A comprehensive overview of DeFi in the Ethereum ecosystem

Ethereum can build many different types of applications. Today, most applications fall into the following categories: DeFi, DEX, Games, Collectibles, Marketplaces, Supply Chain, Development Tools, ID, Governance, Infrastructure, Enterprise Ethereum, Oracles, ERC Standards.

(Overview of Ethereum ecosystem)

This article interprets DeFi in the Ethereum ecosystem.

In the previous article, we mentioned that blockchain 1.0, represented by Bitcoin, is regarded as a "global ledger", while blockchain 2.0, represented by Ethereum, supports decentralized applications. Ethereum is a global open source platform for decentralized applications. On Ethereum, digital assets can be managed and programs can be run by writing code without geographical restrictions.

So what will it look like to use smart contracts to implement finance? The emergence of decentralized finance (abbreviated as "DeFi") has brought us real experience.

Decentralized finance (also known as "DeFi" or "open finance") refers to many decentralized protocols that build open financial infrastructure. Currently, almost all well-known DeFi projects are conducted on the Ethereum blockchain. These protocols are valuable because they are creating the necessary channels to enable anyone in the world with an Internet connection to autonomously access uncensored financial services. It can be said that in essence, DeFi is a series of financial applications developed based on open decentralized platforms such as Ethereum, and the entire business process is an interactive action on the chain.

In the existing system, all financial services are controlled by central institutions. Whether it is basic remittances, asset purchases, or lending, you have to go through intermediaries, who charge rent for intermediating financial transactions. But Ethereum-based financial services connect individuals peer to peer, allowing them to obtain basic financing more easily and economically.

So how should all this be achieved? In fact, one of the important reasons why the financial services industry is as large and lengthy as it is today is that financial transactions in the digital field are not secure. We have no way to trust our online counterparties, so we pay fees to financial institutions to enforce this trust.

Ethereum leverages the same principle of “digital trust” as Bitcoin and applies it to smart contracts, which are snippets of code that automatically execute business logic after certain predefined conditions are met.

Smart contracts look a lot like financial contracts in that they hold funds in escrow and transfer funds based on specific events. This system is superior because the encoded business logic cannot be manipulated by a central party once it is deployed on Ethereum’s main network.

Therefore, we can say that blockchain-based financial services are superior to centralized financial services in terms of the following characteristics:

No permission required: All you need to access these services is an internet connection

Censorship resistance: No centralized authority can reverse the order of transactions and shut down the service

Trustless: Users do not have to trust a central party to ensure transactions are valid

Transparency: Public blockchains such as Ethereum are fully transparent and auditable

Programmable: Developers can create and integrate financial services at very low cost

Efficiency: Open financial services are driven by code, not people, so the costs of middlemen are much lower (if any at all)

Currently, DeFi applications are generally divided into the following categories:

Stablecoins: Dai, GUSD, USDC, TUSD, USDT, Paxos

Lending: bzx, Compound, Dharma, dydx, Expo, Fulcrum, Maker, Torque, Nuo Network

Investments: Bskt, Digix, Set Protocol, Settel, WBTC

Payment: Burner Wallet, The Dai Card, StablePay

Insurance: Etherisc, Nexus Mutual

Prediction Markets: Augur, Gnosis

Synthetic Assets: Synthetix

DeFi Dashboards: Zapper, Zerion

Securities Tokenization: Abacus, Harbor, Polymath, Securitize, Templum

(General classification of DeFi applications)

Ethereum’s DeFi applications occupy the majority of the entire DeFi ecosystem. As shown in the following figure: Ethereum has 204 DeFi applications, EOS has 22, and BTC has 26.

It is worth mentioning that Golden Finance previously reviewed the entire DeFi ecosystem. The following figure shows the key projects of the overall DeFi ecosystem, not just the Ethereum platform. Interested readers can scan the code to read.

