DeFi has been perhaps the buzzword of 2020 in crypto.
Standing for decentralized finance, 2020 was the year when the movement rocketed, with Defi tokens such as Uniswap causing massive ripples in the markets, reaching all-time highs. Most Defi projects are hosted on the Ethereum blockchain. Indeed, according to Coindesk, ‘DeFi now defines Ethereum.’ These projects are run through Decentralized applications (DApps). In this article, Bybit looks at the best DeFi DApps out there as we head into 2021.
What is a DApp?
A decentralized application (DApp) is a software application running on a blockchain. Unlike internet-based applications, they don’t need a centralized database to function. They run on Ethereum, but they also run on other blockchains that run smart contracts, such as EOS and TRON.
Some in the financial industry envisage that DeFi dApps will usher in a revolution by enabling people to conduct financial business in a completely decentralized manner and without an intermediary. So what are the best DeFi DApps out there? Here’s our rundown of the ten best DApps.
Labeled the ‘Godzilla of DeFi’ by Coindesk, MakerDAO has been around as long as Ethereum itself launched in 2015. It is a lending platform where users can borrow the stablecoin DAI, which is pegged to the US dollar. The key to MakerDAO’s success as a lending platform has been its decentralization.
As with all DApps, MakerDAO has no borders. Anybody around the world can use it. Noone is subject to identity or credit checks, as they would be if they used a lending service through a bank. The DAI uses cryptocurrencies as collateral, namely ETH, or some Ethereum-based (ERC-20) tokens, including BAT.
This cryptocurrency becomes locked-up until the user is ready to repay the loan and any incurred fees. Once they do so, the ETH will be released. However, if the ETH price drops below a certain point, it will be sold off to pay the DAI that has been borrowed, plus any penalties. These liquidations, or the threat of them, helps to stabilize the governance of the MakerDAO system.
Uniswap is a decentralized exchange (DEX) that allows anybody to participate in the transactions of ERC-20 tokens without the governance of a centralized body or intermediary. It gives permissionless access to financial services, thus staying true to the decentralized ideals of the Ethereum blockchain.
Since Uniswap is based on the Ethereum blockchain using smart contracts, it replaces traditional exchange functions. For instance, order books, with their own automated and permissionless liquidity pools executed by algorithms. These liquidity pools are pairs of ETH and ERC-20 tokens that are exchanged by traders. On Uniswap, users are incentivized to provide liquidity to these pools by being rewarded with a trading fee share. When they offered liquidity, users are given tokens called LP, which track how much liquidity they contributed.
This method of providing liquidity takes away the necessity of relying on market makers. The advantage of using Uniswap or DEXes is that they are very cheap to use. That is because they require minimal maintenance as they are hosted on the blockchain. Besides, they are also very safe and less risky.
Compound is another borrowing and lending DApp, built on the Ethereum blockchain. It allows users to borrow and lend cryptocurrency from other users. All are conducted through the smart contract protocol. On the other hand, lenders can earn interest from cryptocurrencies by adding to the liquidity pool. To do so, users must first connect their Ethereum wallet, such as MetaMask.
The tokens used on Compound are called cTokens. So, if a user deposits ETH, they will be given cETH in return. By applying the same concept, let’s say a user deposits USDT, they will be given cUSDT in return. These tokens allow users to track the value of the assets they lent and the interest accrued.
The interest of every token will fluctuate depending on the supply and demand of their native cryptocurrencies. However, typically, it will still probably be more than the interest offered by a savings account. Like other DApps, Compound has the advantage of not requiring identity checks and lower transaction fees. Also, the risk of borrowing is minimal, as assets are overcollateralized (a security measure that involves putting forward more of the asset than is needed as collateral.)
Curve is a DEX that quickly gained popularity in the latter stages of 2020 to become one of the most widely used DApps by volume worldwide. Like Uniswap, it uses automated liquidity pools. However, unlike Uniswap, it is explicitly designed to exchange stablecoins and Bitcoin-backed ERC 20 tokens such as Wrapped Bitcoin (WBTC). Therefore, as maintenance costs are lower, so are fees.
Its interface is not what you would call mainstream, but this could well be a deliberate ploy. The Curve isn’t designed for the mainstream user, as its use is so specific. Hence, not too many investors or traders would want or need to exchange stablecoins. Just like with Uniswap, users can earn rewards for adding liquidity to the liquidity pool. Curve is also popular with yield farmers because of the high use of stable stablecoins in yield farming.
Although Curve’s creators claim the lack of assets that can be exchanged increases its operating efficiency, the fact that you can only exchange stablecoins (and Bitcoin-backed ERC-20 tokens) could also be a disadvantage from a user’s point of view.
