The DeFi Landscape
DeFi is comprised of a wide variety of protocols, and more are added all the time as the space evolves. Some of the key protocols are listed below and discussed in the following sections:
- Trading
- Borrowing/Lending
- Staking
- Insurance
- Asset Management
Trading
The largest DEX is Uniswap. It was created by Hayden Adams, a mechanical engineer from New York. The idea came from posts written by Ethereum’s founder about developing an automated market maker and decentralized exchange. As of May 2022, Uniswap facilitates over $3 billion in daily trading volume.
In DeFi, the large-scale trading of crypto assets occurs on decentralized exchanges (DEXs). A DEX does this entirely through automated algorithms instead of the conventional approach of acting as a financial intermediary between buyers and sellers. The algorithms that DEXs use are examples of smart contracts. The idea behind a DEX is disintermediation, which means removing intermediaries so peer-to-peer (P2P) trading can occur. Most DEXs do away with conventional exchange order books, where buyers and sellers are matched based on order prices and volume, in favor of liquidity pools.
Liquidity pools are peer-to-peer marketplaces enabling anyone to supply two tokens into a pool, providing liquidity to match buyers and sellers facilitated by an Automated Market Maker (AMM) algorithm.
Amberdata helps you understand the composition of DEX liquidity pools. You’ll know who holds how much and at what percentage. You can view wallet-level data to see pool participation, earnings and losses (impermanent and realized). Backtest your liquidity mining programmatic strategies with historical DEX data to maximize returns.
Liquidity providers who deposit token pairs earn a percentage of the transaction fees charged to users of the pool. This is called liquidity mining. In exchange for providing assets to the pool, investors are given Liquidity Provider (LP) tokens. Their LP tokens generate a yield that is based on the investor’s share of the total pool liquidity. As long as the assets provided remain in the liquidity pool, the DEX may also reward liquidity providers with native governance tokens. These tokens give access to the DEX’s governance and can also be exchanged for rewards or other cryptocurrencies. This liquidity mining process is critical to the AMM model.
Similar to traditional asset classes there are DEXs that provide spot, derivatives (e.g., options, futures, and perpetual contracts), and margin trading. There are also several DeFi protocols that create synthetic assets that can be traded, including Synthetix and UMA.
With automated and permissionless trading facilitated by automated market makers (AMMs), decentralized exchanges (DEXs) are the key players in the DeFi ecosystem. Amberdata delivers real-time and historical reference data to meet your trading and compliance needs.
Borrowing/Lending
Aave is one of the most popular DeFi lending protocols in the crypto space. The platform lets users lend and borrow crypto tokens. As of May 2022, there was over $16 billion of liquidity locked in Aave.
DeFi lending protocols are leaders in the DeFi ecosystem and present an opportunity for lenders to provide liquidity to the market to earn a passive income, while borrowers are able to borrow in an overcollateralized (perpetually, no end date) or undercollateralized (one-block liquidity, aka flash loans) fashion. DeFi lending protocols offer many advantages over traditional lending. Loans are generally overcollateralized and algorithmically facilitated. Like a DEX, the transaction process is fully automated.
Similar to DEX liquidity pools, DeFi lending pools serve this automated process. DeFi lending is instantaneous and provides permissionless access, enabling loans to be made to anyone with the proper collateral.
With Amberdata, you can understand the different lending and borrowing rates and view each protocol and its composition (e.g., who is in the pool, their lending and borrowing positions and where the assets are leveraged and controlled).
In addition to lenders receiving interest, many DeFi lending protocols reward users with native tokens. Users earn a pro-rata share of tokens based on how much they borrow or lend. This provides an additional yield to users, rewarding active participation in the protocol.
DeFi arbitrageopportunities exist across DEXs, liquidity pools, and protocols. Amberdata provides the DeFi data that is critical to developing efficient arbitrage strategies.
Staking
As of April 2022, the total value of cryptocurrencies staked exceeded $280 billion.
