DeFi is the abbreviation of “Decentralized Finance” or Decentralized Finance, the term refers to the set of applications, protocols and decentralized financial systems of crypto assets and Blockchain technology. With DeFi it is possible to visualize a global financial system that is innovative, inclusive and improves the deficiencies of the current financial system since it has the advantage of a market open 24 hours a day and without a centralized entity, there are also safer, faster and faster operations. cheap.
Bitcoin was the first sample of DeFi when it allowed its users to exchange value one to one directly without the intervention of a third party, Ethereum took innovation to the next level, its users are able to create smart contracts which gives them the possibility of “Schedule your money.” With Ethereum you can program most financial services:
- Send money around the world
- Access stablecoins
- Borrow secured and unsecured funds
- Save in cryptocurrencies,
- Create and sell security tokens,
- Grow a portfolio
- Finance ventures
- Buy insurance
How DeFi works on Ethereum
In DeFi, a smart contract has the ability to perform activities typical of a financial institution, it is a type of Ethereum protocol that can contain funds and send or refund them based on certain conditions. The smart contract will execute on schedule as long as the conditions are met. We can think of four main elements of DeFi:
- The Ethereum blockchain: Contains the transaction history and the status of the accounts.
- Crypto assets: ETH and tokens from the network, mainly of the ERC-20 type (there are also ERC721 tokens).
- Protocols: Smart contracts that provide the functionality, for example, a service that enables decentralized asset lending.
- Applications (dApps): the products we use to manage and access protocols.
Top Ethereum DeFi Projects
Ethereum is currently the most important platform for the development of dApps. It should be noted that there are many more, but in this article, those that are based on Ethereum and that have proven to have a good long-term development plan will be mentioned and, additionally, their tokens are among the most important in the market.
Uniswap: Developed in 2018 on the Ethereum blockchain, Uniswap is an open source and completely decentralized exchange, which means that it is not owned or operated by a single entity, it uses a type of business model called automated liquidity protocol, in addition we can find all the tokens from the Ethereum network (ERC-20 tokens) and it is possible to exchange between those of its kind. Users remain in control of their funds at all times unlike a centralized exchange that requires traders to relinquish control of their private keys so that orders can be registered in an internal database rather than being executed on a chain of blocks directly, this requires more time and is more expensive.Uniswap is currently the fourth largest decentralized finance platform (DeFi), by the beginning of 2021, it had more than 3 billion dollars in crypto assets within its protocol.
Aave: Created in 2017, it is a decentralized money market that runs on the Ethereum blockchain, this decentralized application allows its users to lend and borrow a wide variety of cryptocurrencies. Aaves stands out for its great diversity of crypto-assets in which users they can obtain loans and by allowing lenders to earn passive income from the funds they make available to borrowers. Not only this, the platform provides security and stability to its users through a rather innovative protocol: if an asset is in short supply, interest rates are set higher to encourage lenders to contribute more and vice versa, if there is a large supply of an asset. active, the interest is adjusted lower to encourage borrowers to borrow. The Aave development team set out to allow anyone to develop and implement their own money market on the Ethereum blockchain. Aavele gives its developers a set of tools that they can use to create high-performance blockchains, with a great scalability margin, in addition to giving them the possibility of programming new decentralized applications
Polygon: Formerly known as Matic, it is a protocol that aims to create “the Internet of Ethereum Blockchains”, that is, to create an ecosystem of multiple blockchains with different characteristics compatible with Ethereum. The creators of Polygon seek to achieve this by providing an easy-to-use methodology that allows developers to launch their own Ethereum-compatible custom blockchain with a single click. One of the main barriers of today’s protocols is the difficulty they have to communicate and understand each other, MATIC wants to create an ecosystem in which the different blockchains can exchange value and information freely and easily, eliminating technological and technological divisions. ideologies that separate most of today’s Blockchains.