The emergence of decentralized finance or DeFi has probably been the most intriguing aspect of this market cycle. After years of experimenting with digital assets on the blockchain, developers seem to have figured out how to create financial instruments without the need for intermediaries, credit scores, identities or even collateral.
DeFi projects have been gaining more mainstream attention, as these financial instruments see further adoption. Here are the top three DeFi projects investors and developers need to keep an eye on.
The AAVE protocol has been one of the most successful DeFi projects in recent years. The platform allows users to borrow or lend digital assets. These smart contracts can allow lenders to extract double-digit interest rates and allow borrowers to use leverage without the need to prove their identity or provide credit scores.
AAVE developers have also been aggressively pushing the envelope with new DeFi innovations. They pioneered the concept of a flash loan – a massive amount of leverage offered without the need for capital as long as it’s paid back within a single transaction. Developers are now working on credit delegation, where lenders can delegate their credit to someone else, and a private pool for institutional investors to experiment with.
DeFi projects are built on blockchains, which means they’re only compatible with on-chain data. The entire industry is insulated from the traditional web which has a treasure trove of data gathered over three decades. Chainlink, as the name suggests, wants to solve that by serving as a bridge between on-chain and off-chain data.
This enables infinite new use cases that combine smart contracts and decentralized protocols with real-world data. Weather data gathered by sensors, market data published by stock exchanges, property data published by regulators and census data published by governments can now be used with smart contracts and digital assets using Chainlink.
If it gains more traction, Chainlink could be one of the most consequential DeFi projects in crypto history.
Uniswap allows users to easily trade or swap their digital assets. The platform uses smart contracts to create a liquidity pool from users willing to deposit their digital assets. This liquidity is used to allow other users to swap their assets for other assets in real-time with minimal fees. Part of those fees are then shared with the original liquidity providers.
In short, this is an exchange marketplace without market makers or financial intermediaries.
The DeFi projects listed above have attracted billions of dollars in recent years. Yet the industry is relatively nascent and has plenty of room to further disrupt traditional finance. As the market matures and more capital floods in, these protocols could reshape the way people access credit, buy properties, create wealth and tap into existing assets.