Decentralized Finance Projects: A Comprehensive Overview of DeFi
Decentralized Finance, also known as DeFi, is a movement that focuses on developing a decentralized ecosystem for financial services. DeFi leverages open-source software and decentralized networks — public permissionless blockchains — and aims to operate with minimum or zero intermediaries.
This movement has triggered the growth of a new ecosystem or industry. This new industry is not meant to replace the current financial infrastructure, but rather to exist alongside traditional financial service providers without integration. This provides accessibility and optionality to a broad range of people, leaving them free to decide whether they want to engage or not.
All Decentralized Finance Categories
Asset and Fund Management
KYC and Identity
Asset and Fund Management Protocols
Decentralized asset management protocols allow anyone to set up, manage and/or invest in an investment fund. Setting up and running a fund is often an expensive, complex and bureaucratic process, due to laws and regulatory requirements, plus the involvement of intermediaries, such as accountants, auditors, and custodians. Asset and fund management protocols automate and optimize certain traditional processes, and aim to reduce or eliminate the need of intermediaries.
Decentralized finance applications for secure custody of blockchain-based assets. These custodial services allow you to be and stay the only owner of the asset, by being the only one in control of the private keys and funds, with no intermediaries.
Decentralized exchanges (DEXs) enable users trade digital assets peer-to-peer, such as bitcoin, while still being in control of their private keys. In contrast to centralized exchanges, no third-party acts as an intermediary in any of the trading process that are executed on a DEX.
Examples of decentralized exchange protocols: 0x, Airswap, Bancor Network, b0x network (bZx), Bisq Network, Bitshares, DutchX, dYdX, EtherDelta, EthFinex, Forkdelta, Hydro Protocol, Idex, Kyber Network, LoopRing, OpenLedger, Paradex, Radar Relay, Ren Project and UniSwap.
Decentralized insurance protocols provide infrastructures that allow anyone to build insurance products. The protocol manages and executes the parameters of the insurance, and can be extended with other protocols and risk models to build more extensive insurance products. It allows the development for new and existing insurance products, ranging from commercial insurances, peer-to-peer insurances, and cooperative models, to entirely new and unidentified models of insurance.
KYC and Identity Protocols
KYC and identify solutions offer users – people and devices – to be in full control of their digital identity and data. This should allow them to protect their identities and prove things about themselves, peer-to-peer, using data that the other party can verify.
Lending protocols in decentralized finance facilitate digital asset borrowing and lending. There are a several decentralized lending protocols in the market, varying in their level of centralization/decentralization, and collateralized/non-collateralized. All lending protocols are focused on public permissionless blockchains and are promising solutions for a wider financial inclusion.
In simple terms, with decentralized lending protocols, borrowers can lend (e.g. in fiat money or stable coin) against the value of the digital asset (e.g. Ether) they possess. You cannot lend one-on-one with the value of the asset, since you require a margin of safety to anticipate on price changes. If the value of the digital assets rises, your outstanding debt automatically decreases. If the value of the asset drops, you’ll have to pay a part of your debt or a part of your digital asset is liquidated. Until you have repaid your outstanding debt, the digital asset is locked within the protocol.
Decentralized marketplaces allow for truly peer-to-peer exchange of goods and services. These marketplaces operate without intermediaries and have limited to zero restrictions, allowing people to buy and sell whatever they like.
Buyers and sellers that do not trust each other can use escrow accounts, and agree on a neutral trusted third party to oversee a transaction. Goods and services are commonly bought with cryptocurrency, which makes it much easier to use on-chain escrow accounts. Some marketplaces include decentralized reputation system for buyers and sellers to establish their trustworthiness.
Prediction markets have been in existence for years, but blockchain technology has given it some new impetus. Prediction markets are exchange-traded markets where a collection of people and/or bots speculate and trade on future events or outcomes. These can be election results, winners of Noble prizes, sales of a company, exchange averages, and so much more. By leveraging the wisdom of the crowd, these markets have been proven to be fairly effective to prognose the outcome of an event.
Stablecoins are cryptocurrencies that are not volatile (in theory). This allows for a stable and secure means of transacting, without having the risk that you have paid too much or too less for a good or service. Plus, stablecoins are a solution to store value when the market is volatile or when one expects crypto assets to rise or drop in value, since one does not have to go through the (risky) process to exchange his value back to fiat. There are more (potential) benefits of stablecoins, which we’ll dive into later.
There are three categories of stablecoins, depending on if and how the stablecoin is collateralized.
Fiat-collateralized stablecoins are backed by existing fiat currency, such as the Euro, the Dollar or the Yen. Most commonly, one fiat-collateralized stablecoin is backed by one fiat currency, meaning that there are as much fiat currencies held somewhere (e.g. a bank) as there are stablecoins out in the market. These type of stablecoins – and the management thereof – are not considered decentralized. Examples are: AnchorUSD, Carbon, Gemini Dollar, LBXpeg, Paxos, Stronghold, Tether, TrueUSD, and White Standard.
Crypto-collateralized stablecoins are backed by (a bucket of) crypto assets, such as cryptocurrencies. These stablecoins are decentralized, but cary volatility risks. Therefore, these stablecoins are commonly over-collateralized to have a margin of safety that allows them to anticipate on price volatility of the collateralized asset(s). Commonly, the entire process of backing, issuing and managing both the stablecoin and collateralized assets are managed by a protocol. Examples are: Celo, DAI, Synthetix, and Wrapped Bitcoin.
Non-collateralized stablecoins are – just as the Euro and the US dollar – not backed by anything. These stablecoin rely on an algorithm, known as seigniorage shares. The supply of these stablecoins is algorithmically-governed; it buys and sells the stablecoin based on market supply/demand in order to maintain the token price stable. These are considered the most complex stablecoins to create and maintain, and are therefore not (yet) very present in today’s market. Examples are: Ampleforth and Terra.
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