DeFi is an acronym for Decentralized Finance (aka Open Finance).
According to Coin98, DeFi can be defined as follows:
An ecosystem of financial products and services built on a decentralized network (Blockchain).
To be in the DeFi category, such financial products and services must have the following attributes:
- Censorship Resistance: No third party may suspend or reverse a transaction.
- Programmable Assets: Assets used in products or services must have all the properties of a token on a decentralized network.
- Pseudonymity: Users will not need KYC identities or AML.
- Transparent and trustless: Transparency is demonstrated by anyone verifying transactions via Blockchain. Trustlessness is reflected in the need for users not to trust the reputation of a third party to ensure that transactions are valid.
- Permissionless: Anyone anywhere, anytime can access and use DeFi products and services without being decentralized, or restricted by anyone.
Some common components in DeFi at the moment:
- Lending & Borrowing (Loans and loans): MakerDAO, Compound, Dharma….
- DEXs & Protocols (decentralized exchanges and protocols): Kyber Network, 0x, Uniswap …
- Derivatives, Margin Trading & Prediction Markets: bZx, dY / dX, Set Protocol, Synthetix, Augur….
- Wallets / Aggregators: Metamask, Argent, Zerion, Instadapp, DefiZap …
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Lending & Borrowing
Borrowing and lending are one of the most common use cases in Ethereum's DeFi ecosystem at the moment.
Lending / Borrowing in DeFi is a new, completely automated way to borrow and lend, without the need for a third party, or a written contract.
For that to happen, platforms / protocols about DeFi Lending will use smart contracts to set up rules about:
What is the maximum loan rate based on collateral?
- What is the interest rate when borrowing / lending?
- What is the minimum loan period?
- Which property is accepted for mortgage?
- When will liquidate collateral?
DeFi Lending platforms / protocols will benefit:
- Borrowers (borrowers): The ability to short-sell assets or simply borrow money.
- Lenders: Optimizing profitability from holding assets (cryptoassets).
- Both: Opportunities to profit from interest rate differences between platforms.
Collateral Ratio (Mortgage Ratio)
At the present time, most DeFi Lending platforms / protocols will conduct lending based on overcollateralization. That is, you can only borrow less than the assets you mortgage.
And, the Collateral Ratio of lending platforms / protocols is quite high, on average ~ 325%. That is, you mortgage $ 1,000, you can only borrow up to about $ 308.
Here are the mortgage rates for the 3 most popular lending platforms / protocols:
Interest Lending / Borrowing Rate
The loan / loan interest rate will depend on the platform / protocol and different types of assets will have different interest rates.
To track and compare interest rates between lending platforms / protocols, you can use the tool LoanScan.io
DeFi Lending Growth
DeFi Lending has a strong growth from 2018 to mid 2019 with the growth of total locked assets (TVL) reaching + 30,002.5% (more than 300 times).
Currently, with total locked assets (TVL) of $ 443 million, DeFi Lending is accounting for more than 66.7% of the value of the DeFi ecosystem on Ethereum.
Although, DeFi Lending is still accounting for a high proportion in the whole ecosystem. But, the proportion of Lending is on a downward trend (~ 35%) from the beginning of 2019 until now.
That is shown in the chart below:
This implies that DeFi is moving into areas other than Lending.
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DEXs & Protocols
DEX stands for Decentralized Exchange.
DEX can be defined as follows:
DEX is a platform / protocol that allows any two parties to perform peer-to-peer crypto assets without having to trust a third party.
Four characteristics of DEX classification:
- Types: Exchange or Swap.
- Settlement: Where will the transaction take place? On block chain (on-chain) or off-chain (off-chain)?
- Order Books: Where is the trade order kept?
Directly on block chain (on-chain) or run by 3rd party (off-chain)?
- Pooled Liquidity: Liquidity like?
Included in smart contracts on the chain. Or, do many third parties aggregate buying and selling orders to create liquidity (off-chain)?
