The most promising DeFi projects for 2020: an overview and expert opinions on the future of decentralized finance
Prospective DeFi projects use open source software to provide financial services without intermediaries, transparently and anonymously. At the moment, more than $ 10 billion has been blocked in decentralized protocols, and this number is growing rapidly. DeFi helps make the use of financial services more democratic and includes components ranging from data management to insurance, loans and stablecoins.
There are currently about 250 different DeFi solutions in existence, according to the DeFiPrime website. The Btcnewsweb.com editors reviewed the most promising DeFi of them as of the second half of 2020.
- 1 What are DeFi projects and what they are
- 2 Expert Opinions on the Perspective and Future of DeFi
- 3 How to invest and earn
- 4 Risks of working with DeFi
- 5 Advantages and Disadvantages Compared to CeFi
- 6 What are the criteria for evaluating DeFi platforms
- 7 The most promising DeFi projects
- 8 Conclusion
What are DeFi projects and what they are
DeFi is an acronym that stands for Decentralized Finance. This concept is based on the idea of combining two directions:
✅ The ability to use services similar to banking, insurance and other traditional services.
✅ Giving each person the right to have complete control over their funds.
From a technical point of view, decentralized financial systems are designed to democratize the asset management structure as much as possible, as well as make trading, investment, lending, escrow and other functions completely seamless.
Most DeFi projects run on the Ethereum blockchain, although alternatives are increasingly starting to emerge (such as on Binance Chain). The advantage of Ethereum is that it was originally created as an ecosystem for the development of decentralized applications and provides extensive functionality for developers in this area. This allows developers to create and share projects without the need for large sponsors or middlemen.
The following types of promising DeFi projects are most in demand:
- Lending protocols based on asset pools. Users can borrow cryptocurrencies and tokens secured by other assets, as well as deposit their funds into the pool at interest.
- Decentralized Trading Exchanges (DEX). Network protocols that also use liquidity pools to provide instant asset swaps with minimal fees.
- Synthetic assets. The creation of derivative assets on the blockchain allows users to access a variety of real markets (from fiat money to gold) while maintaining the benefits of a decentralized network.
- Payment networks. Allows you to process thousands of transactions at a time with low commission fees.
- Assets. Tokenized assets that transfer the value of various external products to the Ethereum blockchain. For example, various stablecoins, tokenized bitcoin, etc.
There are quite a few other categories such as lotteries, insurance, or prediction markets. But they are somewhat specific and therefore are used less often than the generally applicable ones, which we have listed above.
Expert Opinions on the Perspective and Future of DeFi
Changpeng Zhao, CEO of Binance
Zhao said in an interview that in the long term, Binance plans to promote decentralization in every possible way, despite the fact that it itself will remain a centralized project. The launched Binance Smart Chain is designed to provide an alternative to users and developers looking to avoid Ethereum’s escalating transaction fees.
Binance actively promotes DeFi projects, gives them the opportunity to be placed on its blockchain, and adds their tokens to the listing. Some of these projects have failed, which has led to criticism of the exchange’s policies on Twitter. Zhao noted to this that there are a lot of projects on Ethereum that have failed, but no one complains about this to Vitalik Buterin.
DeFi is becoming increasingly popular in the markets of China, Thailand, Singapore, and Binance is looking to continue experimenting in this direction.
– CZ Binance (@cz_binance) September 1, 2020
Maria Stankevich, EXMO Development Director
The EXMO team approves of DeFi’s promotion, believing that with decentralized financial products, people’s lives can be significantly easier – no need to collect documents and certificates to take out a loan or create a deposit, no need to confirm a credit history. Everything happens instantly and transparently. In addition, DeFee blurs the borders between countries.
Vitalik Buterin, Co-Founder of Ethereum
Despite the fact that the vast majority of promising DeFi projects are hosted on the Ethereum blockchain, Buterin urges to treat the developing economy in them with caution. He compares “profitable farming” to how the government prints money. Profitable farming (earning a percentage reward for providing liquidity) is a real boom in DeFi, but Vitalik highlights the fact that many tokens are aggressively inflationary, putting downward pressure on prices.
This opinion is shared not only by him. Twitter users have already dubbed lucrative farming the “giant Ponzi scheme.”
Mike Novogratz, head of crypto investment company Galaxy Digital
Novogratz recently invested in decentralized finance asset management company ParaFi Capital. He believes that the potential of DeFi is simply overwhelming and it is necessary to help this direction as actively as possible to develop and cover new areas of the market. And ParaFi chief Ben Foreman added that DeFi represents an emerging architecture for a new open financial network. Bitcoin once successfully demonstrated the benefits of decentralization, but now it’s time to create a flexible investment structure in a broader sense.
