DeFi is the future of our money. And DeFi protocols are the blood of the DeFi world. What are the most important and influential DeFi protocols you should be using or at least closely watching in 2024? Read the article to find out.
The decentralized finance (DeFi) industry has grown rapidly in the past few years, expanding from a tiny niche to a multi-billion dollar powerhouse. This exponential growth is more than a passing trend; it heralds a sea change in the dynamics of our monetary systems.
This transformation is being propelled by protocols for decentralized financial infrastructure (DeFi). They successfully rethink the concept of permissionless, open, and highly interoperable financial transactions. It is our expectation that blockchain technology will provide us with that.
The ultimate goal of DeFi is to make financial services and products accessible to more people around the world by cutting out intermediaries and lowering transaction costs.
According to data from DeFi Pulse, the total value locked (TVL) in DeFi protocols surpassed $100 billion in 2023. The sector's quick growth and the trust users have in decentralized platforms are demonstrated by this.
A new set of protocols that challenge long-standing financial standards is driving this ecosystem's growth. Loaning, borrowing, trading, yield farming, and insurance are just a few of the many decentralized services they offer.
Yes, there is a negative aspect. The DeFi industry is sophisticated and multidimensional, which can mislead even experienced investors.
Even the most devoted investors and Satoshi fans are overwhelmed by the sheer number of protocols in the DeFi ecosystem. There are benefits and drawbacks to each option. Every one unique in its own way.
That much variety can be intimidating to newcomers. You must be aware of the key figures in this emerging financial landscape in order to understand how to traverse it.
The Anatomy of DeFi
DeFi protocols are complex and operate within a larger financial ecosystem, so it is important to first understand them in order to appreciate their impact.
What Is a DeFi Protocol?
A DeFi protocol is a decentralized application (dApp) built on blockchain technology, designed to replicate and enhance traditional financial services. Smart contracts, which are self-executing contracts with the terms directly written into code, are how these protocols work. They enable automated, transparent, and trustless transactions.
How Do DeFi Protocols Work?
Essentially, DeFi protocols eliminate the need for intermediaries by enabling peer-to-peer transactions. Smart contracts enable direct user interaction on the blockchain; these contracts contain criteria that, when met, carry out predetermined actions. Since there is no human element to the process and everyone is following the same set of rules, the likelihood of fraud or human error is greatly reduced.
This could happen, for instance, in a DeFi lending system, where users may deposit their bitcoin into a smart contract and then lend it to one other. Algorithms that factor in supply and demand are typically used to compute interest rates.
Collateral is needed to obtain loans in the cryptocurrency market due to the volatile nature of cryptocurrency values. The value of this collateral can well exceed the principal of the loan.
Types of DeFi Protocols
-
Lending and Borrowing Protocols. These platforms, such as Aave, Compound, and Venus, allow users to lend their assets to earn interest or borrow assets by providing collateral. They democratize access to credit and offer more attractive rates compared to traditional banks.
-
Decentralized Exchanges (DEXs). Protocols like Uniswap and Curve Finance enable users to trade cryptocurrencies directly from their wallets. They use automated market makers (AMMs) to facilitate liquidity, eliminating the need for order books and intermediaries.
-
Yield Farming and Staking Platforms. Yield farming involves lending or staking cryptocurrencies in exchange for rewards, often in the form of additional tokens. Pendle and Lido offer innovative ways to maximize returns on digital assets.
-
Governance Protocols. These platforms empower users to participate in decision-making processes. MakerDAO and Compound allow token holders to vote on protocol changes, fee structures, and other critical updates.
-
Insurance Protocols. DeFi insurance platforms like Nexus Mutual provide coverage against smart contract failures and other risks inherent in the DeFi ecosystem.
The Role of Smart Contracts
Smart contracts are the backbone of DeFi protocols. They are immutable and transparent, meaning once deployed, their code cannot be altered, and anyone can audit them. This transparency builds trust among users and reduces the reliance on centralized authorities.