(Golden Finance DeFi Ecosystem Overview)

This article focuses on the Ethereum ecosystem, with a focus on reviewing the DeFi applications on it.

1. Stablecoins: Dai, GUSD, USDC, TUSD, USDT, Paxos

Mainstream digital currencies such as Bitcoin and Ethereum are non-stable currencies, and their value will continue to change with market fluctuations. In order to facilitate the connection with the real world, crypto practitioners hope to create a "stable currency" that has a relatively stable value.

The world's first stablecoin is USDT, which was issued by Tether in 2014 and is currently the leader in the stablecoin market. Tether claims that for every USDT issued, it will deposit $1 into the bank to anchor the USD to ensure stability. Of course, in recent years, a series of stablecoins have emerged, such as Dai, GUSD, USDC, TUSD, Paxos, etc.

Currently, there are three forms of stablecoins, namely the fiat currency reserve mortgage model, the digital asset mortgage model, and the minting rights model.

Fiat currency reserve mortgage model: users holding stablecoins are actually IOUs issued by the stablecoin issuing company. The centralized issuing company mortgages its own assets to issue stablecoins. Each stablecoin corresponds to an equivalent asset in the bank. The typical example is USDT.

Digital asset mortgage model: mortgage digital assets on blockchain smart contracts to issue digital currencies anchored to legal tender prices. In this model, the collateral itself is mainstream digital currencies such as BTC and ETH.

Minting rights model: Different from the mortgage models of the previous two, the minting rights model is an algorithmic central bank model. The central idea is to automatically adjust the supply and demand relationship of tokens in the market through algorithms, thereby stabilizing the price of tokens at a fixed ratio with legal currency.

In addition to the well-known USDT, the stablecoin DAI on MakerDAO is also a typical representative. There are two currencies on MakerDAO, one is the stablecoin DAI, and the other is the managed currency Maker. DAI is a digital currency supported by collateralized encrypted digital assets, and its price is kept 1:1 stable with the US dollar. Maker is a smart contract platform on Ethereum, which supports and stabilizes the price of DAI through collateralized debt positions, automated feedback mechanisms and appropriate external incentives.

It is worth mentioning that in terms of compliant stablecoins, on September 10, 2018, the New York Department of Financial Services (NYDFS) issued an announcement on its official website, authorizing digital currency exchange Gemini Trust and blockchain startup Paxos Trust to issue cryptocurrency stablecoins that are stable, strictly pegged to the US dollar at a 1:1 ratio. Subsequently, Gemini Trust launched GUSD and Paxos launched PAX stablecoin.

2. Lending: bzx, Compound, Dharma, dydx, Expo, Fulcrum, Maker, Torque, Nuo Network

As mentioned above, compared with the traditional financial world, the core of the DeFi concept is to use the transparent and verifiable features of decentralized platforms to realize various traditional financial infrastructures. Lending is undoubtedly an important part of finance.

In the past two years of development, some DeFi projects have gained relatively wide recognition.

MakerDao is built on the Ethereum smart contract infrastructure, and is a stablecoin issued with on-chain digital assets as collateral and a derivative financial system; Compound is an open source lending market, which determines the lending rate by algorithm, and users conduct lending activities by pledging on-chain digital assets; dYdX is a decentralized trading platform, which is also based on Ethereum's open source protocol and can conduct leveraged transactions; Uniswap is familiar to everyone and has started the boom of liquidity mining. A decentralized market that supports liquidity with a resource pool, and all transactions are completed on the Ethereum chain; bZx is a protocol for decentralized margin trading, which focuses on lending and margin trading. It is most similar to another popular DeFi product dYdX. The biggest difference between the two margin trading protocols is that the bZx protocol has a native token; Dharma is a DeFi project for crypto banks, which is essentially a crypto wallet. Users can get annualized returns by depositing funds. It is similar to the business of ordinary banks, but it handles the banking business of crypto assets. Expo is based on the dYdX protocol and will initially support Short Ethereum pegged to ETH, and will add support for other short and leveraged assets. Expo is integrated with the dYdX margin trading protocol, allowing users to buy, sell, and manage margin tokens, greatly simplifying the margin trading experience;

