Recently, decentralized finance (DeFi) has captured significant attention following a surge in platforms and products catering to this sector.
Decentralized lending platform MakerDAO has risen to prominence amid impressive adoption of its stablecoin Dai Yet, it merely represents a fraction of the burgeoning ecosystem that powers an unstoppable wave in financial innovation.
Protocols for lending, security tokens, derivatives, exchanges, and more are carving out Ethereum's DeFi landscape as one of the most exciting application environments — despite the challenges with scaling.
DeFi's complexity is largely due to ongoing innovations. Let's break down some of the key elements that define this flourishing ecosystem.
What is DeFi?
At its core, DeFi involves traditional financial instruments reimagined on a blockchain — primarily Ethereum. These are primarily built on open-source protocols or modular frameworks for digital assets, designed to offer benefits like censorship-resistance and enhanced financial access.
Total decentralization isn't always wise, and many DeFi platforms provide hybrid models combining digital assets and conventional financial services. BlockFi .
A broader term that captures the ongoing evolution of financial products is open finance, where integrated digital assets, blockchains, and protocols blend with traditional financial frameworks.
Ethereum's application evolution has coincided with the rising popularity of open financial tools within the sector. For instance, recent report Bloqboard’s report on open lending protocols highlighted that active loans across MakerDAO, Dharma, dYdX, and Compound Finance increased by 1,200% in 2018 to reach $72 million.
So what are some of the primary areas in Ethereum’s open finance sphere? Let's explore leading aspects such as Open lending protocols, platforms for issuance and investing, prediction markets, exchanges, open marketplaces, and stablecoins.
Open Lending Protocols
Open lending protocols have garnered significant recent attention, outpacing other Ethereum open finance areas. This is partly due to the surge in demand for Dai and other P2P protocols. Dharma and liquidity pool designs such as Compound Finance Decentralized lending is creating a buzz in the financial sector.
Open, decentralized lending provides numerous advantages over conventional credit models, including:
- Integration with the digital asset borrowing/lending framework.
- Collateralization mechanisms for digital assets.
- Instant transaction settlement and new secured lending methodologies.
- No need for credit checks, offering more inclusive access for those without traditional service access.
- Standardization and interoperability, which can reduce costs through automation.
Secured lending using open protocols like MakerDAO and Dharma is structured to minimize reliance on trust, leveraging Ethereum's setup to reduce counterparty risk without needing mediators. This is achieved via basic cryptographic verifications on public blockchains.
Open protocol lending remains limited to public networks like Ethereum and presents intriguing potential for expanding global financial inclusion. MakerDAO is a standout in decentralized lending, rising rapidly in popularity in 2019 to such an extent that multiple measures stability fee raises have been considered to maintain its Dai: USD price peg alignment, as observed by scaling problems .
Other services like BlockFi use digital assets for lending, enabling users to lend and borrow while using familiar credit models such as credit checks.
Issuance Platforms and Investing
Issuance platforms cover a wide spectrum, with several exchanges doubling as platforms for issuance (i.e., tZERO ).
A key focus area for some issuance platforms is the security token market, where ongoing regulation holds the promise of broader flexible securities is rapidly becoming a narrative in the crypto space.
Renowned security token issuance platforms like Polymath and Harbor provide the necessary structures, tools, and resources for issuers to launch tokenized securities on blockchains. They prepare standardized token contracts for securities (i.e., ST-20 and R-Token) that allow for automated compliance and flexible trade parameters to satisfy regulatory needs.
Likewise, they have integrations with service providers such as brokers, custodians, legal professionals, and more to assist issuers in their progress.
Read: What is an STO?
Dual exchange/issuance platforms, such as Overstock's tZERO, have also been gaining ground.
Asset management platforms such as Melonport have gained recognition by offering a digital asset management interface on IPFS with backend Ethereum smart contracts. Melonport combines price feeds, risk management, compliance features, exchanges, and more.
Issuance platforms and investment management structures are expected to grow in prominence as more market participants enter the open finance arena — particularly institutional players.
Decentralized Prediction Markets
Decentralized prediction markets present some of the more fascinating aspects of open finance. Although complex, they offer immense potential. Augur Augur, launched amid much anticipation as a censorship-resistant prediction market on Ethereum, parallels other platforms like Gnosis are set to follow suit.
Prediction markets have been long-standing financial tools for risk hedging and event speculation. Decentralized prediction markets facilitate this use with cryptocurrencies and shield the markets from censorship.
While concerns over uncensored ‘Deadpool’ bets arise, many see them as a risk linked to non-regulation.
Augur's platform supports everything from political and weather forecasts to risk hedging in financial or unfavorable real-world circumstances.
