What is Defi?

The term “DeFi” refers to a p2p electronic cash system, consisting of projects that use cryptocurrency tokens and Blockchain technology. They allow users to issue, transfer, or own financial instruments.  DeFi technology makes use of smart contracts that don’t need an intermediary entity to execute transactions. It is also known as “Lego Money”, as users can stack dApps or decentralized apps together to maximize their potential returns. 

The Defi market has gained tremendously over the past few years, which has in turn has influenced a massive rise in the value of all tradable tokens that are used for DeFi smart contracts. At the time of writing (27/10/2020), the total DeFi market has a market capitalization of $12.64 Billion as per coinmarketcap data. Some examples of DeFi services in the cryptocurrency market include Augur which lets users bet on the outcome of events, Synthetix, which lets users create and exchange derivatives of real-world assets such as currencies, and Aave, which lets users borrow and lend cryptocurrencies to earn interest. 

Why the Craze Behind Defi?

There are several reasons that can be attributed to the craze behind DeFi. These are mentioned in the brief below. 

Regulations

The first reason behind the rise in popularity of DeFi is regulations. In traditional unsecured lending, for example, there is a legal requirement which states that the lenders and borrowers must know each other’s identity so that the lender can assess the borrower’s ability to repay the debt. In DeFi however, there is no such requirement as it is solely based on mutual trust and preserving privacy. 

Yielding Assets

Almost 80% of S&P 500 companies and 100% of FTSE 100 companies pay a dividend to their investors which is a stark contrast to digital assets where there was no yield or dividend. This means that investors only gained when the digital asset’s underlying price went up. With DeFi, it transforms this model by allowing crypto-investors to earn yield through staking the cryptocurrency they hold. This can add up to as much as 8.6% a year. Even in the case of low-risk, USD pegged digital assets such as USDT and USDC, the annual yield can reach over 15% on some established cryptocurrency platforms. 

Mainstream Involvement

The second reason for the growth of this technology is the involvement of mainstream players. High street financial institutions have started recognizing the potential behind DeFi, seeking different ways to participate. For instance, a project spearheaded by JP Morgan, Royal Bank of Canada, and ANZ, along with 75 other big banks, focuses on using Blockchain technology to speed up payments as part of the Interbank Information Network. There are several major asset management funds taking DeFi seriously as well, such as Grayscale. 

No Middleman

In the existing system of granting loans in fiat currency, it requires an intermediary entity like a bank or credit union to take on the risk of default of the counter party. This process can be slow and time consuming. Digital assets using DeFi can quickly and easily make this happen using p2p technology. 

Top 5 DeFi Coins

The following is a list of the top DeFi coins by volume according to data from coinmarket cap. 

ChainLink(LINK)

ChainLink(LINK)
  • Developed by Sergey Nazarov and Steve Ellis, Value as of 28/10/2020: $11.69
  • Market cap as of 28/10/2020: $4,554,971,748
  • ICO: September 2017
  • Trading Exchanges: Binance, Huobi Global, CoinDCX

ChainLink is a decentralized oracle network. The main aim of the platform is to bridge the gap between Blockchain technology-based smart contracts and most real-world use cases. 

Wrapped Bitcoin (WBTC)

Wrapped Bitcoin (WBTC)
  • Value as of 28/10/2020: $13,052.62
  • Market cap as of 28/10/2020: $1,490,917,126
  • Launched: January 2019
  • Trading Exchanges: Uniswap, Binance, Coinbase Pro, OkEx

Wrapped Bitcoin can be best described as the tokenized version of the normal Bitcoin, running on the Ethereum Blockchain.  It is an ERC-50 compliant token that can be fully integrated into the Ethereum Blockchain’s ecosystem of DEXes, prediction markets, cryptocurrency lending services, and other DeFi applications. It’s token, the WBTC is backed by Bitcoin at a ratio of 1:1, which is monitored by custodians and merchants who ensure that the price remains pegged to Bitcoin at all times. 

Dai (DAI)

Dai (DAI)
  • Value as of 28/10/2020: $1.01
  • Market cap as of 28/10/2020: $ 940,078,325
  • Launched: November 2019
  • Trading Exchanges: Binance, Bilaxy, OkEx, Coinbase Pro

The DAI Stable coin is a cryptocurrency that is backed by collateral and whose value is stable relative to the US dollar. It can be generated on the Maker platform by anyone who wishes to leverage their Ethereum assets. Once generated, they can be used in the same manner as any other normal cryptocurrency. Additionally, DAI also provides the components needed for a more robust decentralized margin trading platform. 

Uniswap(UNI)

Uniswap(UNI)
  • Value as of 28/10/2020: $2.81
  • Market cap as of 28/10/2020: $589,812,775
  • Launched: November 2018
  • Trading Exchanges: Binance, Huobi Global, OkEx, MXC.com 

The Uniswap project comes in two variations, Version 1 and 2. Uniswap Version 1 is an on-chain smart contracts system on the Ethereum Blockchain. It implements an automated liquidity protocol which is based on a constant product formula. Uniswap version 2 is a newer implementation based on the same formula, with the addition of some highly desirable features. Among these features is allowing the ability to create arbitrary pairs of ERC20. 

Maker(MKR)

Maker(MKR)
  • Value as of 28/10/2020: $104.00
  • Market cap as of 28/10/2020: $420,706,443
  • Launched: December 2017
  • Trading Exchanges: Bilaxy, Binance, LAToken, WhiteBIT, OKEx

Maker is MakerDAO’s governance token which was fully launched in December 2017. Its main task is to operate DAI, which is a community managed decentralized cryptocurrency, with a value pegged to the US Dollar. 

Final Thoughts

Decentralized finance applications are a censorship-resistant, transparent tool that enables the transfer, custody, and exchange of assets. Since it caters to a global market, it runs on permissionless public Blockchain networks and is thus more transparent.  It allows anyone to create applications without the need of them being approved by large, central authorities such as banks or government institutions.