Fulcrum is built on the bZx base protocol, the simplest and most effective way to lend and margin trade. Currently, it is the first and only completely trustless margin platform, with no authorization, no fees, and no need to create an account. The bZx base protocol is audited by ZK Labs; Torque is used to borrow assets with unlimited loans and fixed interest rates, and you can get crypto-backed instant loans without KYC or credit checks; Nuo Network is a decentralized debt market where users can interact with Ethereum-based assets in a variety of ways. Nuo's loan product allows users to provide funds to the reserve pool and earn interest every day; Kyber/0x/IDEX are all decentralized trading markets based on Ethereum, and each has certain differences in the technical architecture of order set management, matching and trading; Synthetix is ​​a synthetic asset platform supported by cryptocurrencies, which opens up channels for purchasing fiat currencies, commodities, stocks, indices and other financial derivatives with cryptocurrencies.

3. Investment: Bskt, Digix, Set Protocol, Settel, WBTC

Bskt is a smart contract for creating decentralized token portfolios.

Digix's DGX tokens are backed by physical gold and issued on Ethereum, where 1 DGX is equal to 1 gram of gold.

Settle is a web-based operating system and dashboard for decentralized finance.

Set Protocol is an infrastructure service based on the Ethereum ERC20 standard. It abstracts a package of tokens into a token collection through smart contracts, fully collateralized, convertible, and composable. Its usage scenarios include digital currency index funds, exchange-traded funds, and payment services involving multiple tokens.

WBTC brings greater liquidity to the Ethereum ecosystem, including decentralized exchanges (DEX) and financial applications. Today, most trading volume occurs on centralized exchanges with Bitcoin. WBTC changes this, bringing Bitcoin liquidity to DEXs and making it possible to trade tokens using Bitcoin.

4. Payment: Burner Wallet, The Dai Card, StablePay

Burner Wallet runs in your mobile browser like Safari, no apps or keys to download. Burner Wallet runs on POA Network's xDai sidechain, and because it's DAI, dApps can simply quote USD amounts. In addition, block lock times are only 5 seconds, and gas fees are very cheap and paid in DAI. xDai and DAI/ETH are as easy to transfer as address to address. Burner Wallet, developed by Austin Thomas Griffith. The original intention was to use a ubiquitous platform like mobile web browsers to implement a simple way to exchange stablecoins like DAI. Using a mobile phone, send DAI to another phone in 5 seconds by simply scanning a QR code without downloading any wallets. It can be done using a web browser. Because it is only for ease of use, the private key is stored in a cookie and is not encrypted. So, when you complete the transaction, it costs very little to destroy it.

The Dai Card app is a simple browser-hosted wallet that allows users to transact in Dai instantly, cheaply, and securely.

Similar to a debit card, users “top up” their balance by depositing ETH or Dai directly into their Dai Card address. Dai Card runs on the Ethereum mainnet in a payment channel, so user funds are always self-custodial, greatly simplifying the “cash out” experience. Integrating the Connext system into custom applications is also simple and only requires basic Javascript knowledge. StablePay is an easy way to send, receive, and pay for DAI.

5. Insurance: Etherisc, Nexus Mutual

Etherisc is a decentralized insurance protocol that jointly builds risk transfer solutions, common infrastructure, product templates and insurance as a service to form a platform where anyone can create their own insurance products.

Nexus Mutual allows anyone to purchase insurance risk-sharing pools, providing a decentralized insurance alternative with smart contract protection. Smart contract insurance is not a traditional insurance contract, and claim payments will be implemented through economic incentives driven by digital tokens, rather than centralized, trustworthy insurance companies.

