DeFi applications on Algorand: The road ahead
With the Decentralized finance (DeFi) markets moving at light speed in the recent months, I felt it would be a good time to delve in to this topic and share how Algorand is striving to be the ideal platform for DeFi use cases while not compromising with speed, scalability, security or transaction costs.
Why is DeFi sought after and what applications can it be used for?
DeFi refers to the economic migration from centralized towards decentralized technologies such as blockchain. With the seeds of doubt being sowed in the heads of the users about the credibility of financial and banking institutions since the market failure exhibited in 2008 which led to a depression, there has been a constant effort to move away from centralized systems and now blockchain is at the forefront for movement towards decentralized systems not only in terms of technologies but also responsibility. From simple peer-to-peer and cross border payments to automated loans, DeFi has emerged as one of the most happening sectors in the blockchain space, with a range of use cases being explored by enterprises, institutions, individuals,etc
The DeFi vision is to create a trustless financial system governed by smart contracts that’s open to everyone without relying on central authorities. The underlying smart contracts are transparent, reusable and open to audit for verification and functionality checks.
Platforms providing lending and borrowing services have caught the most attention in the DeFi space. These platforms act as pseudo banks whereby giving the users options to either borrow money with underlying crypto collateral or lend money to earn interest in addition to the platform tokens. Some of the examples of such platforms are Compound, Kava, Sushi, Curve, etc. The enforceable terms and conditions governed by smart contracts which do not require any other mediating party separates it from traditional banking services. By cutting out the middleman, lenders can earn higher returns and clearly understand the risks thanks to the transparency blockchain provides. Reducing administrative, transaction costs in any sphere could be a potential use case for DeFi. Stablecoins are also important to the DeFi ecosystem.
Algorand Protocol: The DeFi drive
Algorand is an open source, secure, scalable, transparent, permissionless, blockchain platform. With features such as Atomic Transfers, Standard asset tokenization and Layer-1 (on-chain) and Layer-2 (off-chain) smart contract options, Algorand provides a great platform to design DeFi solutions. With the addition of new features of Stateful smart contract, rekeying and fast checkup of nodes (check out my article on the same here) — Algorand has upped its game even further to accommodate the requirements to handle faster the DeFi application development and propagate the transaction traffic at comparatively minimal costs with no compromises in execution time.
The recently launched application AlgoSigner, which uses the new features of Algorand, is an Algorand wallet extension that allows users to approve and sign transactions that are generated by Algorand applications. The idea behind integrating AlgoSigner into a decentralized application is that with this one can request to connect to a visitor’s wallet, send transactions for their signature, and transmit signed transactions to the Algorand blockchain without needing to handle keys or secrets thereby making it easy to integrate ALGOs into DeFi applications for payment, investing, or swapping assets.
A few terms that we will hear with DeFi are yield farming and liquidity mining. To simply put, putting your crypto assets to work to generate the higher returns is Yield farming whereas when a yield farmer gets a new token as well as the usual return in exchange for the liquidity it is known as liquidity mining.
Personal Insights: What lies ahead?
On the economics front, DeFi is simply not for all to put their investments and user discretion is highly recommended. For example, someone with a good grasp of the concept and the project can earn $50k in a day whereas someone can find their entire investments liquidated. At the same time, it cannot be said that the work on different use cases in the DeFi ecosystem is not credible. The DeFi ecosystem has already grown beyond 9 billion USD with more players, both developers and investors, entering the ecosystem in huge numbers. There are limitations to the technology and it is a given that most projects will fail.
On the development front, applications revolving around lending, borrowing, staking, swapping will be abundant in the next year or so and will require faster settlements, easier development and lower transaction costs — a few areas being covered by the Algorand platform for all developers building DeFi applications on the Algorand Blockchain. For development support and documentation details, check out the Development Portal.
That being said, one thing is clear: DeFi is here to stay and Algorand with its new set of features is well placed to support multiple DeFi applications.
