What is DeFi?
Decentralized finance (DeFi) is a sector within the cryptocurrency industry focused on providing decentralized financial services. It consists of numerous financial services created by developers that anyone can access. DeFi uses smart contract technology on the blockchain network with zero human intervention. This reduces the chances of errors and increases efficiency.
DeFi Protocols
Protocols can be considered as the rules or standards written for governing particular tasks or activities. DeFi protocols can feature a collection of rules and principles in alignment with real-world institutions for participants in specific industries.
A DeFi protocol uses computer code called smart contracts that run on a network. Most DeFi protocols are built on top of networks like Ethereum or Binance Smart Chain, polygon, and the number of competing blockchain networks with support for smart contracts is increasingly growing.
These networks are all accessible through wallet extensions like MetaMask, and only a few parameters need to be changed to switch networks. These wallet extensions essentially allow users to access their funds directly on their browsers. They are installed just like any other extension and often require users to either import an existing wallet — through a seed phrase or a private key — or create a new one. To bolster security, they are also password-protected. Some web browsers come with these wallets built-in.
It is good to note that each network has its own native tokens that are easily identifiable through the ticker symbol they use on exchanges: Ethereum (ETH), Polygon (MATIC), Binance Coin (BNB) and so on.
These native tokens are used to pay for transactions on these blockchains, so you’ll need some of those tokens to move funds around. You can choose to just buy these native assets before delving into DeFi, or you can add stable coins or other assets.
Protocols as essential prerequisites for operating in the DeFi ecosystem.
Most important of all, DeFi protocols offer liquidity in the DeFi ecosystem while also ensuring interoperability. As a result, multiple entities could use the most popular DeFi protocols for building an app or service.
Top 2 DeFi Protocols you need to check out
Aave
Aave is one of the most popular and leading lending protocols in the DeFi landscape. It utilizes the native token AAVE for the security of the protocol alongside enabling users to participate in the governance of the protocol. Users can stake AAVE tokens through the Safety Module for achieving AAVE rewards. Aave protocol aims to simplify the borrowing and lending of cryptocurrencies. The Aave protocol is essentially a system of smart contracts that manages the funds and enables instant loans. As per the whitepaper, the protocol algorithmically decides the interest rates for borrowers and lenders on its own. For borrowers, the protocol calculates the interest rate based on the funds available in the pool and the amount of funds the borrower requires. For lenders, the interest rate is calculated based on the earn rate and withdrawals at any time.
Uniswap
Uniswap is the largest decentralized exchange (or DEX) operating on the Ethereum blockchain. It allows users anywhere in the world to trade crypto without an intermediary(it is an automated liquidity protocol). Uniswap allows users to trade without intermediaries, with a high degree of decentralization and censorship resistance. Uniswap works with a model that involves liquidity providers creating liquidity pools. This system provides a decentralized pricing mechanism that essentially smooths out order book depth. Since the Uniswap protocol is decentralized, there is no listing process. Essentially any ERC-20 token can be launched as long as there is a liquidity pool available for traders. As a result, Uniswap doesn’t charge any listing fees.
Uniswap is open-source software
Thank you for taking out time to read about my favourite DeFi protocols