Cryptocurrency and blockchain technology have introduced numerous innovations in finance and digital asset ownership, NFTs, gaming, and metaverse experiences.
Among these, one of the most significant crypto innovations is decentralized finance (DeFi), which utilizes blockchain technology to provide users with easily accessible financial services without bureaucracy and slow processing time.
In this guide, we’ll compare the traditional against the decentralized financial system and take a look at some of the leading DeFi projects.
How Does Traditional Finance Work?
The traditional financial system is based on fiat currencies, governments, and banks, which are connected through laws that ensure the fiat economy works smoothly.
Fiat currencies are all traditional or legal tender currencies issued by governments and central banks. For example, the US dollar is the official currency in the US and the most popular global currency. Individuals and companies across the globe recognize the US dollar as a legitimate currency, as its value is backed by reputable financial institutions such as the US government and the US central bank.
What this means is that you can’t just print your own paper money and give it value. Only governments and central banks can do this.
This, in turn, shows how the fiat system is heavily centralized and controlled by financial institutions. You need to adhere to banking rules and have a bank account if you want to accept money transactions or send some yourself.
Having banks as intermediaries limits the control you have over your money because they can freeze your assets or show your balance to government agencies under suspicion. Moreover, banks use centralized electronic systems, so if someone manages to hack a bank’s server, they can get their hands on loads of user data.
When it comes to financial operations such as transferring money, the traditional financial system is very complex and slow. Transferring money from one bank account to another requires users to fill out forms and can take anywhere between a few hours to a few days.
Even bank card payments can take up to two days to complete. More complex operations, such as large, cross-border business payments, require a lot of paperwork and can take a whole week because of the multiple banks involved.
Not to mention taking out loans, which can take weeks because of the extensive documentation requirements. Users need to provide all kinds of documents to get their loan approved, such as employment and proof of income details.
Despite the numerous shortcomings, the traditional financial system is globally adopted. The majority of the world countries use fiat currencies and a bank-based economy. Unlike crypto, fiat currency is accepted everywhere, while digital currencies still have a very long way to go before challenging TradFi dominance.
How Does Decentralized Finance Work?
Decentralized finance (DeFi) leverages blockchain technology and cryptocurrencies to provide users with all the services of traditional finance, along with various new, blockchain-exclusive financial features.
Blockchain networks are decentralized and allow users to transfer assets in the form of cryptocurrencies between virtual blockchain addresses. Crypto doesn’t require users to provide personal information. All you need to have is a crypto wallet to store and manage your portfolio of assets.
Digital currencies give users a much higher degree of privacy compared to banks and traditional finance. Anyone can initiate a crypto transaction, regardless of the number of funds in question, and there’s no paperwork involved.
Also, crypto transactions transcend national borders because they aren’t tied to local financial systems. Users and companies can transfer funds across the globe in a matter of seconds through a fast blockchain. There’s no bureaucracy and the processing time is much faster compared to traditional finance.
Users get to truly own their assets with crypto because when you store assets in a non-custodial wallet, you’re the only person with access to your funds. Decentralized finance enables users to conduct a wide range of financial operations with their digital currencies.
Some DeFi projects are decentralized crypto exchanges that allow users to quickly trade crypto with each other, while the exchange just facilitates the connection between traders.
DeFi liquidity protocols reward users for participating in liquidity pools. Stablecoin lending protocols allow users to borrow stablecoins by depositing crypto collateral with just a few clicks. Staking platforms provide users with numerous crypto-staking options where users earn a portion of the transaction fees from a staking pool.
DeFi platforms don’t have single points of failure like centralized banking networks, and in case someone hacks a few blockchain nodes, they still won’t be able to steal user funds.
The global crypto market is rapidly growing, and in 2022, there were more than 320 million people using crypto. Subsequently, the DeFi market is also on the rise thanks to the broad range of fast, affordable, and efficient financial features it offers to users.
Top DeFi Projects
The crypto market is extremely crowded, with more than 20,000 projects, but most of these projects won’t make it in terms of utility, market cap, and mass adoption.
However, a few hundred of the top projects offer users valuable innovations and features. Let’s have a look at some of the top DeFi projects on the market, according to CoinMarketCap.
UniSwap (UNI) is the largest decentralized crypto exchange platform on the market, but it’s also much more than just an exchange. The platform is a multifunctional DeFi protocol focused on the Ethereum (ETH) blockchain.
Users can trade a wide range of Ethereum-based ERC-20 tokens as well as assets built on Ethereum Virtual Machine (EVM) compatible networks like Arbitrum, Polygon (MATIC), Optimism (OP), and Celo (CELO).
One of the key features of UniSwap is the platform’s liquidity pools, as they’re some of the largest liquidity pools on the crypto market. UniSwap uses automated market maker (AMM) software to pair together buyers and sellers while maintaining optimal liquidity levels by rewarding liquidity providers with a portion of the platform’s trading fees.
Unlike centralized exchanges, traders can use UniSwap by simply connecting their crypto wallet to the platform without any registration process or Know Your Customer (KYC) protocol.
The platform has its native UNI token, which is used as the governance token of the platform, but users can also pay transaction fees with it.
