What Are DeFi Protocols?
It is essential to understand what DeFi is before jumping to DeFi protocols. Decentralized finance, commonly abbreviated as DeFi, is a collective term for blockchain-based applications that disrupt the legacy financial system. Since its inception, DeFi has matured into a vast ecosystem with integrated financial tools and protocols. So, what are DeFi protocols?
DeFi protocols are self-governing computer programs designed to address specific problems in the legacy financial system. According to the latest World Bank report, almost half of the world’s population lacks access to banking services. DeFi protocols strive to achieve financial inclusion among the unbanked and underbanked to eradicate poverty and enhance prosperity.
Currently, most DeFi protocols have become essential elements of the expansive crypto space with various notable cryptocurrency tokens and projects. As these protocols continue to increase, the potential for startups in the ecosystem becomes clearer.
Summary of Important Points
- DeFi protocols are self-governing computer programs that address specific problems in the traditional financial system.
- DeFi protocols strive to achieve financial inclusion among the unbanked and underbanked population.
- DeFi protocols increase the potential for startups in the DeFi space.
Why DeFi Protocols are Important
As discussed earlier, protocols are computer programs that govern specific tasks. In this regard, DeFi protocols comprise a set of rules and principles in line with physical institutions for users in particular sectors.
The users must regard the protocols as necessary requirements for thriving in the DeFi space. Importantly, DeFi protocols provide liquidity through borderless liquidity pools and ensure interoperability in the ecosystem. Liquidity pools are crowdsourced pools of funds held in smart contracts. They facilitate various decentralized activities such as borrowing, lending, yield farming, and governance.
The inability of various blockchains to communicate seamlessly hinders cryptocurrency users from experiencing the true nature of decentralization. DeFi protocols solve this problem by ensuring interoperability between networks. For example, users can share Binance Smart Chain and Cardano blockchain information through a DeFi protocol.
The Best DeFi Protocols
According to the latest defipulse statistics, the total value locked (TVL) in DeFi protocols is $75 billion. DeFi protocols are designed for different applications in the financial world, as illustrated below.
PancakeSwap is a major decentralized finance protocol. It was built in 2020 on top of the Binance Smart Chain to provide liquidity to the DeFi ecosystem. It leverages permissionless liquidity pools that are controlled by algorithms. With the help of Automated Market Makers (AMM), users lend their crypto assets to liquidity pools and receive liquidity tokens as a reward. It boasts significantly fewer fees and is faster than Ethereum-based alternatives.
Aave is a DeFi protocol that allows users to lend and borrow various digital currencies. It offers peer-to-peer (P2P) services through smart contracts and a liquidity pool. Users can lend their crypto assets to earn interest or borrow at a cost-effective interest rate. Aave runs on the Ethereum network and uses algorithms to handle transactions. It distinguishes itself from other lending platforms through collateral swaps and flash loans.
Ethereum is often known as the "father of smart contracts in the blockchain space." It was the first blockchain to implement the idea of smart contracts. Nevertheless, its high transaction charges and congestion issues hinder the mass adoption of DeFi. As such, developers have come up with other alternatives with faster processing speeds and lower fees.
Fantom is one of those alternatives. It is an open-source protocol for decentralized applications and cryptocurrencies. It makes borrowing, lending, and trading more accessible and enjoyable by offering a steady balance of security, stability, and decentralization.
The Graph is a DeFi protocol for analyzing and indexing blockchain data. It operates the way Google analyzes internet data to improve accessibility. Initially, The Graph would only index on the Ethereum blockchain, but since the introduction of Near blockchain, it started indexing on all blockchains.
The Graph works by grouping information into subgraphs or open APIs, making it easier for developers to analyze the information via The Graph QI API. In doing so, this protocol provides the much-needed data to other DeFi protocols, like decentralized exchanges, to run efficiently.
Posts and articles about Defi protocol
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