DeFi in 2022 - Comprehensive Guide
What is DeFi in the crypto world?
In short, DeFi is Decentralized Finance. And, after all, isn't crypto all about decentralized finance? In a way. The DeFi initiative refers to a specific type of financial product that prioritizes decentralization over all else and employs financially rewarding incentive mechanisms to entice investors to participate. The decentralized finance world comprises a wide range of non-custodial financial products, built around a community of highly-experimental crypto projects that have captivated the interest of top companies and venture capitalists—as well as a fair share of scammers.
How does it work?
Aave, Maker, and Compound are three of the most popular projects. These protocols allow you to borrow cryptocurrencies instantly—and often in massive volumes if you can demonstrate your ability to repay the loan in a single transaction. You can also make money by lending out cryptocurrencies.
Then there's Uniswap, a DEX (decentralized exchange) that allows you to trade any Ethereum-based token you want or earn money by adding liquidity to the market for that token. DeFi is also about synthetic assets, such as Synthetix's tokenized stocks or Maker's decentralized stable coin, DAI, which is determined algorithmically by the protocol. These protocols are decentralized and non-custodial, theoretically earning them the DeFi label.
Non-custodial - The term "non-custodial" refers to the fact that the teams do not manage your cryptocurrency on your behalf. Unlike placing your money in a bank or lending out your cryptocurrency to a crypto loans company (such as Cred), you always remain in control over your assets with DeFi protocols.
Decentralized - This implies that the creators of these protocols have given the community power over their smart contracts—in the spirit of the hacker moral, those creators vote themselves out of control as soon as possible and let the users decide on the network's future.
What are the DEXs (Decentralized exchanges)?
DEXs enable users to trade digital assets without a mediator or third party. As a result, they have become a part of the overall crypto industry for years, despite being only one component of the DeFi sector, allowing participants to trade digital crypto without opening an account with an exchange.
DEXs allow you to hold assets away from a centralized platform even while letting you trade at will from your wallets via blockchain transactions. Automated market makers, a type of DEX, became famous in 2020 and use smart contracts and liquidity pools to support the purchase and sale of cryptocurrency assets. DEXs are generally built on top of specific blockchain systems, making their compatibility dependent on the technology on which they are built. DEXs built on the Ethereum blockchain, for example, assist the trading of Ethereum-based assets such as ERC-20 tokens.
Using DEXs necessitates the use of compatible wallets. Self-custody crypto wallets, in general, allow users to control the assets, and some of them are interoperable with DEXs. However, this type of asset storage places more responsibility on you to protect your funds. Furthermore, some DEXs may have fewer features and higher extra costs than centralized exchanges.
DEXs have come a long way in terms of liquidity and establishing a loyal user base, which is still growing. As a result, trading volumes will rise further as DEXs become more robust — that is, better and more efficient.
Wallets are places where digital assets can be stored and traded. Wallets can store multiple assets or just one, and they come in a variety of forms, including software, hardware, and exchange wallets. Self-hosted wallets — wallets for which you maintain your private keys — can be an essential component of DeFi, facilitating various DeFi platform uses depending on the wallet. In contrast, exchange-based wallets manage your private keys for you, offering you less control but also less protection responsibility.
Some of the most popular DeFi wallets:
MetaMask - This one functions as both a wallet and a browser. You can trade with your digital assets by using the app. You can use the wallet to make payments anywhere, securely log into websites to sell crypto assets, donate, borrow, loan, play games, publish content, buy rare NFTs, and much more. Check out another article from our blog to learn more about NFTs and Play-to-earn games. MetaMask also provides web3 applications via popular browsers such as Google Chrome. MetaMask is also available for a variety of devices. It, for example, supports three browsers: Google Chrome, Brave, and Firefox. Available for Android and iOS devices.
Coinbase wallet - It has been one of the top DeFi wallets on the market. However, you can use it to keep all of your cryptocurrency and NFTs in one place. It also allows you to trade over 500 assets on DEXs while earning interest on your investments. It is also not necessary to have a Coinbase account. The wallet supports over 500 different tokens, including BTC, ETH, USDT, UNI, LINK LTC, etc. In addition, you will be able to buy, sell, and store your NFTs all in one gallery. You will also be able to begin using DExs, DeFi protocols, NFTs, and blockchain apps. You can get the Coinbase wallet for Chrome or install the app on your Android or iOS device.
Argent - The Argent comes next. It is one of the best DeFi wallets on the market. The wallet is effortless to use and allows you to store Ethereum and DeFi securely. In addition, with a few clicks, you will be able to trade, earn interest, and invest in digital assets. Furthermore, the wallet provides one-tap access to DeFi and Ethereum, Compound, Uniswap, Lido, Yearn, Aave, WalletConnect, and other services. And there's more. The wallet makes it simple to display, send, and securely store high-value NFTs. You can also buy cryptocurrency with a direct deposit or a debit card.
Eidoo - Eidoo is yet another wallet on our list of the best DeFi wallets. The multi-currency wallet allows us to store both NFT and coins and quickly access other DeFi apps. While it primarily supports the Ethereum network, it compensates by supporting over 1,000 well-known Ethereum-based assets. The wallet is also ideal for investors looking to get their hands on new coin projects. It allows users to participate in Initial Coin Offerings (ICO) through its ICO engine. Furthermore, you can quickly and securely perform swaps on the crypto wallet using their built-in decentralized exchange.
After the list of the best DeFi wallets, let's briefly examine the current best DeFi projects:
MakerDAO ($MKR, $DAI) - MakerDAO is an Ethereum-based decentralized credit platform that supports Dai, a USD-pegged stable coin.
Aave ($AAVE) - an open-source, decentralized, non-custodial liquidity protocol built on Ethereum that allows users to supply and borrow crypto assets while earning a return on assets provided to the protocol.
Uniswap ($UNI) - an Ethereum-based completely decentralized on-chain protocol for token exchange that employs liquidity pools rather than order books. Anyone can quickly exchange ETH for any ERC20 token or earn fees by providing any amount of liquidity.
Sushiswap ($SUSHI) - a completely decentralized on-chain protocol for exchanging tokens via an automated market-making (AMM) process that employs 'liquidity pools' rather than an order book.
Yearn Finance ($YFI) - Build on the Ethereum blockchain, yearn. Finance is a decentralized ecosystem of aggregators that optimize your token lending by utilizing lending services such as Aave, Compound, Dydx, and Fulcrum.
Risks of DeFi
Despite its pledge, the decentralized finance space is still a developing market going through some growing pains. The legal ramifications of DeFi are unlikely to be fully realized. Governments worldwide may try to incorporate DeFi into their existing regulatory frameworks or create new laws attributed to the sector. DeFi, on the other hand, may very well be subject to additional regulations. In terms of implementation, it is unclear how things will unfold in the future. For example, traditional finance may adopt aspects of DeFi while retaining elements of centralization rather than DeFi replacing old mainstream financial options. On the other hand, any completely decentralized solutions may continue to exist outside of mainstream finance.