Beginners guide to the DeFi ecosystem: Some coins and platforms
The current DeFi ecosystem includes DeFi coins, decentralised central trading applications such as Uniswap, SushiSwap, and PancakeSwap, lending applications such as Aave and Compound, and Stablecoin applications like MakerDao, among other components.
DeFi coins
DeFi coins and tokens are not the same and the terms should not be used interchangeably. A DeFi coin, just like fiat currency, transfers an amount during a financial transaction. Example: Maker, Compound, Uniswap, Aave, etc. On the other hand, tokens may or may not have a financial value attached. It can represent physical assets or even act as something like a password or an access key to resources. These can be fungible or non-fungible.
Some of the best Defi coins to invest in are Uniswap, MANA, SUSHI, AAVE, Terra and Lucky Block. While deciding which DeFi token to invest in, one needs to check the growth potential and the cost price, past performance of the token, its current market capitalization, and the exchanges the token is listed on, among other things.
Uniswap (Native token: UNI): It is one of the top decentralized exchanges (unlike centralized exchanges like Binance, FTX, and Coinbase) to buy or sell your crypto assets and has its native DeFi coin. It was one of the first DEXs and introduced the Automated Market Maker (AMM) protocol in the crypto market. The platform allows peer-to-peer swapping between tokens on Ethereum through AMM, which sets the base price of the token taking into account a variety of variables and making the trading process decentralized. It also maintains smart contracts where investors can deposit their cryptos to be accessed by traders.
Swapping is when two parties on two different blockchains trade tokens through automatic exchange contracts. DEXs such as Uniswap, SushiSwap, and PancakeSwap lets you swap your cryptocurrency assets between different types of blockchains. Also called atomic cross-chain trading, it is one of the most decentralized and truly peer-to-peer methods for crypto trading that enables trustless transactions.
SushiSwap (Native token: SUSHI): Very similar to Uniswap, SushiSwap is an all-in-one DeFi platform that has a popular native token. This AMM came to existence to mitigate the various issues being faced by Uniswap and an upgrade to a community governance format. The decentralized platform also offers varied allied services, like earning yield on crypto holdings, staking, farming, getting lending agreements, apart from letting users buy and sell digital currencies by utilizing liquidity pools through Liquidity providers (LPs) and smart contracts.
PancakeSwap (Native token: CAKE): This is also an automatic market maker and yield farm and is one of the largest Ethereum decentralized applications today. Built on automated smart contracts deployed on Binance Smart Chain it allows decentralized trading at a much cheaper rate.
UniSwap, SushiSwap, and PancakeSwap are the three main players in the Automated market space (AMM). Both *PancakeSwap and Sushiswap are forks of Uniswap and all are decentralized finance protocols and automated market maker (AMM)s. But trading fees on PancakeSwap is cheaper than Sushiswap. Unlike Sushiswap, PancakeSwap offers lottery and NFT features apart from having yield farming and preliminary farm choices.
*Source: coindesk.com, coinmarketcap.com
AAVE (Native token: AAVE): It is an open-source Defi protocol through which lender can put their cryptos into a lending pool and get interested in the same. The funds accumulated on the liquidity pool are given to borrowers as ‘flash loans’ against a security deposit/crypto collateral. Its native token, also called AAVE, is one of the leading DeFi coins.
Flash Loans: This kind of uncollateralized lending, is one of the most innovative features of Ethereum-based DeFi protocols and has gained popularity post its introduction on Ethereum lending platform Aave in early 2020. Flash loans work on smart contracts and the process ensures instantaneous transactions. Here the borrower needs to pay back the loan by calling on other smart contracts to perform instant trades with the loaned capital before the transaction ends. If this is not done, the smart contract reverses the transaction. This is especially helpful for traders looking for arbitrage opportunities when two markets are having different prices for particular crypto.
Compound (Native token: COMP): This platform lets lenders deposit crypto into pools and earn interest, and borrowers take loans by depositing collateral. It is a decentralized protocol developed over an Ethereum blockchain. COMP is its governance token. Compound was recently in news for accidentally over-rewarding users with a bug that led to a slump.
Maker (Native token: MKR): Maker/DAI is a dual-token DeFi protocol and is one of the highest-ranked Ethereum-based DeFi platform in terms of TVL (total value locked). The software platform is responsible for the creation of DAI, the world’s first unbiased currency and one of the leading decentralized stablecoin. Dai is maintained and regulated by MakerDAO, a decentralized organization. While MakerDAO is a decentralized organization built on Ethereum that allows lending and borrowing of cryptocurrencies through smart contracts. The Maker Protocol lets any user with ETH and a Metamask wallet to lend money in for the DAI stablecoin. The decentralised MakerDAO ecosystem as well as the Maker Protocol works on a governing token called the MKR token. Although you can borrow DAI on Compound and Aave, you can only mint it on Maker. Maker, Compound, and AAVE are the top three leading protocols that are instrumental in the exponential growth of DeFi lending.
