DeFi Dinner: A 7-course review of the most interesting projects in Decentralized Finance
Before we dive into our 7-course DeFi meal, let’s define what decentralized finance means. Also known as open finance, or DeFi, decentralized finance generally means creating blockchain-based solutions to the structural inefficiencies in the current iteration of our global financial system.
This means using solutions like smart contracts, decentralized applications, decentralized autonomous governance (DAO), exchanges, peer to peer lending alternatives, trading tools, and prediction markets. It also means aligning incentives to create a permissionless, trustless, parallel financial system.
Current financial systems utilize a regulatory framework that ensures its users follow the rules. In contrast, Decentralized Finance achieves consumer protection through software and smart governance which ensures that participants follow the rules by aligning incentives. Users gain additional security because they are in control of their public/private key encryption. Ethereum seems to be the platform spearheading the DeFi movement although Bitcoin and other blockchains have similar undertakings in the works.
In this article we highlight 7 of the most delicious, well-garnished DeFi projects in the space. With that said, bon appétit!
Hors d’oeuvre: Oysters Rockefeller (dYdX — Decentralized Margin Trading, Exchange & Lending)
Decentralized exchanges (DEXs) will be pivotal for mass adoption. Not all decentralized exchanges are equal, so it’s important to learn about which ones are doing it the right way. We just saw what happens when an exchange’s governance model is poorly thought out, as in the case of Shapeshift and EtherDelta which recently implemented AML/KYC due to regulatory enforcement actions on the businesses structured around the exchanges themselves.
Decentralized finance will be the first real application of blockchain technology. The recent creation of decentralized exchange has enabled anyone to swap tokens without a trusted intermediary in the middle. dYdX is taking this a step further by offering not only spot trading but advanced financial products. dYdX smart contracts automate financial deal-making and trade settlement to enable lending, borrowing or full cycle margin trading without needing to trust a broker or middleman. This is an extremely powerful upgrade in terms of access and security vs. traditional finance today.”
— Zhuoxun Yin, Head of Operations dYdX
dYdX Exchange is one of the most interesting approaches to creating a decentralized margin trading platform on the Ethereum blockchain using the 0x protocol.
- Andreessen Horowitz and Polychain Capital led the institutional investment in dYdX.
- It stands alone, in the sense that it has an advanced margin trading protocol and options trading protocol for any ERC-20 token on the Ethereum blockchain, which operates entirely on smart contracts.
- Margin Trading protocol & Options Trading protocol, decentralized p2p derivatives, Short Sells, Margin Lending.
- There is no central authority, and the platform will use a multi-sig contract held by reputable people in the project ecosystem for governance.
- The multi-sig key will only allow the key holders to put the platform in “close-only” mode, which stops allowing new positions to be opened. Positions which were already open will remain unaffected.
Salades: Wedge Salad (Dharma — Decentralized Peer to Peer Lending)
Another major issue faced by the unbanked could be described as a lack of access to the existing infrastructure. Upward social mobility depends on simple things Westerners take for granted, like having a bank account, credit card, or receiving a loan.
P2P lending platforms have never truly succeeded because they seem to attract scammers in large quantities. The major issue is that nobody has figured out how to enforce a virtual promise, or devise a smart contract that has a legally-binding correlation to a real-world asset or legal framework.
Over the past 18 months we’ve developed an understanding of what factors make peer-to-peer lending platforms successful. While specifics vary on a case-by-case basis, the important factors are: accessibility, transparency, and efficiency.”
– Brendan Forster, COO @ Dharma labs
Dharma has made P2P lending a reality by using a clever system of smart contracts, underwriters, debt servicers, borrowers, and lenders to create a decentralized marketplace.
- Users can borrow or lend any ERC-20 token on the Ethereum blockchain.
- Dharma is heavily based on the 0x protocol.
- Dharma’s lending market is fee driven and reputation based, so users will gravitate to the services with the best ratings and prices.
- The incentives of the platform are aligned to encourage participants to act honorably.
- Service providers have the option of integrating real-world legal contracts to provide a remedy in the case of default.
Pottage: Lobster Bisque (Tagomi — Institutional Crypto Brokerage)
One of the major issues facing the large scale deployment of institutional capital in the blockchain space and cryptocurrency markets is liquidity. When a large player opens a position on a traditional cryptocurrency exchange, it can cause a noticeable shift in price, as market-depth for small market cap blockchain projects is not very pronounced.