Yuri Mazur, Head of Data Analysis Department, CEX.IO Broker
Mazur notes that many investors are now moving from traditional investment to DeFi projects and recalls that investing in this area is worth no more than 10-15% of capital. The crypto market has always been and remains volatile, but DeFi tokens on it are the most risky direction that cannot be made by the main investment core.
Ryan Selkis, founder of market aggregator Messari
Ryan is convinced that a bubble is currently inflating in the DeFi space. On his Twitter, he said that the market was flooded with financial pyramids, and urged everyone to be prepared for its collapse.
The DeFi bubble will pop sooner than people expect.
We’re nearing the apex of ponzi economics, rug pulls, and “yield” hopping, and ETH fees are going to eat too heavily into non-whale profits.
– Ryan Selkis (@twobitidiot) September 10, 2020
How to invest and earn
Promising DeFi projects provide an opportunity to generate additional income in different ways. Most in demand:
- Profitable farming. Receiving tokens for adding liquidity to the protocol. The concept became popular thanks to the COMP project, which began distributing its control tokens and thereby encouraged users to perform transactions in the credit protocol. In September 2020, the Binance exchange launched the Binance Launchpool platform for DeFi pharming. Now it presents promising DeFi projects: Bella, Wing, Flamingo, Venus, Alpha Finance.
- Liquidity supplies. Decentralized trading exchanges operate on the mechanism of liquidity pools, which require suppliers to invest their assets. The reward allows you to effectively incentivize members.
- Staking. The user blocks his funds in the wallet and does not touch them for a certain time, thereby maintaining the operability of the network and receiving a reward for this.
- Investment. Many tokens have good price potential and can be used as investment assets for the purpose of further resale. However, this is very risky, there have been ups and downs in the rates of such tokens by thousands of percent in a matter of hours.
- Landing page (p2p lending). Cryptocurrency owners who are not yet using it can put it into circulation and receive an interest income from this operation. The cryptocurrency is used to issue secured loans to other users.
- Leverage. DEX exchanges that support margin trading need lenders to provide leverage to traders. Interest income is charged for this action.
Different methods have their advantages and disadvantages, so choosing the best option or a combination of them can take some time.
Risks of working with DeFi
The current DeFi landscape is often compared to the ICO craze in 2017. Of course, DeFi is not as susceptible to aggressive speculation as compared to ICOs, but the impressive level of profitability that decentralized projects offer makes you think about the risks that investors often forget. Among them:
✅ Smart contract vulnerability. No matter what security measures the developers come up with, hackers also do not stand still and look for loopholes that allow them to steal funds or change the protocol in their favor.
✅ Vulnerabilities on the side of users. Not every user properly monitors the safety of their private keys and passwords. At a minimum, we recommend using hardware wallets and two-factor authentication.
✅ Failed protocol updates. Many DeFi projects are managed by DAO, that is, with the participation of the votes of all token holders. But the opinion of the majority may not always coincide with yours personally.
✅ Financial risks, the main of which is the fall in the value of an asset. It is almost impossible to predict rate jumps due to the lack of historical data.
The best way to learn about the features and risks of DeFi products is to try it yourself with small amounts, while always taking into account that this type of investment is a high-risk one.
Advantages and Disadvantages Compared to CeFi
Let’s consider how promising DeFi sites differ from similar centralized services.
✅ Anonymity, lack of verification and any requirements for the identity of the user.
✅ Low fees and high transaction speed.
✅ Self-control of own funds.
✅ Open source.
❌ Risks of vulnerabilities in protocols.
❌ Less clear user interface.
❌ High volatility of tokens.
❌ There are many low-quality projects on the market.
What are the criteria for evaluating DeFi platforms
To find really promising DeFe sites, you can analyze them yourself or (which is wiser) trust the opinion of specialists. There are sites on the network that evaluate projects according to various parameters in order to compile a list of the best.
The main factors that are taken into account in analytics:
✅ the number of active users;
✅ capitalization of the platform token;
✅ the total volume of the value locked in the protocol;
✅ availability of open source;
✅ the security of smart contracts that are audited;
✅ financial risks (whether the assets are secured or their value is supported only algorithmically).
We offer a list of 10 DeFi platforms worth checking out. They are listed in descending order of locked value as of October 2020.
The most promising DeFi projects
Uniswap is a decentralized protocol created for the exchange of assets on the Ethereum blockchain. Traditional order books have been replaced here with liquidity pools, so that anyone can instantly exchange ERC-20 tokens with each other and ETH directly. You can also earn here by providing liquidity to the protocol. Exchange fees are used to reward liquidity providers (0.3% per trade).
It is noteworthy that, if desired, any user can also create his own liquidity pool by entering into the protocol an equivalent amount of ETH and the ERC-20 token. The market maker sets the exchange rate, which is adjusted during trading. When there are fewer assets on one side and more assets on the other, the price changes to maintain a balance.
