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KONOMI Network

DeFi Related Projects and Models Analysis

Introduction

DeFi is an abbreviation for Decentralized Finance. In the world of Blockchain/Cryptocurrency, it is an umbrella term which encompasses a number of financial applications that is centrally directed towards disrupting financial intermediaries.

The term refers to smart financial contracts, DApps (Decentralized Applications), protocols, and digital assets that have been built on Ethereum. We can also refer to it as a chained mechanism that is built on blockchain which can be attached or detached from the central chain on the whim. As like in Blockchain, where the history of a transaction can be stored in several sources with no single entity having control over all the transactions; DeFi expands the use of Blockchain towards more sophisticated financial applications.

Legacy digital payment methods that are run by traditional organizations have them sit in the middle as an intermediary. So even if you are paying for your groceries with a credit card, the control over the transaction still lies in the hands of a financial institution (the middlemen). Among the primary advantages of DeFi is that it cuts out such middlemen from the big picture.

Emerging as one of the most active sectors in the world of Blockchain, the DeFi ecosystem has been progressing as an expansive network of digital financial instruments and integrated protocols, having over 7 billion worth of value locked in the form of Ethereum Smart Contracts. These Smart Contracts give birth to decentralized exchanges such as Automated Market Makers.

Automated Market Makers

AMM (Automated Market Makers) is on its way to replace the limit order books and traditional exchange-listing process with an algorithm-based permissionless liquidity pool which utilizes mathematical formulas for deciding on the price of a token.

The trade occurs for various digital currency pairs without any buy/sell orders with no need for the sellers to find a buyer. The reserves are replaced with Smart Contract-based liquidity pools. The theoretical price for each token in a pool is determined by the relative percentage of each token within the pool. A variety of AMM exist today, but the most popular ones among them include:

· Balancer.

· Uniswap.

· Curve.

· Kyber.

Smart Contract Blockchains (such as Ethereum) have some performance restrictions but AMMs can work around them by eliminating any need for the classical order book mechanism, which was not only highly time-consuming for market makers as it required a lot of adjustments to be made to the buy/sell orders. But the liquidity provided by AMM made the entire process not only cheaper but also simpler with an automated one-time process. As pitching in on traditional exchanges required highly advanced and technical knowledge, the liquidity pool made it easier even for average users.

Overall Landscape

The overall landscape of DiFi is, even at this point, too vast to comprehend entirely and deliver in such a small piece. However, the landscape has some key players (as mentioned above) that are playing their part in shaping the overall landscape of the DiFi ecosystem.

Source: https://www.theblockcrypto.com/2019/03/14/mapping-out-ethereums-defi/

As a number of projects are surfacing in DeFi space on a frequent basis, the picture above provides an overview of the current DeFi landscape. The most trending protocol categories include:

· Derivatives.

· Exchanges and liquidity.

· Stablecoins.

· Credit and lending categories.

· Predication makers.

A considerable amount of ETH is sent for the collateralization purposes to these applications with over 2 million ETH being locked up in DeFi platforms. Some of the most noteworthy protocols deployed over the DeFi landscape include:

DAI

It is the collateral backed cryptocurrency independent of any mediator for its stability and peg while solely existing on the blockchain. The backing collateral is locked in publically available and audited smart contracts.

To back the value of DAI through a system of CSPs (Collateralized Debt Positions), trusted third parties, and a feedback mechanism; the makers utilize a sequence of smart contracts deployed on the main-net. This can be leveraged by any ETH holder to generate DAI stablecoin.

Compound

Another protocol that utilizes algorithms for determining the interest rates for the money markets or the pools of tokens which is based on the supply and demand for each token. For every ERC 20, the money markets are unique and the transactions are recorded transparently with historic rates of interest.

Uniswap

A protocol for automating the exchange of the tokens on Ethereum which is a set of smart contracts deployed over the main-net. Among the top 5 DeFi platforms, it has no token, no amount of fee goes to the platform or the creators (it instead goes to the liquidity providers; users), and no centralized order book. In terms of the value locked, it is the third-largest DeFi platform.

Users in DeFi — How to Incentivize Early Users and Deliver Value

One of the most highlighted advantages of DeFi is that everyone can become a part of it. It has no borders and users can leverage the benefit of the pool system and AMM. Though the majority of it still remains to be filled, which brings up the question of, can early users be incentivized anyway?

With correlation to the liquidity mining, around 5 Billion USD was observed to be flooded into DeFi. The user-base was observed to have grown over 200K just in August among the top 14 protocols. The collaboration of DAO and DeFi made it possible to empower the community and incentivize them to be able to participate proactively in decision-making.

Among the most popular ways for building crypto applications and community, one is to leverage by distributing tokens and incentivizing the users for community participation. For relatively young protocols and developing communities, tokenizing their project and letting the users own the project is one of the best ways to observe rapid development and empowerment.

If a project is unable to offer high APY to incentivize their early users, it can opt for the new DAO VC type of funding. This can greatly help in community building and initial validation.

Conclusion

DeFi is a prominent and perhaps the most potent aspect of the blockchain (Ethereum) to enable the decentralized financial transaction. It is seen not only as of the need of the time but holds the prospect to be established as the future medium for pool-based non-governed financial transactions.

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Konomi is a decentralised liquidity and money market protocol for cross-chain crypto assets. Using Substrate as the development framework, the network aims to provide money markets for assets in the Polkadot ecosystem.

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KONOMI

KONOMI

decentralised money market on Polkadot

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