The Top 10 Most Influential DeFi Protocols
MakerDAO
Originally started by Rune Christensen in 2015, MakerDAO leads the way in the distributed finance (DeFi) industry.
It unveiled DAI, among the first distributed stablecoins anchored to the US dollar and collateralized by bitcoin assets.
Operating on the Ethereum network, MakerDAO lets users create DAI by locking down collateral like Ether (ETH) in smart contracts called Maker Vault. This system uses smart contracts to keep the peg to the dollar and guarantees the stability of DAI by automated management of collateralizing ratios.
DAI's market valuation as of October 2024 is around $5.3 billion, which emphasizes its great acceptance inside the DeFi ecosystem. With a market capitalization of roughly $1 billion, the governance token, MKR By voting on important choices including risk limits, collateral kinds, and fee changes, MKR holders actively participate in the governance of the protocol, therefore preserving the dispersed ethos of the platform.
The development of a distributed stablecoin by MakerDAO gave the DeFi ecosystem a vital instrument since it let users transact with a stable medium in an unstable market. Blockchain systems' distributed decision-making pattern is modeled by its governance structure.
MakerDAO has greatly helped to democratize finance by letting people use their crypto assets create liquidity, therefore complementing the basic ideas of DeFi.
Uniswap
Introduced in 2018 by Hayden Adams, Uniswap transformed distributed exchanges (DEXs) by means of the automated market maker (AMM) concept.
Constructed on the Ethereum blockchain, Uniswap lets users exchange ERC-20 tokens straight from their wallets without using middlemen or conventional order books. Rather, it uses a constant product formula (x y = k) and liquidity pools to enable trades and hence enable smooth, permissionless token exchanges.
As of October 2024, Uniswap's governance token, UNI, has a market valuation of over $5.4 billion; daily trading volumes on the platform are often handled by daily trade volumes above $1 billion.
By means of a portion of the trading fees, liquidity providers are rewarded, therefore improving the general liquidity and efficiency of the DeFi market.
Uniswap has greatly raised liquidity inside the DeFi ecosystem by democratizing access to token trading and removing entrance requirements. Many additional DEXs have been influenced by its AMM paradigm, therefore reinforcing its central importance in distributed finance. By letting new projects be seen free from the limitations of centralized exchanges, Uniswap's permissionless token listing has also encouraged creativity.
Aave
Originally ETHLend when Stani Kulechov founded it in 2017, Aave renamed in 2018 to indicate a different path.
In Finnish, the term "Aave" denotes "ghost," thereby reflecting the protocol's emphasis on openness and transparency. Mostly running on the Ethereum blockchain and growing to networks like Polygon, Aave is a distributed lending platform letting users lend and borrow a wide spectrum of coins.
Aave's native token, AAVE, has a market capitalization of around $2.3 billion as of October 2024; the protocol usually has a total value locked (TVL) more than $10 billion.
Aave brought novel ideas including flash loans—unsecured loans payable back-off within a single Ethereum transaction. Without first capital, this function creates arbitrage chances and sophisticated financial tactics.
Variable and stable interest rates let users control borrowing expenses by means of flexibility. Users get tokens, interest-bearing tokens reflecting their ownership, when assets are entered onto the platform.
Aave's governance structure enables AAVE token holders to take part in decision-making process, therefore impacting the parameters and development of the platform.
Aave has greatly advanced the DeFi loan business by improving capital efficiency and bringing fresh financial products. Its creative features and easy-to-use interface have drawn institutional and retail players, therefore helping distributed finance to be more widely accepted.
Lido
Established in December 2020, Lido was started by a group of entrepreneurs including Jordan Fish and Vasiliy Shapovalov to solve staking on proof-of-stake (PoS) blockchains issues.
Operating on networks like Ethereum and Solana, Lido offers liquid staking solutions whereby users may stake their assets and keep liquidity by means of staked tokens (stTokens), so reflecting their staked holdings.