6. Prediction Market: Augur, Gnosis

Prediction markets facilitate the trading of event derivatives. They have been around since the 1990s and are sometimes referred to as information markets, idea futures, and decision markets. Participants use prediction markets to speculate on the outcomes of events. Many believe that decentralizing prediction markets will allow us to harness their full potential by reducing the cost of participation, bypassing strict regulation, and by making the platform more accessible across regions.

Augur is a prediction market protocol based on Ethereum. Users can use digital currency to make predictions and bets, relying on the wisdom of the crowd to predict the development of events. It can effectively eliminate counterparty risk and server centralization risk, while using cryptocurrencies (such as Bitcoin) to create a global market. Augur does this by allowing anyone to create and speculate in financial derivatives at any time and anywhere at low cost. This is the first time in history that such a thing has happened. If Bitcoin gave us decentralized currency and Ethereum brought decentralized computing, Augur will empower a decentralized financial system.

Gnosis is an open platform for creating prediction market applications on the Ethereum protocol. It provides an open platform for people to predict the outcome of any event, greatly simplifying the process of creating customized prediction market applications. At the same time, Gnosis uses the characteristics of blockchain trust machines and smart contracts to automatically execute, allowing players to enter the prediction market more flexibly and freely, bringing more imagination to the prediction market. In the future, Gnosis participants do not even need to be natural persons. In the Internet of Things, information collected by sensors can also be easily entered into the blockchain as information assets for sale.

7. Synthetic Assets: Synthetix

Synthetix is ​​synthetic fiat currencies collateralized by crypto assets. Born as a stablecoin project Havven, it launched the first stablecoin pegged to the US dollar in June 2018. Havven changed its name to Synthetix and expanded its scope to a synthetic asset platform launched on Mainnet in December 2018. As of June 2019, the Synthetix platform supports more than 20 Synths representing fiat currencies, commodities (such as gold), and crypto assets. Stocks, indices, and other derivatives are expected to join soon. It is one of the only platforms that supports shorting certain tokens through synthetic inverse tokens, such as iMKR, iXTZ, iBNB, iETH, iBTC.

It is a decentralized payment network designed for daily digital currency consumption. The Synthetix network uses a dual-currency system to reduce price volatility. The transaction fees of the network are used as collateral to issue a new asset-backed stable token on the blockchain, the Nomin token.

8. DeFi Dashboard: Zapper, Zerion

Zapper.fi aims to manage, monitor, and deploy DeFi assets and liabilities in a simple interface. It was created by merging DeFiSnap and DeFiZap. The former DeFiZap aims to provide one-click direct access to multiple DeFi protocols from an Ethereum wallet. It is a smart contract system Zaps that deploys ETH and the upcoming DAI across multiple DeFi protocols in a single transaction. Zaps injects ETH into DeFi protocols on top of Ethereum, thereby promoting widespread user adoption.

Zerion provides a blockchain-based interface between decentralized financial applications. Zerion creates a trustless banking system that provides secure and seamless access to all financial use cases. Zerion aims to be the gateway to the world of decentralized finance. The blockchain-based DeFi decentralized financial protocol can be used on applications such as 0x, Uniswap, Kyber, Compound, MakerDao, etc.

9. Securities Tokenization: Abacus, Harbor, Polymath, Securitize, Templum

Polymath aims to bring compliant securities to Ethereum in the form of tokens. Polymath Network is a platform for creating tokenized securities. Polymath uses blockchain to assist users in the complex legal process of securities transactions, while providing complete transparency and greater security, as well as a more efficient way to audit transactions using smart contracts. The system aims to bring much-needed regulation to crypto security tokens in a completely revolutionary way.

Harbor is a "one-stop" securities digitization platform. In addition, on the Templum platform, both security tokens can be issued and secondary market investments can be made by issuers and investors. Like other solutions, Templum has built-in AML/KYC certification services to ensure that the platform complies with regulatory requirements.