An Overview of the DeFi Space
If 2017 was the bubble marking the initial adoption of cryptocurrencies, then 2020 is the solidification of this foundational energy, coinciding with the launch of products and projects that will truly unbank the global population.
We have been observing and analyzing the blockchain space as a whole, particularly focusing on the decentralized finance (DeFi) space, for quite some time. Now, we want to share with our followers a mechanism to understand the space that is redefining finance as we know it.
As such, Our Research Series will highlight the different components of this space, and explore the companies we believe are leading the pack in each component:
The Aave Protocol marks Aave’s shift from a decentralized P2P lending strategy (direct loan relationship between lenders and borrowers) to a pool-based strategy. Lenders provide liquidity by depositing cryptocurrencies in a pool contract. Simultaneously, in the same contract, the pooled funds can be borrowed by depositing a collateral. Loans do not need to be individually matched, and instead rely on the pooled funds, as well as the amounts borrowed and their collateral. This enables instant loans with characteristics based on the state of the pool. There is now approximately 1.510 million USD locked in the Aave Protocol (as of August 27, 2020). This is a market dominance of 20.85% of the total value locked in USD in all decentralized finance applications (DApps).
Akropolis is a financial protocol for the growing billion-dollar informal financial economy. Akropolis found that Kenyan Chamas — saving circles — are the most profitable informal financial organizations. Chamas register 4 billion USD in savings annually, and the overall informal economy contributes more than 47% of Kenya’s GDP. However, due to the nature of their informality, these organizations are oftentimes subject to fraud, fund mismanagement, and corruption. The Akropolis protocol aims to create a new digital financial landscape by providing a unified program interface for the cooperation and exchange of value of digital financial organizations.
Compound is a protocol on the Ethereum blockchain that establishes money markets, which are pools of assets with algorithmically derived interest rates, based on the supply and demand for the asset. Suppliers (and borrowers) of an asset interact directly with the protocol, earning (and paying) a floating interest rate, without having to negotiate terms such as maturity, interest rate, or collateral with a peer or counterparty. Each money market is unique to an Ethereum asset (such as Ether, an ERC-20 stablecoin such as Dai, or an ERC-20 utility token such as Augur), and contains a transparent and publicly-inspectable ledger, with a record of all transactions and historical interest rates. There is about 780 million USD locked in this protocol (as of August 27, 2020).
Kava is the first cross-blockchain Defi platform that enables traders to take on leverage. Users can use any asset supported by Cosmos (which is an ecosystem of blockchains that can scale and interoperate with each other) as collateral in Kava, making it accessible to more assets than any existing DeFi platform. Kava platform users can gain exposure on their crypto assets through margin trading and hedge using the USDX stablecoin as a stable store of value.
The Maker Protocol allows users to generate Dai by leveraging collateral assets approved by “Maker Governance”. Maker Governance is the community-organized and operated process of managing the various aspects of the Maker Protocol. Dai is a decentralized, unbiased, collateral-backed cryptocurrency soft-pegged to the US Dollar. Resistant to hyperinflation due to its low volatility, Dai offers economic freedom and opportunity to anyone, anywhere. Maker is unlocking the power of decentralized finance for everyone by creating an inclusive platform for economic empowerment, enabling everyone to have equal access to the global financial marketplace. There is presently around 1.420 million USD locked in the Maker Protocol (as of August 27, 2020).
The Augur Protocol is the backend for a betting platform. It is also an attempt to try to solve one of the most difficult problems confronting software engineers working to develop practical applications for blockchain technology, particularly smart contracts: the oracle problem. Augur is a trustless, decentralized peer-to-peer oracle employed on a predictive market protocol, powered by Ethereum. The Augur oracle allows information to be migrated from the real world to a blockchain without relying on a trusted intermediary or third party. Augur acts as a Blockchain-based prediction market to give people a financial incentive to seek the truth, and then protects these individuals with the twin shields of pseudonymity and decentralization. Currently, there is about 0.6 million USD locked in the Augur Protocol (as of August 27, 2020).
The Balancer Protocol is a n-dimensional automated market-maker (AMM) built on the Ethereum blockchain. It allows anyone to create or add liquidity to customizable pools and in exchange earn trading fees. Instead of the traditional constant product AMM model, Balancer’s formula is a generalization that allows any number of tokens in any weights or trading fees. Another way to view Balancer is as an inverse exchange-traded fund (ETF): instead of paying fees to portfolio managers to rebalance their portfolio, a user collects fees from traders, who continuously rebalance the user’s portfolio by following arbitrage opportunities. Balancer was launched in March 2020 and has been audited by Trail of Bits. Balancer recently introduced its native governance tokens called BAL, which are distributed to liquidity providers through a process called liquidity mining. At present, there is about 380 million USD locked in the Balancer Protocol (as of August 27, 2020).
