As already presented in other series, the universe of decentralized finance (DeFi) is quite wide. With this, the investor can have access to a wide range of financial services and products and even investments in works of art, such as NFT. However, what are the most secure and reliable DeFi protocols on this market? Many DeFi protocols have come under attack throughout 2021. This type of failure often causes both direct token theft and massive price devaluation. In either case, the investor can suffer huge losses if he invests in an unknown or poorly secure protocol.
Therefore, this text will present the main networks and protocols that exist in the DeFi market. Through them, it will be possible to start your research and investments with more security and practicality. In this text, we are going to know and understand more about these protocols, the most known of which are the following:
- AAVE ;
- Maker ;
- Compound ;
- Curve Finance;
- Synthetix ;
- Chainlink ;
- Uniswap .
Main DeFi Networks and Protocol Types Currently, most DeFi protocols basically work on two networks: Ethereum and BINANCE Smart Chain (BSC). Other networks, such as Chainlink (LINK) and Cardano (ADA) are taking their first steps, but they still do not have large shares of this market. Generally speaking, DeFi protocols can be divided into the following categories:
- loan protocols;
- Yield Farming Protocols;
- Decentralized Exchanges (DEX);
- Asset tokenization;
- Arts and NFTs negotiation;
- Derivatives.
As presented in the first text in this series, one way to see which DeFi projects are safer is through the Total Allocated Value (TLV). The projects with the most money allocated from this list are also often the most used and safest. Therefore, they are the ones we will see later in this text.
In addition, it is important to assess which platforms are most sought after by investors. The aforementioned DeFi Pulse website, for example, brings the projects in order of TLV and also by categories. It is possible to deduce from the table below that, among other things, the most sought after modality by investors in DeFi is loans. After all, five of the ten protocols with the highest TLV are focused on this modality.
After loans, decentralized exchanges (DEX) appear with three projects among the largest. That is, 80% of the largest DeFi protocols are exchanges or borrowing platforms. Therefore, the great demand of investors is for 1) platforms that make it possible to receive returns on capital, and; 2) places to trade DeFi tokens.
Most of these projects run on Ethereum, the network that pioneered the popularization of DeFi and smart contracts. However, other networks have shown growth and, as a result, have stolen market shares. The main one, let's get to know the best known and most valuable projects within the development of Ethereum network.
AAVE
AAVE is a liquidity protocol that allows investors to earn interest by borrowing their cryptoactives . This protocol is non-custodial, that is, the borrowed crypto actives are under the custody of their owner and not of AAVE. In addition, the platform is decentralized and open source.
The protocol supports borrowing with various tokens, including stablecoins and other DeFi tokens. In this sense, AAVE brings a new investment option, especially for long-term holders. With the protocol, these investors can place their tokens to earn interest, thus generating passive income.
In this process, the entire operation is done through the connection of the wallets with the AAVE protocol. Thus, there is no need to transfer ownership of the tokens to a platform or place them in the custody of third parties. As there are no deposits, the protocol has no funds that can be stolen by hackers, for example
In other words, the AAVE is a safe way to create savings or passive income with cryptocurrencies. Interest rates are usually attractive, in many cases exceeding the double digits per year, and mostly compound interest. This is currently the largest DeFi protocol in terms of allocated value, with over $19 billion.
Maker (MKR)
The MKR is the token that feeds the Maker, also known as the MakerDAO. As the name implies, MakerDAO functions as an Autonomous Decentralized Organization (DAO). In turn, this network is responsible for managing and issuing one of the best known stablecoins on the market: DAI.
DAI, in turn, is a stablecoin native to the DeFi market. Like the protocol, DAI is decentralized and, unlike centralized stablecoins like USDT and USDC, does not have a central company or issuer. Therefore, network tokens cannot be confiscated or blocked.
Within the DeFi ecosystem, DAI serves as a way for investors to obtain a stable currency without having to sell their cryptocurrencies. For example, imagine an investor who has Ether ( ETH ), needs to borrow money, but doesn't want to get rid of his cryptocurrencies. He can borrow dollars via DAI, using his ETH tokens as collateral.
With this, the investor can use his position in ETH to obtain dollars via DAI. Such an operation has two clear advantages. The first is that there is no need to sell ETH. The second is a consequence of the first, since, by not selling the tokens, the investor will not have to pay capital gain taxes and other fees that could be charged in the transaction.