Despite the promise, Augur has struggled to attract substantial volume since its inception, often due to the high entry barrier for using decentralized prediction markets. Nonetheless, platforms like Augur and Gnosis — set to introduce governance and micro-insurance options — should gain traction as cryptocurrencies and their potential climb further into the mainstream consciousness.
Exchanges and Open Marketplaces
Exchanges in the realm of open finance focus on decentralized exchange (DEX) protocols and P2P trading platforms. DEXs facilitate asset exchanges on Ethereum between parties without third-party intermediaries, unlike centralized exchanges like Coinbase.
DEXs face volume challenges due to their niche character and often lacking user-friendly interfaces, thus still experiencing the early adoption phase.
These exchanges also use innovative approaches like atomic swaps and other non-custodial means for asset exchanges, offering quick settlement times and low risk.
In the Ethereum dapp ecosystem, the decentralized exchange remains consistently popular, while others like EtherDelta have attracted media attention—partially due to negative regulatory outcomes dictated by the SEC. IDEX Some purported DEXs make suspicious claims of full decentralization or being non-custodial; hence it's wise to conduct individual research before utilizing them.
Highlighted DEXs on Blockonomi:
Another segment of open markets emphasizes trade of non-fungible tokens (NFTs), often dubbed crypto-collectibles. Platforms like
simplify the exploration, discovery, and trading of crypto assets from NFTs in games like Cryptokitties to virtual real estate in Ethereum-based ventures. OpenSea and Rarebits even supports user-created marketplaces and governance voting. District0x’s MemeFactory aims to debut shortly. Decentraland .
Some marketplaces like District0X Ethereum’s P2P marketplaces hold profound long-term potential, potentially encompassing markets for unique digital assets and fractional real-world assets like art, aligned side by side.
Recently, stablecoins have made waves in the cryptocurrency domain with new models for issuance and reserve auditing. These tokens are blockchain-issued and aim to maintain stability against external assets — mainly USD, but sometimes gold or others.
Stablecoins
Crypto-collateralized stablecoins like Maker's Dai see their underpinned asset (e.g., ETH) over-collateralized relative to the issued asset (Dai), contingent on the existing collateralization ratio.
Stablecoins primarily fall into 3 categories :
- Crypto-collateralized
- Fiat-Collateralized
- Non-Collateralized
For example, with a 150 percent ratio, depositing $150 of ETH in a Maker CDP yields 100 Dai. Maker’s system operates solely with borrowers since the protocol admins and mints/burns Dai against CDP and governance standards.
Dai stands out for its resistance to censorship and ability to offer
Fiat-backed stablecoins dominate the space and include the likes of compliance-checked, audit-ready coins. decentralized leverage .
Read: our Guide to Stablecoins
These stablecoin models vary little, relying on user faith through transparent audits demonstrating USD reserves that validate the token's circulating supply, maintaining the price peg. Tether , USDC , and Gemini Dollars From a part of view, Fiat-backed stablecoins show limitations, as they strip away blockchain advantages and introduce extra risk layers.
Companies behind these stablecoins generate profits from interest on user-held (USD) deposits stored in a bank. They are designed to be redeemable in a 1:1 USD ratio. cypherpunk However, as market competition stiffens, emerging insights suggest that interest rates may drive forthcoming trends in the stablecoin domain, cutting providers' margins while benefiting consumers.
What exactly does DeFi entail? Let's dive into the dynamic world of Decentralized Finance.
Grasping the full scope of Decentralized Finance, also known as DeFi, can be quite complex given the current spike in innovation. That's why we've crafted a comprehensive guide just for you. intriguing analysis Over recent months, Decentralized Finance (DeFi) has been garnering significant attention, with an influx of platforms and services offering DeFi solutions.
This is just a slice of an ever-expanding ecosystem that's reshaping the future of finance in an unstoppable way. stumbled and shut down Within Ethereum's sphere, DeFi is emerging as one of its most significant and promising application environments, despite the network's ongoing challenges with scalability.
Conclusion
Trying to wrap your head around DeFi can be an intricate affair due to rapid technological progress, but let's delve into some key elements of this flourishing ecosystem.
At its core, DeFi represents traditional financial instruments reimagined and reconstructed on a blockchain, particularly Ethereum. Built on open-source protocols or modular frameworks, these tools facilitate the creation and distribution of digital assets, designed to leverage the strengths of a public blockchain, such as resistance to censorship and expanded financial access.
While decentralizing everything might not be the best strategy, many DeFi applications strike a balance by incorporating a mix of digital assets and traditional financial services.
2Comments
Decentralized Prediction Markets
Recently, open lending protocols have captured more attention than other open finance categories on Ethereum. A large part of this is due to the significant increase in the use of Dai and other peer-to-peer (P2P) protocols.