Benefits of DEX:
- Self-Custody: User always takes control of his property.
- Permissionless: Users can access and perform transactions anywhere, anytime.
- Trustless: 2 parties conducting transactions do not need to trust each other's reputation.
Total DEX Volume 2019
DEX trading volume in 2019 is at $ 2.3 billion, down 74% (nearly 4 times) compared to 2017.
DEX's trading volume in 2019, still dominated by the DEX Order Books group accounted for 57.82%, led by IDEX.
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Following closely was the Pooled Liquidity group (Kyber + Uniswap) accounting for 31.5% of total trading volume.
The trading volume is shifting from the DEX Order Books group to the Pooled Liquidity DEX group.
This is clearly shown in the latest 3-month trading volume, Uniswap + Kyber has accounted for more than 60% of the trading volume.
Margin Trading Protocols
DeFi Margin Trading is only in the early stage.
DeFi Margin Trading can be defined as:
A platform / protocol that allows users to buy / sell crypto assets larger than they have automatically without trusting a third party.
Speaking of DeFi Margin Trading, there must be:
- Crypto Assets: What type of crypto assets will be supported for trading?
- Collateral Assets: What type of crypto assets are used as collateral?
- Interest Rate (APR): What is the loan rate for each type of asset?
- Leverage: What is the maximum leverage to use?
- Expiration: Is there a due date?
- Max Slippage: What is the amplitude of slippage when making buy / sell orders?
DeFi Margin Trading 2019
Although, it only appeared in the late 2018 – early 2019 period. 12,240% after only 1 year.
In September 2019, the DeFi Margin Trading Group accounted for about 7.19% of the total TLV of DeFi.
However, at the present time, this rate is only 3.78%, down 47% in just 3 months.
This is addressing the instability of platforms / protocols about DeFi Margin.
Derivatives & Assets
DeFi Derivatives can be:
A platform / protocol that allows users to create, buy and sell derivative products related to cryptocurrencies without the need for third parties.
Speaking of DeFi Derivatives, there are points you need to know:
- Price Feed: Prices will be tracked by the platform / protocol itself or provided by a trusted provider.
- Collateral Assets: Which assets will be used as collateral when creating derivative products.
- Collateral Ratio: What is the mortgage rate?
For example: Synthetix
- Price Feed: Provided by ChainLink
- Collateral Assets: SNX token
- Collateral Ratio:> 700%
DeFi Derivatives in 2019
DeFi Derivatives is a very fast growing sector in terms of locked assets (TVL), an increase of + 9753.3% (~ 97.5 times) after only 1 year.
Currently, DeFi Derivatives account for 26.68% of the entire DeFi ecosystem, just behind the DeFi Lending segment.
However, DeFi Derivatives are strongly differentiated as Synthetix alone accounts for 97.89% of the total TVL value.
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Wallets / Aggregators
DeFi Wallets / Aggregators is a game about EQUITY, not a game about TOKEN.
To be classified as DeFi Wallets, that storage wallet must be OBLIGATORY is a non-custodial wallet.
Users have complete control of their crypto assets through holding private keys.
Remember: Not your keys, not your coins.
Some popular non-custodial wallets: MyEtherWallet, Argent, Metamask …
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Aggregators are meant to be a collection of different DeFi products, allowing users to select and use multiple products at the same time.
For example, DEX.AG is an aggregator of DEXs, allowing users to trade tokens through many different DEXs.
Most Aggregators have only appeared since 2019, with a few popular names such as Instadapp, DeFiZap, ParaSwap, Zerion, DefiSaver, DEX.AG, 1inch.exchange … etc.
Opportunity to invest in Aggregators?
For VCs: YES.
Although, aggregators still have no way to earn revenue / profit. However, VC investment funds still accept to invest in this type. With 2 recent typical projects, InstaDapp ($ 2.4m) and Zerion ($ 2m).
For my brothers: DIFFICULT!