The Bancor Protocol enables automatic price determination and an autonomous liquidity mechanism for tokens on smart contract blockchains. These Smart Tokens have one or more connectors to a network that hold balances of other tokens, allowing users to instantly purchase or liquidate a Smart Token for any of its connected tokens directly through the Smart Token’s contract, at a price that is continuously recalculated to balance buy and sell volumes. Currently, there is around 27 million USD locked in the Bancor Protocol (as of August 27, 2020).
Curve is a decentralized exchange liquidity pool on the Ethereum blockchain designed for extremely efficient stablecoin trading. Launched in January 2020, Curve allows users to trade between stablecoins with a low slippage, low fee algorithm designed specifically for stablecoins and earning fees. Behind the scenes, the tokens held by liquidity pools are also supplied to the Compound protocol or iearn.finance, where they generate more income for liquidity providers. Presently, there is around 1.220 million USD locked in the Curve Protocol (as of August 27, 2020).
dYdX is a non-custodial trading platform on the Ethereum blockchain geared toward experienced traders. The dYdX platform lets users lend, borrow, or margin trade any supported asset. These functions will eventually be expanded to derivatives. dYdX is powered by smart contracts, which eliminates the need to trust a central exchange while trading. There is currently around 41 million USD locked in the dydx Protocol (as of August 27, 2020).
The Gnosis Protocol enables ring trades to maximize liquidity. Ring trades are order settlements which share liquidity across all orders, rather than a single token pair, and are uniquely suited for trading prediction market tokens and the long tail of all tokenized assets. The Gnosis Protocol is a trading protocol for ERC-20 tokens, compatible with any ERC-20 token, but only tokens listed on the protocol can be traded. There is now around 6.1 million USD locked in this Protocol (as of August 27, 2020).
RenVM serves as an engine powering decentralized interoperability solutions. RenVM provides one of the only practical interoperability solutions that can scale. It is also the only solution that allows for secret computation over multiple inputs and multiple parties. RenVM is not a product or an application in and of itself, but instead is a network (and an accompanying SDK) that allows developers to bring cross-chain functionality to their DeFi applications.
A Set is a digital asset (ERC-20) that represents a fully collateralized portfolio of other assets including Bitcoin (WBTC), Ethereum (WETH), and fiat-pegged coins (DAI). Sets automatically rebalance according to a strategy coded into a Set’s smart contract, to make executing any portfolio strategy simple by holding a single asset. Using Sets removes the need to manually manage multiple assets and rebalance your portfolio.
Currently, there is about 24.2 million USD locked in the Set Protocol (as of August 27, 2020).
Synthetix is a network for on-chain synthetic assets that track the value of real-world assets. It is a decentralized synthetic asset issuance protocol built on Ethereum. These synthetic assets are collateralized by the Synthetix Network Token (SNX) which, when locked in the contract, enables the issuance of synthetic assets (Synths). This pooled collateral model enables users to perform conversions between Synths directly with the smart contract, avoiding the need for counterparties. There is now around 856 million USD locked in this protocol (as of August 27, 2020).
Uniswap is an automated liquidity protocol powered by a constant product formula and implemented in a system of non-upgradeable smart contracts on the Ethereum blockchain. It obviates the need for trusted intermediaries, instead prioritizing decentralization, censorship resistance, and security. Each Uniswap smart contract, or “pair”, manages a liquidity pool (aka “provision”) made up of reserves of two ERC-20 tokens. Anyone can become a liquidity provider for a pool by depositing an equivalent value of each underlying token in return for pool tokens (LP tokens). These tokens track pro-rata LP shares of the total reserves and can be redeemed for the underlying assets at any time. There is now around 198.4 million USD locked in the Uniswap Protocol (as of August 27, 2020).
The Flex Network Protocol (FNP) is an app and open standard that enables instant cryptocurrency payments in stores and online. FNP is designed to act as an intermediary between merchants and the blockchain, offering inexpensive and fraud-resistant transactions without volatility exposure. FNP will enable consumers to pay with their preferred cryptocurrency while preserving their freedom, security, and data privacy. Furthermore, neither Flexa nor FNP require any debit cards or merchant point-of-sale upgrades. At present, about 135 million USD is locked in this protocol (as of August 27, 2020).
Coinbase is a global digital asset exchange company (GDAX), providing a venue to buy and sell digital currencies, as well as to send information about those transactions out to the blockchain network to verify those transactions. Coinbase also serves as a wallet where the digital currencies can be stored. The application operates exchanges of Bitcoin, Ethereum, Bitcoin Cash, and Litecoin, as well as other digital assets with fiat currencies in 32 countries, as well as Bitcoin transactions in many more countries.
