The Future of Finance breakdown 3(c): DeFi Applications
This week we continue building the reference architecture across both TradFi and DeFi, with section 3(b) that describes DeFi Applications.
Decentralized finance (DeFi) applications have become increasingly popular in the world of cryptocurrency, and for good reason. By utilizing a decentralized approach to financial services, DeFi can provide users with access to a variety of financial services such as lending, borrowing, derivatives trading, asset management, and more. In this blog post, we will be taking a deep dive into the various DeFi applications that are currently available and how they fit into the reference architecture.
The key components in this domain include:
dApps and protocols
Decentralized Autonomous Organizations (DAOs)
Crypto native wallets and aggregators
Web3 browsers
Here’s another refresher on the landscape that we see playing out, keying in on where we will focus in this post:
Figure 1: the future of finance shows DeFi apps offering decentralized protocols to offer lending, borrowing, governance, and custody of various financial instruments
… and the following image shows a view of the respective vendors and projects building out the DeFi Applications of the future:
Figure 2: some of the major players in DeFi Apps include Aave, Maker, Argent, and MetaMask
DeFi Application component 1: dApps and DeFi protocols
dApps. dApps are decentralized applications that run on top of blockchain networks such as Ethereum. These applications utilize smart contracts to facilitate various types of financial transactions without relying on intermediaries or traditional banking systems. Notable examples of dApps include Compound, Aave, and yearn.finance. Compound is an algorithmic money market protocol which allows users to lend out their cryptocurrency in exchange for interest payments; Aave is another lending platform but with a focus on flash loans; finally, yearn.finance is an automated yield optimization service that helps users maximize their returns on investments in cryptocurrencies.
DeFi protocols.
Uniswap. This is a decentralized exchange (DEX) protocol that allows users to buy and sell tokens on the Ethereum blockchain. It uses an automated market maker (AMM) model, which allows users to trade tokens without the need for an order book or matching engine. Uniswap has become one of the most popular DeFi protocols, with billions of dollars in trading volume.
Compound. This is a decentralized lending and borrowing platform that allows users to earn interest on their cryptocurrencies or take out loans using them as collateral. Compound uses smart contracts to automate the lending and borrowing process and allows users to earn interest on a wide range of assets, including Ether (ETH), stablecoins, and other cryptocurrencies.
Aave. This is another decentralized lending and borrowing platform that allows users to earn interest on their cryptocurrencies or take out loans using them as collateral. Aave differentiates itself from other DeFi protocols by offering a range of features, such as customizable loan terms, flash loans, and the ability to earn yield on deposited assets.
MakerDAO. This is a decentralized finance protocol that uses smart contracts to create and manage a stablecoin called Dai. MakerDAO is governed by a decentralized autonomous organization (DAO) and uses a unique collateralization system to ensure the stability of the Dai token.
Synthetix. This is a decentralized exchange protocol that allows users to trade synthetic assets, which are digital tokens that represent the value of real-world assets. Synthetix offers a wide range of synthetic assets, including stocks, commodities, and currencies, and allows users to trade them without the need for intermediaries.
Overall, these DeFi dApps and protocols are helping to revolutionize the way that financial services are delivered and accessed, by enabling users to access a range of financial products and services in a decentralized and trustless manner.
DeFi Application component 2: Decentralized Autonomous Organizations (DAOs)
DAOs are digital organizations that operate autonomously via computer code rather than relying on human decision-making or intervention. Examples of DAOs include Compound Governance and MakerDAO Governance which both utilize voting systems to allow stakeholders to participate in decision-making processes within the organization.
A decentralized autonomous organization (DAO) is a type of organization that is run through code and a set of rules that are encoded in a smart contract on a blockchain. DAOs operate on a decentralized basis, with decisions being made by a consensus of members rather than by a central authority.
DAOs are designed to be transparent, efficient, and resilient, as they are run through code that is open to inspection and cannot be easily changed. They can be used to manage a wide range of projects and organizations, from decentralized finance (DeFi) protocols to social media platforms to charitable foundations.
Some examples of projects that are DAOs or governed by DAOs include:
MakerDAO. This is a decentralized finance protocol that uses smart contracts to create and manage a stablecoin called Dai. MakerDAO is governed by a DAO, with decisions being made by MKR token holders who vote on proposals to make changes to the protocol.
Aragon. This is an open-source platform that allows users to create and manage decentralized organizations. Aragon includes a range of tools and features that make it easy to set up and run a DAO, including voting, governance, and fundraising tools.
