERS OF A DEFI PROTOCOL
LAYERS OF A DEFI PROTOCOL.
Every system is comprised of different parts and DeFi is no exception. Its system is designed in layers that are responsible for various processes and enable the smooth functioning of transactions and contracts.
Decentralized finance is based on 5 layers:
The first one is the settlement layer, the Ethereum blockchain that serves as the foundation for writing code and designing applications. This is the base layer used for the system to run, it would be impossible for DeFi to exist without the blockchain.
This is due to the importance of the protocol layer — which is written on blockchain standardized codes (protocols). The protocol layer is responsible for programming applications and governing specific activities or tasks. Protocols enable the creation of the asset and the application layer.
The most popular DeFi protocols
Now that we have a better understanding of DeFi protocols, it is time to get familiar with the main types, their functions, and features.
As mentioned above, DeFi protocols are represented by user-friendly decentralized applications that provide access to financial services allowing several market players (buyers, sellers, lenders, or borrowers) to be involved at the same time on peer-to-peer conditions.
Here are some of the most well known DeFi protocols:
- Decentralized Exchange (DEX): a platform used for trading different currencies (national and crypto), e.g. exchanging the U.S. dollar to Bitcoin and vice versa. Like all DeFi protocols, DEX links users directly without intermediaries. The leading ones are Uniswap, Binance, and Balancer.
- Decentralized Lending / Borrowing Platform: these networks enable market players to lend and borrow money using smart contracts, in which the terms and conditions are set before the transaction. Thus, a borrower is obligated to repay a loan by a deadline and an investor earns interest. As smart contracts execute loans, third parties are eliminated from such transactions. This makes for more favorable terms such as lower rates and no bank fees. Some popular examples are: Aave, Compound, and MakerDAO.
- Decentralized Insurance Platform (DIP): This project emerged because of numerous cases of fraud and malfunctions during transactions. These platforms are an alternative to traditional insurance. It aims to lower users’ risk in these situations and to protect their digital assets. The terms are the same — a market player is charged for a service and provided with this insurance in case of situations like smart contracts bugs or hacker attacks. DIP offers various use-cases such as crypto wallet insurance, smart contract cover, collateral protection for crypto-backed loans, etc. Nexus Mutual, Etherisc, and VouchForMe are some leading decentralized insurance providers.
- Decentralized Prediction Market (DPM): a platform that gathers people who are willing to buy predictions rather than products or currencies. Users can bet on future events by buying those shares that align with their predictions. You can buy shares of everything from tomorrow’s weather to presidential elections. It is a modern way for the bravest and riskiest market players to try their luck and earn some extra money. Augur and Gnosis are two market leaders.
- Asset Management Tools: is a protocol created for users who want to make investments, but due to a lack of knowledge need help. Thus, the investor is exposed to, according to the platform, the best possible investment strategies. Upon choosing their egy the platform takes over and runs the process. Currently, the leading asset management solution is Set Protocol
- Kindly read more of my articles on reddit
- Use the link…https://www.reddit.com/user/CryptoCore1