To mitigate this effect, OTC markets have emerged to offer market-making services for institutional clients. However, dealing with large scale allocations at an institutional level is a nightmare of regulatory compliance because banks often won’t offer services to crypto-asset funds, custody solutions are not readily available, and many jurisdictions are playing wait and see before implementing a definitive framework for compliance. This makes trading crypto-assets on an institutional level very inconvenient.
Peter Thiel’s Tagomi brokerage is trying to simplify this process so the Wall St. capital that’s sitting on the sidelines to the tune of over $3 trillion USD can safely get exposure to a wide variety of crypto-assets, with institutional-grade execution, with the least amount of slippage.
- Tagomi has raised $27.5 million in initial funding from Paradigm Capital, Pantera Capital, and Peter Thiel’s Founders Fund.
- Tagomi was the 18th company to receive New York State’s Bitlicense, one of the most stringent regulatory standards in the blockchain investment space.
- Tagomi’s Bitlicense makes it one of the few institutional platforms available in one of the world’s most important financial centers.
- Tagomi has also received a money transmitter’s license from NY state.
- Tagomi has the benefit of Peter Thiel’s leadership, as well as an experienced team from the traditional trading world.
Poisson: Trout Pontchartrain (ETHTTT — Blockchain Automation)
Blockchain automation promises to revolutionize a whole slew of industries by massively improving transparency, auditability, security, smart governance, and workforce automation. Finance, legal services, government, insurance, human resources and IT are all industries expecting disruption from blockchain automation improvements in efficiency.
ETH This Then That (ETHTTT) is a promising platform for automating smart contracts on Ethereum. The platform is live and users can begin automating their smart contracts across many different Decentralized Finance platforms and decentralized applications (DApps). It takes its inspiration from IFTTT, or If This Then That, a popular app for automating interactions between different software platforms.
- ETHTTT will allow many DApps to be linked together, triggering an event when the user’s preselected conditions are met.
- ETHTTT puts the ability to leverage the power of DApps of the Ethereum ecosystem without having to know how to write code.
- Can automate and connect a lot of different DeFi apps to interact seamlessly.
- Developed by a team of developers led by Corbin Page from Consensys, Ethereum cofounder Joseph Lubin’s blockchain infrastructure, and development company.
- Point and click solution for non-technical Ethereum users.
Sorbet: Melon Sorbet (Melonport — Asset Management Computer)
Melenport A.G. was founded for the development of Watermelon protocol, and now that the protocol is complete, they are handing the codebase over to the open source community, as planned since the company’s inception.
In Q1 this year, Melonport deployed the first of its kind v1.0 (Melon) to the main-net introducing an exciting new infrastructure which simplifies asset management, reduces barriers to entry and increases transparence. The protocol itself enables the set up, management, operational, administrative, regulatory and accounting aspects of fund management in smart contract code. This collection of rules is embedded in code and enforced at a smart-contract level removing the need in theory, for any financial intermediaries and relying fully on decentralized technology and the transparency that comes with public blockchains (Ethereum based).”
– Mona El-Isa, Co-founder, @ Melonport
Melonport is a protocol for running a decentralized investment fund. It’s permissionless and trustless, so now anyone can launch a cryptocurrency and blockchain investment fund. This dynamic has the potential to completely disrupt the way people invest. Melon allows any ERC-20 token on Ethereum to be used with the platform.
- Melonport gave control of the protocol in feb 2019 to a decentralized consortium-like group governance system made up of entities and individuals called the Melon Council to future govern the protocol. Madeeba Ltd (former Melonport team) will represent one seat on that council and hopes to continue contributing to the protocol in future.
- The Watermelon Protocol is the underlying technology of the Melonport platform.
- The Melon protocol consists of a “Vault” for decentralized custody of a wide variety of Crypto-assets, and “Modules” which can be programmed to meet the needs of individual fund managers.
- As part of v1.0, managers can select from the five integrated exchanges including Ethfinex, Kyber Network, 0x relayers (Radar Relay, ERCdex) and Oasis Dex as well as many other rulesets (risk management, whitelisting of investors, performance & management fees, etc).
- The Melon protocol lets anyone set up a system of smart contracts which can manage Crypto-assets according to predetermined conditions, much cheaper than setting up a traditional fund.
L’Entrée: Filet Mignon (BTCPay Server — Decentralized Payment Processing)
In 2010, we saw the first high-profile example of social media de-platforming in the case of Wikileaks, when Mastercard, Visa, and Paypal refused to let them collect payments and donations following Wikileaks release of documents critical of the US led war in Afghanistan. In 2018, we saw cryptocurrency exchange Coinbase deny services to Wikileaks without explanation in similar circumstances.