A fundamental element of proof-of-stake (PoS) blockchains are validators. Validators are network participants who stake (or lock) a certain quantity of native coins to participate in verification of new blocks of data being added to the network. In exchange for participating in validation of new blocks, validators earn staking rewards. They have a vested interest in the blockchain and must perform their duties correctly or risk being “slashed” and losing part or all their staked coins. Staking offers crypto holders a way of putting their digital assets to work. As validators, they can earn passive income without needing to sell their tokens. This is referred to as direct staking. The most popular cryptocurrencies that can be staked are Solana (SOL), Ethereum (ETH), Terra (LUNA), and Cardano (ADA).
In the DeFi space there are more than 40 staking protocols over 20+ blockchains.
As of April 2022, the TVL of the 22 liquid staking protocols was nearly $23 billion.
One of the issues with direct staking is that the high balance requirements to become a validator are often beyond the means of many coin holders. For example, to become a validator on Ethereum requires staking 32 ETH. However, any digital asset holder can participate in the staking process by delegating their holdings to stake pool operators who do all the heavy lifting involved with validating transactions on the blockchain. There are even DeFi staking protocols like Lido and Socean that optimize delegation to maximize return and reduce staking risk.
With Amberdata, you can see the current yield on various proof-of-stake protocols and can easily determine which exchanges have better yields. When deciding when and where to stake, Amberdata provides the analytics you need to maximize staking yield.
Liquid staking protocols like Lido and Socean take the staking concept one step further by solving the issue of locking the staked asset. In these protocols, underlying invested assets remain locked while participants receive a token representing their ownership share of the stake pool. These tokens are liquid and can be used in other DeFi protocols for utility and additional returns without sacrificing the staking rewards earned by the underlying staked asset.
Lido is the top liquid staking protocol. According to Lido’s stats on April 26, 2022, they had $19,232,873,531 staked among 101,481 stakers. $10.6 billion is from Ethereum.
Insurance
As a new segment of the digital asset class, DeFi poses considerable risks. Bugs in dApps, design issues with smart contracts, poor data from oracles, and software exploits are some of them. New DeFi insurance dApps are now available to provide coverage for these risks.
DeFi insurance providers allow you to pay a set amount or percentage of assets to get coverage to protect against loss of assets on a particular protocol for a specific time period. The amount paid is based on the provider, duration and coverage type. It’s important to understand exactly what events are covered when obtaining DeFi insurance, as is the case with traditional insurance policies. DeFi insurance coverage is available for protocol attacks/hacks, stablecoin price crashes and even smart contract bugs.
Nexus Mutual is one of the leading DeFi insurers, providing coverage for smart contract failures and exchange hacks. Some of the other popular DeFi insurance providers include Solace and Unslashed. Even blockchain infrastructure provider Blockdaemon recently announced staking slashing insurance as a new offering.
While DeFi provides great opportunities, it comes with its share of risks. In 2021, over $12B was lost as a result of DeFi hacks.
Asset Management
The asset management sector of DeFi aims to provide services such as yield optimization and portfolio management in a non-custodial, decentralized fashion, with no need for active managers. DeFi asset management’s focus is to make investing cheaper, safer and more accessible. They often connect to a wide variety of DeFi protocols making for a seamless experience for investing across them, with automated collateralization, rebalancing and liquidations. DeFi users can manage their investments across the entire protocol ecosystem with easy-to-use management dashboards.
Yearn Finance is one of the emerging asset management leaders, providing automated strategies implemented with smart contracts with the intent to find the most favorable yields while minimizing risk. Yearn creates pools of assets across lending protocols like Aave, Compound and Fulcrum, continuously looking for the best yields and rebalancing. This approach effectively automates yield farming strategy for the user. Yearn’s most complex feature is Vaults. These automated smart contracts combine strategies to maximize returns. As an analogy, think of Vaults like actively managed mutual funds. Investing in Vaults is simple as the interface allows users to see the historical return for each strategy and invest with popular stablecoins like USDC and DAI.
Yearn Finance was launched in 2020 and as of November 2021 had already amassed $6 billion in assets under management.
Other popular asset management protocols include Enzyme Finance and Set Protocol.
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