Decentralized Finance has been an emerging part of the crypto finance economy, building a huge fan following since it started emerging in early 2019. 2020 brings even more promising developments that can change the core operating model of the financial sector.
If you aren’t familiar with what DeFi is, it can be defined as follows: Decentralized Finance (DeFi) is a movement that leverages decentralized networks to transform traditional financial products (loans, investments, etc) into transparent protocols that run without centralized intermediaries.
Many consider DeFi to be the natural evolution of the crypto finance economy, as it moves to replace or at least disrupt the traditional banking system. Imagine being able to do everything a bank does…. without a bank. It’s a foreign concept to most, but something that enthusiasts hope will become a reality sooner rather than later.
For additional reading on DeFi, be sure to check out this amazing course on BlockGeeks.
It is my opinion that these three protocols have a huge growth potential in terms of introducing us to new concepts in crypto.
1. Compound Finance – Lending, Collateralized Borrowing.
2. Convexity Protocol – Crypto Options
3. Yield Protocol – Fixed Income Products aka Bonds
My first taste of DeFi came from compound finance when I heard about it from a16z video. After exploring the platform, I was truly impressed with how much thought was put into developing this protocol.
Let’s assume you’re holding some crypto for a good return on investment through price appreciation but what if you can further diversify your portfolio by earning some interest rate on it so you can offset your holding costs and also stabilize the portfolio? Compound finance is something you may want to look in to.
Source: Compound Finance
As you can see, if you supply(deposit) your crypto with compound, you earn an interest rate which is very comparable to the interest rates offered on savings accounts in the developed countries, unlocking a new rate of return on your passive investment. On top of this, you can even use that supplied crypto as a collateral and borrow an equivalent amount of other crypto to diversify your holdings, helping you leverage and improve the liquidity of your portfolio. What’s best is that you only need a wallet like metamask to execute these transactions, so say good bye to the exchange fees.
In short, Compound Finance aids you in earning an additional return on your crypto assets without ever selling your crypto!
We’ve seen this concept emerging in crypto finance lately, with companies like Bitbuy’s partner Cred. Although Cred operates a little differently than this DeFi protocol, the results are similar and the interest earned for HODLer’s can be very lucrative.
I fell in love with the whitepaper and would recommend everyone to read it, as the writer Zubin did an excellent job of describing the basics of options and how convexity protocol makes it so easy to create and trade crypto options.
Let’s say you’re HODLing Ethereum, but what if Ethereum drops below your buying price? To hedge this downside risk, you can visit Opyn and buy protected puts by staking your ether as collateral and create oTokens which serve as the option tokens that can be sold on the market to option buyers on Uniswap.
This critical development in crypto options can bypass the exchanges thereby removing the centralized control of option pricing and introduce more liquidity into the derivatives space.
The Retail investment industry hasn’t been able to benefit much from the 100 trillion Bond Market due to the illiquidity and the sophistication of fixed income products, even though they’re an excellent financial planning product. You can’t go to your broker and buy a bond for $100 as you need to have a huge minimum investment to even get started in this space due to the cost of buying bonds.
Crypto Ecosystem was unknown to Bonds until Dan wrote the Yield Protocol that makes it easy for anyone to stake their crypto of any amount as collateral and sell Bonds(yTokens) that have a maturity date and are priced on the basis of a target asset (Such as a Stablecoin like Tether).
The maturity date, interest rate coupon of the bond and the price of the yToken’s price are verified using an on-chain price Oracle. This aids in liquidity and transparency for the bond buyers and sellers. So for any crypto finance investor who wants to achieve fixed income returns on their holdings, yield protocol is looking like one of the best solutions.
MakerDAO (Dai stablecoin)
Dai, unlike other stablecoins, uses Ethereum, a relatively volatile digital asset to maintain a steady value. It does so using complicated smart contracts to offset price gains and losses that Ethereum makes day to day.
Kyber Network(On-chain liquidity)
Kyber is an on-chain liquidity protocol that aggregates liquidity from a wide range of reserves, powering instant and secure token exchange in any decentralized application. Kyber allows anyone to swap tokens instantly without having to use exchanges. For example, it could allow vendors to accept different types of cryptocurrency while still being paid in their preferred crypto of choice. Any smart contract blockchain has the ability to integrate Kyber.
Synthetix is a crypto-backed synthetic asset platform that provides on-chain exposure to real-world currencies, commodities, stocks, and indices. Synthetix uses “Synths” which are tokens that provide exposure to assets. The assets currently available are gold, Bitcoin, U.S. Dollars, and stocks such as Apple and Tesla. Synthetix wants to be a leader in crypto finance by offering an all in one investment mix offering.
DeFi is one of the fastest evolving crypto finance ecosystems so stay tuned for even more fascinating developments. It will certainly be interesting to see which protocols gain steam and seriously disrupt the traditional financial landscape. Mass adoption will be the only way to break the trend, will these open source protocols be able to go mainstream? Only time will tell.
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Disclaimer: These protocols have not been reviewed by Bitbuy, and this analysis and opinions in this article are those of the writer and not of Bitbuy as an organization. This article should not be considered investment advice in any way.