The Decentralized Finance (DeFi) industry has seen rapid growth in the past year. Data compiled by DeFi Pulse shows that the total value locked (TVL) has surged to more than $40 billion from less than $1 billion last year. At the same time, the number of DeFi projects has grown to more than 60, with 11 of them having a TVL of more than $1 billion. In this article, we will look at what DeFi is and the popular examples.
What is DeFi?
The finance industry is currently controlled by certain institutions. For example, in the United States, only the Federal Reserve can set interest rates. Similarly, in banking, the decision on the interest rate they charge is usually determined by the bank itself. As a result, the customer tends to have no meaningful power when key decisions are made.
Similarly, the financial industry has borders. For example, it is almost impossible for a person in the UK to borrow money from a US bank.
The DeFi industry is solving some of these challenges using blockchain technology. For example, there are DeFi projects that enable people from around the world to borrow money. Other projects help people exchange their cryptocurrencies.
Types of DeFi projects
As mentioned above, the lending industry is broken. It is inaccessible to most people and only a few people make decisions.
Lending DeFi projects are solving this problem using the power of blockchain. In fact, lending is the biggest segment with more than $18 billion in TVL. It also has four of the 11 DeFi projects with more than $1 billion in TVL.
Most of the lending DeFi projects work in a relatively simple process. They give people from around the world a platform where they can borrow collateralized loans. The funds offered are provided by people who want their funds to earn interest.
Unlike banks, the lending DeFi ecosystem is not controlled by anyone. Instead, the interest rate of loans offered in the ecosystems is determined by the demand and supply in the market. This supply is known as the liquidity pool.
Some of the best-known lending DeFi projects are Aave, Maker, Compound, and Alpha Homora. With Aave, you can deposit one of the 22 supported Ethereum ERC currencies and borrow. It has a total value locked of more than $5.93 billion. With Alpha Homora, you can deposit a cryptocurrency and earn interest.
Lending DeFi projects TVL
Decentralized exchanges (DEXes)
Trading cryptocurrencies is relatively easy today. Furthermore, there are hundreds of exchanges from around the world. Among the most popular ones are Coinbase, Gemini, and Binance, among others. All these exchanges are centralized, meaning that they are controlled by a certain group of people.
Decentralized Exchanges, popularly known as DEXes, are relatively similar to these centralized exchanges. Furthermore, they help people buy, exchange, and trade cryptocurrencies. The key difference is that these projects are usually decentralized where no one has the final say. Instead, since they are run on blockchain, decisions are made through consensus.
DEXes offer additional perks that centralized exchanges don’t. For example, one can make anonymous transactions using the network since they don’t ask for specific information like your home address and other personal information. DEXes also don’t have control of your funds like other centralized exchanges. Most importantly, they are usually safe because data is not stored in a central location.
Some of the biggest DEXes are Uniswap, SushiSwap, Balancer, and Bancor. All these DEXEs are built on the Ethereum network.
DEXes total value locked
Derivatives are complex financial products that have been around for decades. In the United States, most people heard about derivatives after the Global Financial Crisis (GFC) in 2008/9. In short, a derivative is a financial product that derives its value from another asset. These assets are mostly used to speculate and hedge risks. Among the most popular types of derivatives are swaps, collateralized debt obligations (CDOs), and futures contracts.
The DeFi industry is attempting to disrupt the derivatives industry. The industry has more than $3.43 billion in total value locked (TVL). The most widely used network for DeFi derivatives is Ethereum, which was among the pioneers in the smart contracts industry.
Synthetix Network is the biggest Derivatives platform with more than $2.9 billion in total value locked. The project describes itself as a decentralized synthetic asset issuance platform that is built on Ethereum. Each of these assets is collateralized by the Synthetix Network Token, that is tradable through most exchanges.
Another fast-growing derivative is Nexus Mutual, which is trying to disrupt the vast insurance industry. The project works by pooling resources and offering specific insurance types to individuals. Nexus has a TVL of more than $288 million.
Other derivative projects include DeFi are HEGIC, Futureswap, and Cover Protocol.
The payment industry is the cornerstone of the world today. Fintech products like PayPal and Skrill help to process billions of dollars every year. However, in the past few years, users of these centralized products have had some problems like fee increases. The payments category of DeFi is attempting to solve these problems by using the power of blockchain. In its early days, this industry was focusing on payments in the crypto industry.
Some of the popular DeFi payment platforms Flexa, Matic Network, and Lightning Network. In total, these platforms have about $863 million in total value locked. For example, Lightning Network is enabling safer and faster high-volume micropayments without third parties.
The asset management industry is well-known. In the United States, among the popular asset management companies are hedge funds, mutual funds, and private equity funds. The industry is highly centralized, where only a few people make the decisions.
The assets segment is attempting to decentralize the industry by offering yield-generating services. For example, Yearn.Finance offers solutions that provide aggregation, yield generation, and insurance using the Ethereum network. The project has more than $498 million in TVL. Similarly, RenVM has created a network of virtual computers that enable services like cross-chain lending, exchanges, and collateralization. In total, assets of DeFi projects have more than $4.18 billion in TVL.
In addition to Yearn and RenVM, other popular projects are Badger DAO, Set Protocol, and Index Coop.
Assets DeFi TVL
DeFi is one of the fastest-growing industries in blockchain technology. It is changing all sectors of the financial industry, and analysts believe that it will continue growing. For one, it is an industry that could open the borders that currently exist in centralized finance. In this article, we have looked at some of the popular sub-sectors and examples of the top players.