MakerDAO is an Ethereum-based lending platform that supports the USD stablecoin DAI. A Maker user can open a vault, lock the cryptocurrency there as collateral, and create an equivalent amount of DAI on its basis. The stability fee is expressed in the form of continuously accrued interest on the invested cryptocurrency. When the debt is repaid, interest is paid.
It is possible to borrow up to 66% of the value of the collateral in DAI (thus the collateral ratio is 150%). If the value falls below this level, then there is a threat of a fine and liquidation of collateral. Holders of the native MKR token participate in the management of the system by voting on various parameters.
Curve is an exchange liquidity pool powered by Ethereum and focused primarily on interaction with stablecoins. Members are able to trade stablecoins with low fees and low slippage.
The platform offers seven different pools for use, which differ in the assets they support and additional conditions. At the moment, these are the Compound, BUSD, Y, PAX, sBTC and ren pools, which make it possible to work with a really wide range of ERC-20 currencies. To incentivize liquidity providers, the CRV token is used, which is rewarded for investments in a particular pool.
Aave is an open source non-custodian protocol for decentralized lending and borrowing. By injecting liquidity into the protocol, the user converts their cryptocurrency into ERC20-compliant aTokens. Interest starts to accrue on these tokens immediately.
On the other hand, users can borrow any of the supported assets against cryptocurrency collateral. Parameters such as liquidation threshold, liquidation penalty or collateral ratio depend on the specific asset. Interest rates are also constantly adjusted based on supply and demand for a particular asset, although the participant can choose the option with a more stable rate.
WBTC is a Bitcoin-backed ERC-20 token. The main idea is to transfer all the large-scale liquidity that the Bitcoin network has to the more flexible Ethereum space. Initial storage is provided by BitGo, and initial liquidity is provided by Kyber and Ren. WBTC is available for trading on various decentralized and centralized exchanges.
Anyone can be convinced of the full provision of WBTC, this is open information. The governance structure of the WBTC is a DAO, where each of the sixteen participating projects has voting rights, including Compound, Dharma, MakerDAO, and others. The process is open, but controlled by a multi-signature contract maintained by DAO members.
Compound is an algorithmic financial market on the Ethereum blockchain that allows you to take secured loans or earn interest on deposits. Interest begins to accrue immediately after depositing funds into the protocol, and rates change every 15 seconds based on market conditions. All liquidity supplies are presented in the form of cTokens, and the participant has the option to borrow up to 75% of the total value of the cTokens.
At any time, you can enter or withdraw funds, the main thing is to always keep the required level of collateral in order to avoid liquidation of the position. 10% of the interest paid goes to the reserve, and the rest is paid to suppliers in the form of COMP management tokens issued in May 2020.
yearn.finance is a credit aggregator ecosystem. Gives access to Compound, Dydx, Aave, Fulcrum protocols and automatically selects the option that looks the most profitable at any given time. As soon as the client invests tokens, the system converts them to yTokens and adjusts the balance in such a way as to optimize the contribution.
The YFI token is used to manage the platform and is distributed to liquidity providers. Control over the issuance of the token belongs to the multisig wallet, which requires the consent of at least six out of nine participants for each change.
Synthetix is an Ethereum platform for creating synths (so-called synthetic assets). The value of these assets always matches the value of real assets, be it cryptocurrency, fiat currency, commodity, etc. (about thirty variants of synths, plans to expand the list). The platform’s own token is called SNX, users need to block it or ETH as collateral in order to create freely tradable synths.
SNX holders creating synthetic assets receive income from transaction fees when synths are traded on the internal Synthetix.Exchange.
Balancer is an AMM (Automated Market Maker) that any member can use to create liquidity pools or add assets to them. The principle is similar to Uniswap, but there the contributed assets are automatically divided by value 50/50, and in Balancer the ratio can be adjusted.
Within the framework of the protocol, there are different types of pools: private (one owner has the right to add liquidity and freely edit any parameters), general (anyone can add liquidity, everyone has the same privileges), smart pools (a kind of private, but with the difference that parameters are mostly controlled by the smart contract).
RenVM is a project that provides the ability to combine external digital assets (currently supported by BTC, BCH and ZEC) with the DeFi sphere. RenVM is not a standalone application, rather it is a network from which developers can build new decentralized applications. With Ren, asset value can easily move between blockchains. A fault-tolerant protocol ensures that transactions are processed fairly.
Today, we can observe the emergence of a completely new global, flexible and transparent financial structure in real time. New DeFi projects appear almost every day, but, of course, not all are successful, but only the most promising in terms of security and usefulness. Before investing in a little-known protocol, study it thoroughly.