Aave (AAVE) is a very useful DeFi protocol designed for crypto lending and borrowing. Users interested in earning interest can select a liquidity pool to deposit certain cryptocurrencies. Aave then lends out that crypto to borrowers who need to provide other cryptocurrencies as collateral to borrow assets from the platform.
Aave is one of the largest DeFi protocols in terms of market capitalization and total value locked (TVL). TVL represents the amount of crypto deposited by users into the DeFi protocol’s treasury (i.e., its liquidity pools).
Users can borrow or lend more than 20 digital currencies on Aave. The platform specializes in Ethereum and stablecoins, such as Binance USD (BUSD), Dai (DAI), Tether (USDT), Pax Dollar (PUSD), True USD (TUSD), USD Coin (USDC), Gemini Dollar (GUSD), LUSD Stablecoin (LUSD), and Synth SUSD (sUSD).
Since Aave is a DeFi protocol, the community governs the platform by voting for proposals. The more AAVE tokens you hold, the more voting strength you have.
THORChain doesn’t take custody of your coins while you’re bridging them from one blockchain to another. The protocol isn’t focused on profit. Instead, it acts as a tool for providing the crypto community with easy cross-chain swaps. All of the fees on THORChain are distributed among liquidity providers.
Users can connect to THORChain through a variety of wallets and crypto platforms, such as ShapeShift, Asgardex, Brokkr, Skip, THORSwap, THORWallet, and others. Transactions on THORChain are paid with RUNE tokens, so users need to connect to the platform with a wallet that supports RUNE.
Users can exchange assets built on the Avalanche (AVAX), Binance Chain (BSC), Ethereum, Bitcoin (BTC), Litecoin (LTC), Dogecoin (DOGE), and Cosmos (ATOM) networks. Additionally, THORChain has various liquidity pools that reward liquidity providers with an annual percentage yield (APY) for providing liquidity. The rewards are paid out in RUNE tokens.
1inch Network (1INCH) is a popular, multi-functional DeFi platform that provides users with everything from decentralized crypto trading to staking and liquidity pools.
The primary feature of 1Inch is its DEX aggregator section that lets users swap various assets by pulling liquidity from numerous sources. Instead of just providing users with trading options from one source, 1Inch searches various decentralized exchanges to find the best solution for your trade.
1Inch connects to more 240 liquidity sources across various blockchains, including Ethereum, Binance Chain, AVAX, MATIC, OP, Fantom (FTM), and other networks.
As far as liquidity pools are concerned, 1Inch has more than 300 active liquidity pools, which is one of the widest choices among DeFi platforms. Users can provide liquidity for numerous cryptocurrencies and earn liquidity provider rewards in 1INCH, ETH, and the cryptos they provide liquidity for.
Users also have nine blockchain bridges at their disposal, which is very handy for transferring assets between different blockchains. The blockchain bridges include AVAX, MATIC, Binance Chain, OP, Arbitrum, Gnosis, Aurora, Klaytn (KLAY), and FTM.
Additionally, users can even buy crypto with fiat currency on 1Inch with the help of the MoonPay fiat-to-crypto payment gateway. The service delivers crypto directly to your wallet.
Lido DAO is one of the leading Ethereum liquid staking protocols on the market. Although Lido focused on Ethereum during its early days, the developers and the community decided to introduce staking options for several additional popular blockchains at one point. Today, besides ETH, users can also stake Solana (SOL), Polygon (MATIC), Kusama (KSM), and Polkadot (DOT).
When you stake some of these cryptos on Lido, you get staked tokens in exchange for your deposit. These tokens accrue staking rewards over time, and you can use them across other DeFi platforms to earn additional rewards while earning an APY on Lido DAO. The term liquid staking means that you can manage your staked tokens and use them on the crypto market while simultaneously staking on Lido.
Users can earn additional rewards and participate in liquidity pools across various platforms, such as SushiSwap, Curve Finance, Aave, and other DeFi protocols, with staked Lido tokens. Lido DAO uses a decentralized governance model with numerous network nodes operated by reputable crypto companies, such as Blockscape, Codefi, Stakely, and others.
Curve Finance is one of the most important DeFi protocols on the market. It’s the largest decentralized stablecoin exchange and supports a wide range of liquidity pools. Users can exchange a bunch of leading stablecoins, such as Dai, USDT, USDC, and others, along with ETH, Frax, and the platform’s native CRV tokens.
The Curve liquidity pools are a key element of the platform. Users can deposit various cryptocurrencies to add liquidity and also deposit Curve Finance’s CRV token in exchange for liquidity provider tokens. You can earn liquidity provider rewards on Curve or deposit your LP tokens on another platform that specializes in Curve liquidity providing, such as Convex Finance or Yearn Finance. These two platforms offer super high APYs for staking Curve liquidity tokens.
Both platforms are constantly competing for a larger share of the Curve liquidity pools, and this competition is popularly known as Curve Wars.
DeFi is one of the crucial parts of the crypto market because of the fast and innovative financial features that it offers to users. Instead of using slow, centralized electronic cash systems and banks, users now have the possibility of exchanging assets, earning interest, or taking out loans with a crypto wallet and a few clicks.
There are tons of meaningful DeFi projects on the market. The ones described in this guide are just the largest protocols, which serve to illustrate the diversity of services offered by DeFi platforms.