Bitcoin promised to free us from banks, but Ethereum might be the technology that ends up really doing it, through DeFi.
Decentralized Finance, or DeFi for short, is a movement in the crypto community to create financial products which are decentralized and uncensorable. There’s no gatekeepers here. All you need is your Metamask wallet and some crypto
While Bitcoin gave us decentralized money, DeFi apps on Ethereum are giving us new, better ways to save, lend, and borrow money. These decentralized applications replace many of the functions banks give us today, but unlike banks, they don’t ask us to give up sensitive private information, charge us excess fees, or even ask us to trust them with our funds.
While it’s still in early stages, DeFi Apps already hold significant value. According to DeFiPulse, the top 17 DeFi apps nearly $500M USD worth of value.
Let’s look at the Top Dapps, what they do and how they work.
The most successful DeFi app by far is MakerDAO, a crypto-collateralized stablecoin. Using Eth as collateral, users can generate DAI, a USD-pegged stablecoin.
Unlike traditional loans, users don’t need a credit history, or even a bank account. Anyone with a compatible wallet and Ether can generate DAI using ETH as collateral. That DAI can be used for leveraged trading, paying for expenses for a business, or anything else a traditional loan is used for.
Unlike other stablecoins such as Tether, USDC, GUSD, TUSD, MakerDAO’s DAI is decentralized and all transactions can be tracked on the blockchain. This avoids many of the issues plaguing the stablecoin industry such as trouble getting bank accounts and non-transparency.
While no one besides Bitfinex themselves knows what’s in their bank accounts, anyone using MakerDAO can examine the blockchain to see the ETH being locked up is enough to collateralize the DAI in circulation.
Everything about MakerDAO, in fact, is quite transparent. Users of DAI can check the current price and interest rates, governance decisions, and if they buy some MKR tokens, can even participate in governance themselves.
2. Compound Finance
Decentralized Money Markets
The second most-used DeFi app today is Compound Finance, a crypto lending marketplace. Unlike previous lending markets on exchanges such as Bitfinex or OKEx, Compound Finance does not hold funds custodially. Instead, the cryptocurrency on the platform is held by smart contracts — software on the blockchain.
Every asset on Compound has a smart-contract-based money market. Loans by users are pooled into these markets. This pooled liquidity approach allows Compound to provide good liquidity on each coin it supports.
Whereas a P2P lending marketplace would require users to negotiate terms and periods(as anyone who uses Bitfinex lending well knows) for each loan, the crypto in the Compound money markets is completely fungible. Users can easily loan any amount eaisly, without worrying about details of the loan. In addition, users can withdraw their funds at any time.
Compared to a traditional savings account which may pay up to 2.3% interest(as of 2019), Compound currently offers much higher interest rates(currently 11% on DAI and 7% on USDC). Unlike traditional money market accounts, there are no restrictions on withdrawals. Simply put, Compound is a better way to save in almost every way than a traditional money market account.
Synthetic assets exchange
Synthetix uses synthetic assets to allows users to use cryptocurrency to speculate on assets outside of the cryptocurrency ecosystem. Whereas before you could only buy or sell cryptocurrencies, now you can trade gold, silver, or even equities, without leaving the cryptocurrency ecosystem.
Currently the tradeable assets on Synthetix include common cryptocurrencies such as BTC and ETH, as well as gold and silver, but other assets such as equities or bonds could foreseeably also be created and traded on the exchange.
Synthetix mint these synthetic assets in a process similar to MakerDAO CDPs, by staking Synthetix’s native SNX tokens. This collateral is used to provide a fungible liquidity pool. All synthetic assets on the exchange trade against the SNX pool. In return, SNX stakers are rewarded trading fees.
More than a Dashboard for DeFi
InstaDapp is a one-stop dashboard for the best DeFi Dapps — MakerDAO, Compound, and UniSwap. Besides providing easy access to the top DeFi Dapps, it also includes cross-Dapp integrations that make using DeFi easier and better than using those Dapps individually.
InstaDapp currently integrates Compound, Maker, and Uniswap. Instead of visiting several websites and logging in multiple times, users can simply visit InstaDapp to access everything at once.
Besides easy access to the Dapps, cross-Dapp integrations make everything nicer. For MakerDAO, InstaDapp allows easy creation and repayment of CDPs. It facilitates ETH to MKR swaps, simplifying the payment of stability fees.
Since borrowing DAI is sometimes cheaper on MakerDAO and sometimes cheaper through Compound InstaDapp has a “protocol bridge” feature whereby users can swap their ETH/DAI positions from MakerDAO to Compound or vice-versa to take advantage of cheaper rates.
dydx takes crypto lending platforms to their natural conclusion, which is to integrate lending with a DEX to create a decentralized exchange with leverage. While Compound lets you earn interest on your crypto and dexes like forkdelta let you trade crypto trustlessly, dydx does all of it.
The result is something even better than the sum of its parts. dydx provides a slick interface worthy of a centralized exchange. Users can easily deposit funds, which automatically start earning interest, and then use those funds to trade, with or without margin. Order books, charts, and order interfaces are as nice as any exchange you’ve ever used.
Dydx isn’t just a decentralized exchange. It’s trust minimized margin trading, with interest-earning balances. It’s a lending platform in disguise as well, and rates are competitive with Compound(DAI currently earns 12% interest on dydx vs. ~10% on Compound Finance). It isn’t just a decentralized, crappier version of a centralized exchange, it’s better in many ways than what we’ve had before.
Old-timers in the cryptocurrency world all know of ShapeShift — a website where you could easily exchange one cryptocurrency for another. If you’ve paying attention to the news you may have also heard of the numerous issues ShapeShift has faced, such as hacks, or closing off access to New York residents
Uniswap is a better Shapeshift. A decentralized exchange focused on a simple user experience. Instead of a centralized company, it’s a decentralized application. Users log onto the website and trade directly through their metamask or compatible cryptocurrency wallet.
The best part of Uniswap, besides the decentralized nature of it, is its simple and clean user interface. Simply go to uniswap.exchange, connect your MetaMask wallet and make your trade. Unlike traditional DEXes, the user experience is extremely simple — you don’t have to fumble with typing or looking up esotoric token contract addresses.
With better UX, good exchange rates, no withdrawal fees(besides gas fees), no registration needed, It’s simply better in every way than a centralized exchange.
DeFi = Better Finance.
The key aspect of the top DeFi applications isn’t just that they’re decentralized, but that they’re better than existing solutions.
MakerDAO provides a fully transparent, crypto-native stablecoin, and allows users to hold onto their ETH while still freeing up capital for other uses. No credit check required.
Compound’s interest rates are several times better than money market accounts, with an amazingly easy to use interface, and the ability to withdraw at any time.
Synthetix allows users who may have difficulty getting a forex trading account or may not have access to certain equities markets to speculate on prices easily.
dydx provides a slick margin-trading interface with integrated lending. Interest earning balances make this exchange more profitable to use than many existing exchanges.
Uniswap lets you quickly and easily switch between any tokens in the Ethereum ecosystem without having to register, logon, and wait for withdrawal on a centralized exchange.
This isn’t just decentralized finance, this is categorically better than what’s out there today — DeFi is the future of finance.