The Eidoo Project is the first open, inclusive, global effort dedicated to the creation of an effective “blockchain-to-human interface”, simplifying the interaction between users and blockchain-based assets without sacrificing the main advantages that this technology can bring. Its output will be a set of products and services providing a new intuitive, easy, consistent, and safe user experience. This experience will be focused around a simple and secure way to store, buy, sell, transfer, and exchange blockchain-based digital assets, including all the major cryptocurrencies and tokens.
The Gnosis Safe Multisig is a smart contract wallet running on Ethereum that requires a minimum number of people to approve a transaction before it can occur (M-of-N). If, for example, you have 3 main stakeholders in your business, you are able to set up the wallet to require approval from all 3 people before the transaction is sent. This assures that no single person could compromise the funds.
The Math Wallet supports more than 48 blockchains. Math also has a DApp Store to make investing in those DApps far simpler. The universe of the Math Wallet supports the development of more DApps, offering the functionality to me more than just a wallet.
dForce strives to build a DeFi full stack including a stablecoin protocol, liquidity protocol, lending protocol, derivative protocol, and more. Interoperability and programmability allow these components to be layered on top of each other like Lego blocks. This unveils more creative value-offerings and creates a positive feedback loop among these protocols, which further fuel its interaction with other permission-less open finance protocols.
Dharma is the world’s first cryptobank. It does everything a normal bank does without being a traditional bank. Using Dharma, you can deposit and withdraw stablecoins, cryptocurrencies pegged to the value of $1 USD, anytime, day or night, and earn interest instantly. From any country, Dharma makes it easy for users to save your money and earn a high rate of return, instantly.
Frontier is a mobile interface integration of all DeFi protocols and wallets, enabling users to track, view, and manage positions in real-time without giving away their private keys. Presently, Frontier is able to support 9 different protocols, including the Maker Protocol and the Kava Protocol.
InstaDApp is a decentralized bank built on top of the MakerDAO protocol in order to simplify banking needs such as taking out loans. InstaDApp provides users and developers with a single point of integration to access all DeFi protocols. The aim of InstaDApp is to make DeFi easier, scalable, and more secure for users, developers, and protocols alike.
The Melon protocol is a blockchain protocol for digital asset management built on the Ethereum blockchain. It enables participants to set up, manage and invest in digital asset management strategies in an open, competitive, and decentralized manner.
AUGMINT is an infrastructure which automatically adjusts the supply in circulation of each of its AUGMINT token in a similar way to fiat money. AUGMINT tokens are only issued when a new, collateral-backed loan is issued. AUGMINT tokens are automatically destroyed (burnt) on loan repayment. In case of loan default, the collateral goes to AUGMINT stability reserves, managed by smart contracts.
The Lightning Network
The Lightning Network is dependent upon the underlying technology of the blockchain. By using real Bitcoin/blockchain transactions and its native smart-contract scripting language, it is possible to create a secure network of participants which are able to transact at high volume and high speed.
Opyn’s Convexity is a generalized options protocol built on the Ethereum blockchain that allows DeFi users to create put and call options. Convexity also provides an easy interface to buy and sell options. Put options work as insurance in traditional finance. A put option gives the buyer the right to sell a set stock at a specified price on or before a set date. This means that no matter how low a stock’s price goes, the investor has the right to sell the stock for the agreed upon price. Convexity uses put options to provide option buyers insurance on their Dai and their assets on Compound (Dai and USDC).
The Reserve Protocol is developing on the Ethereum Network but ultimately expects two-way bridges to enable complete interoperability of the Reserve token across all major smart contract platforms. The initial production version of the Reserve Protocol will be substantially centralized, and over time each protocol component will be migrated on-chain and released from control by the founding team. The Reserve token will initially have a target value of $1 USD but is designed to go off of the peg to the USD in the long term.
Wrapped tokens as a whole are a solution to make assets interchangeable and representable on the Ethereum chain. Some of the key benefits of wrapped tokenization are global liquidity, increased fractional ownership, smart contract programmability and reduction in transaction fees. WBTC is the first of such wrapped tokens, enabling DApps to easily access Bitcoin. All transactions, contracts, and audits will be publicly viewable to maintain transparency and enable trust in the network. The framework also provides a way in which multiple institutions in the cryptocurrency space can perform different roles to get past common issues faced by asset backed tokens.
Every time an exchange of assets occurs through the 0x Protocol, an event is emitted which gets stored on the permanent blockchain ledger. This event contains information about the trade such as which assets were traded, who were the parties involved, what fees were charged, and who/what was responsible for facilitation. 0xTracker has a worker process which continually fetches 0x events from the blockchain.
ETH Gas Station
ETH Gas Station aims to increase the transparency of gas prices, transaction confirmation times, and miner policies on the Ethereum network.