With the network running over $10 billion in staked assets and Lido's governance token, LDO, having a market valuation of over $1 billion as of October 2024 Lido improves the accessibility and effectiveness of staking in the DeFi ecosystem by letting users get staking incentives without shutting off their assets.
Lido's distributed node operator system helps the underlying blockchains to remain decentralized and secure. LDO token holders engage in the governance of the system, therefore impacting choices on node operator choice and fee rates.
Other DeFi systems can also make use of the st Tokens produced by Lido, therefore generating more yield chances and encouraging ecosystem interoperability.
Lido has fundamentally changed the DeFi scene by releasing the liquidity of staked assets, therefore allowing users to optimize their holdings' value and engage more actively in distributed finance events.
Compound
Robert Leshner and Geoffrey Hayes launched Compound in 2017 as a DeFi technology enabling distributed lending and borrowing of cryptocurrency.
Compound, which runs on the Ethereum blockchain, uses algorithmically calculated interest rates based on real-time asset supply and demand.
The governance token COMP has a market valuation of roughly $404 million as of October 2024; the TVL of the system regularly exceeds $5 billion.
Users of the platform get cTokens reflecting their investment when they provide assets, which over time build interest. Providing collateral allows borrowers to access money; the platform guarantees over-collateralization to help to reduce risks.
By giving COMP tokens to consumers who either supply or borrow assets, compound popularized the idea of liquidity mining by motivating involvement and thereby improving the liquidity of the protocol. The governance structure lets COMP holders suggest and vote on protocol modifications, therefore promoting a community-driven method of development.
Compound has helped the DeFi lending market develop and mature by streamlining the earning interest on cryptocurrency assets process and offering a safe borrowing platform. Its developments have affected many other procedures, so confirming its importance in the ecology.
Curve Finance
Michael Egorov launched Curve Finance in 2020; it is a distributed exchange focused in effective stablecoin trading.
Operating on the Ethereum blockchain and supporting networks like Polygon, Curve swaps assets of similar value, such stablecoins or wrapped tokens using a special AMM technique tuned for low slippage and cheap costs.
As of October 2024, Curve's governance token, CRV, has a market valuation of about $331 million; the TVL of the platform sometimes exceeds $10 billion. Trading fees and CRV token awards let liquidity providers motivate themselves to deliver assets to the liquidity pools of the platform.
StableSwap algorithm of the protocol makes high-efficiency swaps between stablecoins and pegged assets possible, so it is an essential part for stablecoin liquidity in the DeFi market.
Curve's governance model's time-weighted voting approach supports long-term stakeholders, therefore matching incentives with the continuous success of the protocol.
Curve has become crucial infrastructure in distributed finance since it offers a consistent and quick platform for steady asset trading. Its interaction with other DeFi protocols guarantees general efficiency and interoperability, therefore confirming its part in the ecosystem.
dYdX
Antonio Juliano started dYdX in 2017; it is a distributed exchange with sophisticated trading tools including margin and perpetual contract trading using up to 25x leverage.
Working on the Ethereum blockchain, dYdX uses Layer 2 scaling techniques—more especially, Zero-Knowledge Rollups from StarkWare—to improve transaction speed and lower costs.
The DYDX governance token has a market valuation as of October 2023 of $624 million.
dYdX draws both seasoned traders and newbies looking for complex financial instruments by delivering sophisticated trading capabilities usually available in centralized exchanges to the dispersed world.
Layer 2 implementation of the platform solves scalability problems, therefore allowing low-cost transactions and high throughput. DYDX token holders engage in governance, therefore impacting choices about token economics, features, and protocol characteristics.
The way dYdX expands the possibilities of distributed exchanges outside basic token swaps helps DeFi. Offering a strong platform for derivatives trading, it has drawn more liquidity and involvement in the DeFi ecosystem, hence bridging the distance between conventional finance and distributed platforms.
Nexus Mutual
Hugh Karp launched Nexus Mutual in 2019 as a distributed insurance platform offering protection against smart contract failures and other DeFi risk sources. Operating on the Ethereum blockchain, Nexus Mutual uses a risk-sharing pool whereby members provide money used to reimburse claims.