DYdX is another DEX based on the Ethereum blockchain. However, unlike other DEXes, on dYdX, you can lend, borrow, and trade cryptocurrencies on margin. There are two types of margin trading available: isolated and cross margin trading. There are currently three trading pairs available on the platform – ETH DAI, ETH USDC, and DAI USDC.
As well as margin trading, users can lend assets to accrue interest and conduct regular trading of the assets. There are some minimal miner taker fees for trading.
Users can earn interest by lending assets to other users. As with other lending DApps, the risk to the lender is low because of over-collateralization. For borrowing, the minimum collateralization ratio on dYdx is 125%.
Aave is another borrowing and lending DApp built on the Ethereum blockchain where users can lend their assets and earn interest in the process. To do this, they must connect their Ethereum wallet to the DApp. In a way, it’s similar to Compound.
However, Aave distinguished from the rest through the additional feature— flash loans. Practically, flash loans are loans that are valid just for one blockchain transaction. It allows for uncollateralized debt. But how is it possible?
This is made possible because the transaction is reversible at any time if the loan is not repaid. Assets for flash loans are sourced from smart contract pools. The interest rates on Aave for flash loans are low, at only 0.30%. Besides, flash loans also paved ways for arbitrage opportunities. To do this, traders can get a loan, make an arbitrage trade, and then pay back the loan and any interest that has been accrued.
7. Yearn Finance (YFI)
Yearn Finance is one of the new kids on the block, launched in July 2020, yet quickly become one of the most popular DeFi DApps. It is a yield aggregator that practically does all the yield farming work for you. It automatically searches the DeFi DApps on the Ethereum blockchain for the best yield returns.
The YFI token saw remarkable price rises after being launched. After having a launch price of $739 in July, its price shot up rapidly, reaching over $43,000 by September. Analysts put this down to the strong confidence those in the DeFi space have in Yearn Finance, which has an expanding range of products.
The main product is called vaults, where users can deposit their cryptocurrency and earn yields in return. Vaults use more complex strategies to get yields than their original product, which is called Earn. Hence, the common term yEarn is born.
Synthetix allows users to speculate on the price of real-world assets, such as other crypto assets, currencies, stocks, and precious metals (amongst others), using ERC-20 tokens. These tokens, known as synthetic assets or ‘synths,’ can track these assets’ prices.
Just as with Maker DAO, where users need to lock up ETH as collateral to create the stablecoin DAI, users on Synthetix need to lock up Synthetic Network Tokens (SNX) as collateral to create the platform’s native stablecoin, Synthetic USD (sUSD).
To acquire the real-world information of the assets’ price, Synthetix has teamed up with Chainlink and its oracle technology to give decentralized price feeds.
We’ve focused so far exclusively on Ethereum-based DApps, so it’s only fair to share the love around a little. Newdex is the first DEX to be based on the EOS blockchain. As of December 2020, it is the most popular EOS DApp by volume. It also operates on the TRON blockchain.
As with other DEXes, Newdex does not require KYC or has direct access to your funds. A wide variety of EOS trading pairs are available to trade and side chains, including BOS and TLOS.
EOS’s enhanced scalability (over Ethereum) has given this DApp an advantage in terms of transactions per second (TPS). However, this may not be such an advantage after Ethereum 2.0 is fully implemented. Nevertheless, Newdex is an excellent option for users looking for alternatives away from Ethereum.
Marketed as “your global, no limit betting platform’, Augur allows users to bet on a wide range of real-world events, such as sports, economics, and elections. It raised 2,000 BTC and 100,000 ETH in an Initial Coin Offering (ICO) in 2015.
At the heart of Augur are tradable tokens known as Reputation (REP). These tokens can be used to place bets, dispute the outcome of a bet, and purchase participation tokens. Reputation is an apt name for the tokens, as they can be received for being right about a disputed bet. They can also be received by purchasing and reporting on a bet.
Users buy or sell shares on the outcome of an event. Augur’s creators see the platform as the answer to a ‘broken’ betting ecosystem, where users readily get their betting limits lowered and accounts closed. As Augur is 100% decentralized and peer-to-peer, this cannot happen.
The Bottom Line
As DeFi continues to grow, DApps will inevitably become more and more prevalent. They have distinct advantages over conventional applications, such as the fact that they never have downtime, users have complete control over their funds, and they have ultra-low transaction fees. Additionally, as crypto becomes more widely used, people will no doubt be attracted to how they accept cryptocurrency as payment. With DApps such as Uniswap, they can be used for passive income.
A study by Blockchain Explorer has predicted that the “market size of DApps is projected to reach USD 21,070.2 million by the end of 2025”. Nevertheless, challenges remain. They can be very expensive to develop and tend to suffer from a lack of user-friendliness. Although these factors are changing, it may take some time yet before DApps become fully mainstream.