Since then we have seen an explosion of online censorship, social media, and financial deplatforming to silence people who voice controversial opinions. This censorship and trend towards financial deplatforming have led to the creation of many decentralized and censorship-resistant alternatives, which allow content creators to route-around centralized financial alternatives which deny them service. One such alternative is BTCPay server.
Our free and open-source technology stack gives individuals, small business owners, and enterprises the ability to become a self-hosted payment processor. That means that once they launch the software, they can accept Bitcoin directly to their wallets, with no third-party involvement or fees for their business. At this stage of adoption, businesses still need to convert to fiat at some point due to avoid volatility and cover their expenses.
We’re very close to finalizing a fiat-bridge which will enable instant-fiat conversion to an exchange of your choice, which in a way decentralizes the fiat part as well. BTCPay can be deployed on any machine which meets the minimal requirements. People can run it in the cloud, but for ultimate, censorship-resistance and decentralization, they should run BTCPay on their own hardware infrastructure.”
– Pavlenex, Contributor, @ BTCPay Server
BTCPay is a self-hosted payment processor, which cannot be shut down since users install it on their own server or hardware. BTCPay comes ready to use with a Bitcoin full node and Lightning Network node for trustless payment processing. It also includes a host of apps and add-ons which make it more versatile than centralized custodial solutions like BitPay or OpenNode.
- BTCPay works with Bitcoin and a variety of popular altcoins.
- BTCPay is self-hosted allowing anyone to become their own crypto version of Paypal.
- BTCPay has a Point Of Sale app for accepting cryptocurrency payments at a physical brick and mortar location.
- BTCPay has an invoicing feature which allows freelancers to create Cryptocurrency invoices for clients.
- BTCPay has a crowdfunding app allowing any person to become their own crypto version of Kickstarter or GoFundMe, and run fundraising campaigns with censorship-resistance.
Desserts: Crème Brûlée (InstaDApp — Decentralized Bank)
We have touched upon the reality of how difficult it often is for people in developing nations to get access to credit, consumer loans and other basic banking services that people in developed nations take for granted. Access to affordable loans is a huge barrier standing in the way of improving your economic situation, financing an entrepreneurial pursuit, or purchasing an important good or service.
DeFi is definitely the future. If you take myself for example, I’m 19 years old and I’m using decentralized finance because it is easy. In the case of centralized finance, I have to register accounts, deposit money, physically move places; even opening loans is difficult. DeFi is already changing the world with projects like MakerDAO who provide new ways to handle finances. From code to coins to nodes, the power will be with the citizens. We the people are totally dependent on banks right now, we have to use our houses as collateral just to take out a loan.
When assets move to blockchain, it will be very easy to receive several loans simultaneously from anywhere in the world. I can use my own tokens (which represent gold, real estate, etc.) as collateral and choose the interest rate I want to pay. Banking will still be there, but banks won’t. It is complete financial autonomy.”
– Samyak Jain, Co-Founder, @ InstaDApp
InstaDApp is looking to create a user-friendly, low-tech graphical user interface for issuing or receiving loans in DAI on Ethereum’s Maker DAO. Maker allows users to issue Ethereum collateralized loans in DAI, a dollar pegged stable coin which is decentralized and permissionless to use. These loans are not limited by verification of identity, geographical location, regulatory regime, or even age of consent. They are regulated by smart contracts called CDPs.
- InstaDApp is a decentralized banking interface for Maker DAO.
- InstaDApp loans must be collateralized at a rate 1.5x the amount of the loan with Ethereum.
- InstaDApp Statistics: Total debt processed till now: 687,122 DAI, Current debt: 289,906 DAI, Total collateral equals 6674 ETH: 1.2M USD
- InstaDApp allows for collateralization of loans in a variety of other tokens as well.
Decentralized Finance promises to irreversibly change the way that things are done in the financial sector. Through decentralization, a myriad of previously impossible options are now on the table for many who faced exclusion from accessing the global financial infrastructure. It is yet to be seen if these kinds of solutions are met with widespread adoption in developing economies. Only time will tell.
In developed economies, with a highly structured regulatory framework, these options may be better served by much more efficient centralized options with decades of network effect. This is where the importance of hybrid blockchain and traditional finance solutions seems to be emerging strongly. Solutions which meld the versatility of blockchain and established banking infrastructure may be the game-changer necessary to spark mass adoption.
Either way, DeFi offers exciting possibilities, ones that will disrupt a multitude of financial sectors which have remained unchanged for decades. It’s time to make a technological leap forward.