With a market value of maybe $205 million as of October 2024, Nexus Mutual's token, NXM having paid claims on various well-known events, the platform has been crucial in reducing DeFi participation risks and building user confidence in distributed systems.
To join the mutual, members go through a Know Your Customer (KYC) verifying process. They evaluate claims and decide on payouts, therefore promoting a community-driven method of risk control. Nexus Mutual removes one of the main obstacles to entrance in DeFi—security issues by offering a distributed substitute for traditional insurance.
DeFi technologies have been more widely embraced in response to Nexus Mutual's safety net service. It is quite important for the resilience of the environment since it reduces hazards and offers a guarantee against any losses.
Pendle
Launched in 2021 by TN Lee and his team, Pendle is a DeFi system aimed at tokenizing future yield, thereby empowering users over their yield management practices.
Pendle allows users of Ethereum and Arbitrum to segregate yield-bearing assets into main and yield components, therefore enabling separate trading of each.
Pendle's token, indicating its rising impact in the DeFi arena, has a market capitalization of roughly $656 million as of October 2024.
Pendle presents fixed-income methods to distributed finance—a concept common in conventional finance but very new to DeFi—by allowing the trade of future yield.
Pendle's AMM is tailored especially for yield tokens, so enabling effective price discovery and liquidity. Locking in future yields or speculating on yield rates lets users be flexible and have chances for diversification.
Pendle increases the spectrum of financial instruments accessible to consumers by closing the distance between conventional fixed-income products and DeFi, hence strengthening the maturity and depth of the DeFi sector.
Venus Protocol
Designed by the team behind Swipe Wallet—including Joselito Lizarondo—Venus is a DeFi lending and borrowing tool run on the Binance Smart Chain (BSC). Venus provides easily available DeFi services to a larger user base by using BSC's reduced fees and faster transaction rates than Ethereum.
Venus's governance token, XVS, has a market capitalization of about $125 million as of October 2024; the TVL of the protocol sometimes exceeds $3 billion. Venus lets users create VAI, a distributed stablecoin linked to the US dollar and supply and borrow a range of cryptocurrencies.
Users of the protocol pay interest on borrowed assets and earn interest on provided assets, therefore acting as a money market system. Maintaining a dispersed approach, Venus's governance model lets XVS token holders affect protocol settings and development decisions.
Venus has been instrumental in extending the reach of distributed finance outside the Ethereum ecosystem by including DeFi lending and stablecoin features into BSC. DeFi services' inclusiveness and scalability are enhanced by its easy-to-use interface and connection with BSC's vast user base, therefore complementing the more general aim of democratizing banking.
Final Thoughts
The financial systems are at a crossroads as a result of the fast rise of DeFi protocols. Along with shaking up the financial industry as we know it, these ten principles have paved the way for a new system that is more open, honest, and productive for everyone.
Decentralized stablecoins from MakerDAO, AMM models from Uniswap, flash loans from Aave, and liquid staking from Lido are just a few examples of the distinctive innovations brought about by the various protocols.
Open access, reduced prices, and the promotion of financial sovereignty are the ways in which they overcome the shortcomings of conventional financing.
Having said that, there are obstacles in the DeFi space. Persistent dangers include security holes, unclear regulations, and unpredictable markets. As the notorious 2016 DAO attack and other smart contract exploits have shown, young technologies are extremely vulnerable.
Protocol cooperation, enhanced security, and regulatory elucidation will play critical roles in the future development of the DeFi ecosystem.
Steps toward resolving scalability and interoperability difficulties include the deployment of Layer 2 solutions and cross-chain interoperability efforts such as EigenLayer.
All things considered, these protocols are at the front of the DeFi revolution, which is fundamentally altering the financial scene. They show how blockchain technology can make the financial system more fair. They have already begun to have an impact on the cryptocurrency market, and they will only become more pervasive as time goes on.