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In the last article of the DeFi Series, we dived into the fundamental conception of DeFi and how it can benefit our everyday lives. As we have all witnessed in recent years, DeFi is rapidly developing, and there are currently various projects available out there. While we cannot say which projects will prove to be the best, some undoubtedly stand a better chance than others.
In this post, let us look at the three basic DeFi protocols and some examples of the notable DeFi projects
#1: Lending Protocol (Eg: Aave)
DeFi Lending Protocols are basically decentralized banks that give their users access to lend and deposits while enable everyone to earn interest on supplied stablecoins and cryptocurrencies.
Aave is a notable example of a DeFi Lending Protocol Project and is built atop the Ethereum network. All of the transaction processes on the network use the Ethereum blockchain. Like most DeFi projects, the purpose of Aave was to solve the pressing issues facing traditional lending services and convert centralized financial services over to their decentralized equivalents. In a typical lending scenario, when you lend your money to a bank, you will probably get a smaller interest than when you deposit that same amount of USDC(approximately $1) to Aave. Aave technology enables users to deposit in cryptocurrencies in the most transparent and permissionless manner where all interest or profits earned for lending their assets will be paid directly into the user Aave wallet.
#2: Decentralized Exchange (Eg: UniSwap)
DeFi Decentralized Exchange allows users to exchange cryptocurrencies without KYC
UniSwap is an example of DeFi project that contributes to the very core of the decentralized ecosystem, and UniSwap launched its UNI governance token in September 2020. UniSwap's primary goal is to solve decentralized exchanges' liquidity problem by allowing the exchange to swap tokens without relying on buyers and sellers creating that liquidity. What's unique about UniSwap is that any token using the ERC20 can be listed without permission on UniSwap. Apart from that, the network is developed to create a smart contract and liquidity pool easily if one does not exist.
#3: Yield Farming (Eg: Pancakeswap)
DeFi Yield Farming is a process that allows cryptocurrency holders to earn rewards on their holdings by depositing cryptocurrency into a lending protocol to gain interest from trading fees.
Pancakeswap is a great DeFi project that provides Yield Farming protocols as one of their services. PancakeSwap uses the Binance Smart Chain (BSC), and according to their docs, they are building an automated market maker (AMM) similar to Uniswap that allows any two tokens to be exchanged some added gamification features on top of it. Pancakeswap yield farming can works in a similar way to bank loans. However, in yield farming, cryptocurrency users are the bank itself. The core of Pancakeswap yield farming is that users can exchange one token for another without any intermediary, and the token swap can occur via liquidity pools between the token pairs. Users can also earn rewards by staking their tokens to provide a liquidity pool. Of course, that is not all of what Pancakeswap has to offer. Users can also stake coins into so-called Syrup Pools betting on the price of Binance Coin (BNB), lottery feature a wide array of collectible non-fungible tokens (NFTs) to purchase.
It is hard to determine which DeFi projects will succeed as the best. However, understanding the different types of DeFi protocols and how it used in some notable DeFi projects will be helpful for all users, especially when researching and selecting DeFi projects for investments. As always, this is not financial advice!
Stay tuned and see you again next time!
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