Use Cases in Decentralized Finance
In our last blog post, we introduced the basic concept of Decentralized Finance (DeFi) and its characteristics. Contrary to other use cases of decentralized protocols DeFi has already gained a lot of traction in the last year. It is being used by over 3 million users and there are over USD 55bn locked in the applications. In this post, we will introduce three of the most prominent use cases within DeFi.
Lending & Borrowing with Aave
The most popular use case by total value locked (TVL) in the DeFi space are lending and borrowing protocols such as Aave. These applications allow users to either lend tokens to other users and earn an interest fee on it or borrow tokens against collateral to have more liquidity. Aave was founded in 2017 (previously ETHLend) and has grown to the largest DeFi application by TVL locked of USD 9.73bn. It offers its services for 26 ERC-20 tokens including Ether, USDC, and the Curve DAO Token. Due to automation by smart contracts, Aave can offer higher interest rates compared to traditional players which attracts many users. Aave is currently also building an institutional version in line with regulatory requirements to bridge to the traditional financial space.
Decentralized Exchanges with Uniswap
The second most popular use case area in DeFi are Decentralized Exchanges (DEX). These are crypto exchanges build on a blockchain, predominantly on Ethereum, where users can swap different tokens. There are two main differences when using a DEX compared to a centralized crypto exchange such as Coinbase or Binance: The custody of tokens and trade settlement. At traditional exchanges, a user transfers funds (fiat/crypto) over to the exchange which then holds them on behalf of the user. This bears multiple risks as the exchange can get hacked and the funds would be lost. DEXs are non-custodial, a user connects his wallet with the DEX and swaps the tokens which are then directly deposited in his wallet. At no time, the DEX is holding one’s tokens. Also, DEXs have no order books as traditional exchanges. They use a novel method named Automated Market Making (AMM) by leveraging liquidity pools. The most popular DEX is Uniswap with a TVL of USD 5.35bn which was the first to use AMMs instead of order books. Also, Uniswap was the first DEX to overtake the 24h trading volume of the centralized exchange Coinbase. 
No-Loss Lotteries with PoolTogether
Besides lending & borrowing platforms and decentralized exchanges which also have traditional counterparts, DeFi also offers new types of applications that combine multiple elements such as PoolTogether. PoolTogether is a no-loss lottery and savings account inspired by UK Premium Bonds. In PoolTogether users can deposit coins such as USDC to their account which each coin counts as one lottery ticket. The tickets from all users are deposited on Compound another DeFi lending application and accrue interest. On a weekly basis one user gets randomly selected to win the entire interest accrued by all tickets wich is currently around USD 50.000. If a user does not win, he can always withdraw his funds. This highlights the interoperable element of DeFi we mentioned in the last post as the connecting of different applications created entirely new ones.
While DeFi is still in its infancy it has already gained a lot of traction in the last year with an increasing number of users and up to USD 88.45bn locked-in applications in May. Many of its applications attract users with high interest rates and profit sharing. It can be expected that more and more applications will be built with user-friendly interfaces that will also attract the mass markets and not only tech-savvy crypto investors. The potential of DeFi is enormous and could change finance at its core.
This document was prepared by Sygnum Bank AG. This document may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Bank AG, its affiliates, and partners at the time of writing. The document is for informational purposes only and contains general material. It is for use by the recipient only. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Bank AG to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analyses contained in this document have been compiled from sources believed to be reliable. However, Sygnum Bank AG makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.