What is DeFi?
Key components of DeFi ecosystem and major DeFi projects
This article is originally appeared on https://luniverse.io/analyzing-the-defi-ecosystem/
Introduction
The amount of staking assets (TVL, Total Value Locked) in DeFi has increased more than 40 times, from $1 billion to $41 billion now (Feb. 21’).
DeFi presents a new alternative to existing financial systems (CeFi, centralized financial). What happened to GameStop and Robinhood recently has shown a decline in reliability of and the possibility of development of the DeFi which ensures both transparency and fairness.
In this article, we will take a look at key components of DeFi ecosystem and major DeFi projects.
Lending
As you can see from the fact that all three top projects with the largest TVL in DeFi are lending platforms, the lending service is currently the most active service in the DeFi market. DeFi lending platforms offer loans without intermediaries and allow users to enlist their crypto coins on the platform for lending purposes. Besides, DeFi lending protocol enable lender to earn interest on supplied stablecoins (e.g. DAI, USDT) and cryptocurrencies (e.g. BTC, ETH). Defi lending is the most prevalent contributor for locking cryptocurrencies.
The Maker Protocol, one of the largest decentralized applications (DApps), was the first DeFi application to earn significant adoption. Maker allows users to borrow against a variety of supported crypto assets as collateral that they deposit into smart contracts. When users seek to borrow through the MakerDAO platform, they deposit supported cryptocurrencies as collateral and receive their loans in DAI. When a user wants to borrow DAI, they deposit ETH or other collateral asset into the Maker Protocol and receive a loan relative to their collateral. The loaned DAI can be paid back at any time in return for the collateral or alternatively, if the value of ETH drops, the liquidation process will be carried out. However, when they are paid back, DAI tokens are automatically destroyed. The entire process of taking out a loan, paying off, and liquidating is programmed.
Decentralized Exchange (DEX)
DEX(Decentralized Exchange) is a DeFi service following lending services. DEX is a peer-to-peer (P2P) marketplace that enables the trading of tokens through automated processes. The centralized exchanges are not truly anonymous since they store personal data of individual investors on exchanges as well as private keys in hot wallets. However, DEX only mediates transactions between users, so that users can be assured from the low risk of hacking. It is also possible to make transactions such as virtual asset tradings or loans between individuals which cannot be done on the centralized exchange. Therefore, the demand for DEX is gradually increasing, since it can solve security, transparency, and efficiency problems of centralized system.
Uniswap, which once occupies more than 63% of the DEX market share, introduced an automated model based on AMM (Automated Market Maker), and the price of tokens is determined by the quantity of Ethereum and tokens in the liquidity pool. The difference from the previous exchanges is that there is no order-book system. If a user “swap”s, the buying/selling is made immediately. In other words, there is no process of finding buyer/seller to do transaction with, and the transaction is made immediately regardless of whether the transaction volume is low. As Uniswap has succeeded with this innovative operating system, a number of Uniswap models are emerging.
As the DeFi market grows, it is expected that the decentralized exchange will continue to grow. The Financial Action Task Force (FATF) announced a “Travel Rule” in its recommendations that requires Virtual Asset Service Providers (VASPs) to transmit transactions and customer details to the next institution for certain transmittals of funds. If only the platform for P2P transactions is provided, such as DEX which only provides the trading platform, it is not considered as a VASP. However, due to the nature of the decentralized exchange, that transactions can be made without any identification, future FATF sanctions may be a risk factor.
– “VerifyVASP”, A Decentralized Protocol for Secure and Immediate Data Sharing Among VASPs
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