The DAO. This was one of the first DAOs, created in 2016 to fund and manage decentralized projects. The DAO raised over $150 million in a crowdsale and was designed to be governed by its token holders, who could propose and vote on projects to fund. However, The DAO was hacked shortly after its launch and lost a significant portion of its funds, leading to its eventual collapse.
MolochDAO. This is a DAO that was created to fund Ethereum infrastructure projects. MolochDAO is funded by contributions from its members, who can propose and vote on projects to fund. It has funded a number of projects, including Ethereum 2.0 and various Ethereum Layer 2 solutions.
Overall, DAOs offer a new way of organizing and running projects and organizations in a decentralized and transparent manner. They have the potential to disrupt traditional models of governance and decision-making, and are being explored in a wide range of industries and sectors.
DeFi Application component 3: Crypto native wallets and aggregators
Crypto native wallets are wallets specifically designed for storing cryptocurrencies such as Bitcoin and Ethereum while aggregators provide an integrated interface for accessing multiple cryptocurrencies from one platform. Notable examples of crypto native wallets include Argent, Metamask, and Coinbase Wallet while notable examples of aggregators include Dharma, Zerion, and Instadapp.
Custodial and non-custodial wallets.
In the context of cryptocurrency and digital assets, a wallet is a software program that stores private and public keys and interacts with various blockchain to enable users to send and receive digital currency and track their balance. There are two main types of wallets: custodial and non-custodial.
A custodial wallet is one where the wallet provider has control over the private keys of the user. This means that the wallet provider has the ability to access and move the user's funds, and the user must trust the provider to handle their funds securely. Examples of custodial wallets include exchanges and online wallet services.
On the other hand, a non-custodial wallet is one where the user holds their own private keys and has full control over their funds. This means that the wallet provider does not have access to the user's funds and cannot move them without the user's permission. Non-custodial wallets give users more control over their funds and reduce the risk of their funds being compromised by a third party. Examples of non-custodial wallets include hardware wallets and software wallets that the user installs on their own device.
In general, non-custodial wallets are considered to be more secure than custodial wallets, since they do not rely on a third party to handle the user's private keys. However, they also require the user to take on more responsibility for the security of their funds, as they are responsible for keeping their private keys safe.
Some great examples of custodial wallets are the native wallets that reside on crypto exchanges for retail accounts, such as Coinbase.
Some great examples of non-custodial wallets include Coinbase Wallet (the dedicated application), Argent, and MetaMask.
Aggregators.
Cryptocurrency aggregators are designed to help users find the best prices for their trades and access a range of trading options in a convenient and user-friendly manner. They are particularly useful for users who want to take advantage of the liquidity available on multiple DEXs and optimize their trades.
1inch. 1inch is a decentralized exchange (DEX) aggregator that allows users to find the best prices for their trades across a range of DEXs. It uses smart contracts to split orders across multiple DEXs and optimize the trade execution process.
Paraswap. Paraswap is a DEX aggregator that allows users to find the best prices for their trades across a range of DEXs. It also offers a range of other features, including a trading platform, a marketplace for buying and selling assets, and a marketplace for borrowing and lending assets.
Loopring. Loopring is a decentralized exchange protocol that allows users to trade cryptocurrencies and other digital assets in a decentralized and trustless manner. It also offers a DEX aggregator service that allows users to find the best prices for their trades across a range of DEXs.
DeFi Application component 4: Web3 browsers
Finally, web3 browsers are specialized browsers designed for interacting with decentralized applications built on top of blockchain networks such as Ethereum. The most well-known example is Brave Browser which provides support for web3 wallets as well as providing enhanced security features such as ad blocking capabilities and tracking protection tools.
The Brave browser is a web browser that is designed to protect user privacy while they browse the internet. It blocks third-party trackers and ads by default, which can help to protect user data and improve online privacy.
One way that the Brave browser is different from traditional browsers like Google Chrome is that it includes a built-in support for web3 and can run dApps directly in the browser. This means that users can interact with decentralized applications without the need for a separate wallet or browser extension.
In addition to its support for web3 and dApps, the Brave browser also has a number of other features that set it apart from traditional browsers. These include a focus on performance and speed, as well as built-in protection against phishing attacks and malware.
Overall, the Brave browser is designed to offer users a more private and secure browsing experience, while also providing support for the decentralized web.
Summary.
DeFi has quickly become one of the most popular use cases for blockchain technology due to its promise of providing access to financial services without relying on traditional banking systems or intermediaries. In this blog post we took a comprehensive look at the various components that make up the DeFi application landscape — from dApps & protocols to DAOs & crypto native wallets — so that readers may gain a better understanding of what’s possible with this exciting new technology. With developers continuing to push boundaries everyday in terms of what’s possible with these technologies it’ll be exciting to see what comes next!
