Chances are, if you watch the financial markets, you’re hearing the words “decentralized finance,” or “DeFi,” pop up with more and more frequency.
The thriving peer-to-peer crypto network is becoming a standard part of a diverse crypto portfolio, grabbing the attention of consumers and billionaire investors alike. It sounds exciting—and it is—but what is it exactly? And what makes DeFi different from every other sector of crypto that you know?
What is DeFi
In a financial world that is becoming increasingly digital, DeFi harnesses the efficiency and power of smart contracts (digital contracts that live on the blockchain) to create a space for lending, borrowing, trading, saving, and earning interest that doesn't require all of the usual bureaucracy and minutiae. This allows them to bring the convenience of completely peer-to-peer transactions to investors. The goals of the DeFi network are simple:
Ditch the paperwork
Smart contracts are processed digitally on the blockchain, so no paperwork and no wait time through the bank for transactions to clear.
Cut out the middleman
Automating the contract process on the blockchain takes away the need for human intermediaries, eliminating the need to engage outside mediators, like lawyers, to process agreements between parties.
Pick up the pace
With no need to rely on different parties or deal with wait times to complete a transaction, DeFi makes doing business a more seamless and fast experience from start to finish.
Equalize the opportunity
Many of the financial opportunities offered through DeFi platforms are usually reserved for major financial institutions like hedge funds and banks. DeFi is closing the gap between the individual and the financial oligarchy.
The top 10 DeFi picks for 2021
The world of DeFi is getting bigger every day, but there are a few projects that are paving the way for network advancement. Here are our top ten DeFi assets to watch through 2021:
1. Aave (AAVE), initiated in 2017 under the name ETHLend, is one of the original DeFi platforms on the market. Aave is a decentralized liquidity platform that allows for borrowing assets and earning rewards on deposits. It brings together lenders and borrowers in a decentralized space to allow for an equal opportunity lending system. You can also earn rewards and discounts by staking the AAVE coin on the Aave DeFi platform.
2. Avalanche (AVAX) markets themselves as “the fastest smart contracts platform in the blockchain industry,” while also solidifying their place in the booming NFT space and building connectivity with other blockchain projects such as SushiSwap (SUSHI), Chainlink (LINK), and the Graph (GRT). The project positions itself as a direct rival to Ethereum due to its ability to provide cheaper transactions in a fraction of the time. Avalanche recently completed $230 million in funding to support its DeFi initiatives, making it a compelling place for DeFi projects to set up shop.
3. Chainlink (LINK) is a decentralized oracle service that aims to connect smart contracts with data from the real world using oracle technology. Chainlink recently announced the launch of a Programmable Token Bridge that will allow for new communication between DeFi blockchains. This will help DeFi to properly scale and avoid the bottlenecks holding back the earlier generations of blockchain projects.
4. Compound (COMP), like Aave, is a liquidity source for borrowing and lending assets. When you make a deposit to Compound, you receive CTokens in return, which you can then use to purchase other cryptocurrencies on the platform. The CTokens serve as a stamp of approval, saying “yes, this user has assets staked in the network, they’re good to borrow.” The project has recently passed over $800 million in value locked in the platform.
5. Band Protocol (BAND) is similar to Chainlink in that it focuses on decentralized oracles that collect real-world data, which is then sent to smart contracts on blockchains like Cosmos and Ethereum. Because DeFi needs reliable external data, such as sports scores, weather reports, or price feeds, delivered securely and safely to the on-chain environment, Band Protocol will continue to serve as a cornerstone of the DeFi data space.
6. Terra Luna (LUNA) is a next-generation smart contract platform that combines decentralized finance with the concept of stablecoins. Its platform supports stablecoins that offer instant settlements, low fees, and seamless cross-border exchange. Luna functions as the volatile backbone that keeps Terra, its stablecoin sibling, balanced and grounded. Adding the emerging popularity of DeFi to the serious attention stablecoins are getting—from consumers and governments alike—makes LUNA one to watch.
7. Polygon (MATIC) is one of the most well-adopted and fastest-growing Ethereum Layer 2 scaling solutions and decentralized application ecosystems. It boasts features such as interoperability, scalability, and security. Basically, Polygon adds a few traffic lanes to the heavily traveled Ethereum Layer 1 highway. The majority of DeFi projects are currently housed on the Ethereum blockchain. Therefore, less congestion on Ethereum means faster speeds and more benefits for the DeFi ecosystem.
8. Solana (SOL) is revolutionizing consensus mechanisms (how platforms verify transitions—”yep, that trade happened.”) with its proof of history concept. This means that, instead of mining or staking on the platform to validate transactions, all transactions are proven true by a time stamp on the blockchain. Solana is known as Ethereum’s main competitor because it provides fast speeds while still being a Layer 1 platform, meaning it doesn’t need any help from another platform to perform these quick transactions.
9. Uma (UMA) is actively working to promote financial inclusion and democratize the derivative space. Uma expands into the financial space and makes it accessible to people across the globe, creating true global investment inclusivity. It is fueling the fire at the core of DeFi.
10. Uniswap (UNI) is a decentralized exchange that allows users to buy and provide liquidity directly from crypto wallets at minimal costs. Its AMM (automated market maker) provides ample liquidity for robust traffic and fast trading on its platform. Due to its popularity Uniswap’s native token, UNI, can be found on investment platforms outside of the DeFi network, like Voyager.
The future of DeFi
DeFi platforms are having a moment and getting some much deserved recognition from both consumers and investors. DeFi funds are raising millions of dollars each day to push initiatives, improve and build platforms, and grow the already thriving network. These advancements are paving the way toward financial equality by increasing accessibility to important and otherwise unattainable financial tools. DeFi eliminates the gap, making the roadblocks that gatekept economic advancement for the very wealthy few a thing of the past. The future of DeFi is already here, and it’s for everyone.
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