In addition, the MKR and DAI can be borrowed on multiple platforms, earning interest to their holders. The protocol was conceived in 2015 and launched in 2017. Since then, both the network and stablecoin have grown exponentially in value, reaching, at the time of writing this text, US$ 7.35 billion in allocated value.
Compound (COMP)
Compound is another protocol that operates in the loans and interest segment. You can borrow or borrow up to 14 tokens, including stablecoins and DeFi tokens. The platform was also launched in 2018 and, since then, it has grown significantly both in use and in allocated value.
There are a number of liquidity pools in Compound and you can invest in one or more of them. When making this loan, the platform gives in exchange cTokens, which represent the amount invested. If you want to redeem your capital, the investor sells these tokens and redeems the invested capital.
Each token has its cToken version. Thus, whoever applies ETH in the protocol receives cETH, USDT applications yield cUSDT, and so on. Over time, the exchange rate of these cTokens against the underlying crypto-asset increases, and the investor can redeem them for more than the amount initially invested. This is how the protocol distributes your interest, whose fees can be seen on the website itself.
Uniswap (UNI)
Uniswap decentralized exchange (DEX) is a protocol used to exchange tokens created in the Ethereum blockchain. These exchanges are carried out in an automated way through smart contracts. Created in 2020, Uniswap saw its popularity explode along with DeFi and the launch of the UNI token in 2020.
As a DEX, Uniswap does not hold custody of any token traded on the platform. For trades to take place, the platform has people who use their tokens to provide liquidity to each traded pair. They are known as liquidity providers.
In exchange for providing liquidity, providers are rewarded with part of the fees charged by Uniswap. In this sense, DEX pays only transaction fees charged by the platform. In other words, trading through Uniswap provides lower costs and, with automation, more agility in operations.
Yearn.finance (YFI)
The yearn.finance protocol was one of the first to take advantage of the rise of DeFi. It acts as an investment aggregator that enables investors to seek the best yields on the market. The protocol uses automation to always find the highest rates, boosting profitability for liquidity providers.
The project was launched in February 2020 and was an almost immediate success. In just three months, the YFI token came to cost US$ 82,745, a historic high reached in May. By way of comparison, the BTC cost $8,804 at the same time. In other words, YFI was worth almost ten times more than the main cryptocurrency on the market.
Even today, yearn.finance is one of the best known DeFi income projects. Although it lost space, the protocol made history by calling attention to the advantages of the DeFi market. Besides, of course, it was one of the few tokens in history that managed to surpass the unit value of BTC.
Synthetix (SNX)
The name Synthetix comes from the English word Synthetic, which means synthetic. The word itself was a great inspiration for what the platform does: creating synthetic assets. In other words, Synthetix creates tokens that represent real assets such as stocks, derivatives, or even cryptocurrencies.
The network was launched in 2017 through Ethereum, but gained prominence from 2020. The protocol works through synths, synthetic assets that can replicate almost anything, from the price of oil and cryptocurrencies to the highest stock indexes in the world .
Synths track and provide returns based on the underlying asset without requiring the investor to directly hold the asset. In this way, Synthetix provides access to traditional market investments through tokenization. The protocol has advantages such as security, 24-hour operation and fast liquidity.
Other DeFi Networks So far, the protocols seen in this text have been built on Ethereum, which is, in fact, the main core network for DeFi. However, Ethereum also has its limitations, especially in the high price of fees, which brought difficulties for small investors. In this sense, other DeFi networks started to gain space in the market.
Networks like Polygon – formerly Matic – seek to increase the scalability of Ethereum and have grown in value. Others, such as Binance Smart Chain (BSC), have lower rates as one of their differentials. As a result, projects with less capital can run their operations without having to worry that network congestion will increase transaction prices.
Recently, BSC broke its daily transaction record by reaching more than 12 million transactions on July 29, 2021. The amount was almost ten times greater than transactions handled by Ethereum on the same day, as shown in the chart below. This achievement demonstrates not only the growth of the network, but the demand that still exists in the DeFi market.
Finally, the development of the DeFi ecosystem is quite broad, which means that new projects are always popping up. At the same time, protocols that seemed promising disappear or lose relevance. Keeping up to date and paying attention to which networks are more or less secure is essential for investors to be able to keep their capital protected and, at the same time, not be left out of this great revolution.
