DeFi Components. What are they?

What is DeFi?

DeFi (Decentralized Finance) is a decentralized financial system that eliminates the control of banks, and financial institutions over money, financial products, and financial services.

The values of DeFi

The value DeFi brings to users

• Easy to access and use by everyone

• Easy to store assets on digital wallets with high security

• Transfer and receive money fast

• By applying Blockchain technology, DeFi helps users remove control from third parties

Many other components are developed based on DeFi, such as:

• Stablecoins

• Decentralized exchanges

• Stableswap

• Liquidity mining

• Decentralized lending & borrowing

• Margin trading/derivatives

• Aggregator

These components provide a lot of new utilities to users and usher in a decentralized financial future. With the development of DeFi now gradually expanding and attracting more users worldwide, the prospect of DeFi becoming a significant threat to centralized finance is not so unrealistic.

Components of DeFi

Stablecoins

Stablecoin is a cryptocurrency pegged to a stable asset such as (Gold, silver, diamond, oil, …) or fiat (Euro, Dollar). Backed by tangible assets, stablecoins have a stable value over time and have minimal price fluctuations.

Decentralized exchanges

A decentralized exchange is a peer-to-peer marketplace where cryptocurrency transactions occur.

The primary purpose of decentralized exchanges (DEX) is to provide solutions and promote direct transactions without going through 3rd parties such as banks and financial institutions. Since 2020, many DEXs have emerged and become famous, such as Uniswap, Sushiswap, Pancakeswap, and Curve.

As of June 2022, the DeFi market is currently locking $76.64b out of circulation. At present, DeFi is proving its position and opening up opportunities for more emphatic development in the future, so the opportunity for DEXs to come later is still huge, like AshSwap, KyberSwap, Platypus, and Wombat Exchange.

Although the same decentralized exchange, each name mentioned above solves and optimizes a different aspect, more specifically:

• KyberSwap: KyberSwap is an automated market maker, providing swap across multiple exchanges for traders, and maximizing earnings for liquidity providers.

• Platypus: A whole new kind of AMM for stableswap lower slippage, simpler UX.

• Wombat Exchange: Swap stablecoins at minimal slippage and stake at maximum yield.

• AshSwap: The very first decentralized exchange following the stable-swap model on the Elrond blockchain. Providing a stablecoins swap solution with lower slippage with optimized UX and maximizing yields for liquidity providers.

What is StableSwap?

Stablecoins are an indispensable component in DeFi, but to participate in all DeFi products, we may need to own more than one type of Stablecoin. It will be difficult when we have to hoard many types of Stablecoins, your assets will be scattered, and it will be difficult for you to make the most of your capital when participating in the market.

Stableswap was born to solve that problem; many decentralized exchanges now offer Swap solutions with low transaction fees and slippage, so you can easily convert Stablecoins to serve many needs of use.

Liquidity mining

Liquidity mining is a term that refers to making profits from DeFi platforms by providing liquidity to those DeFi platforms.

More specifically, when you provide liquidity for a cryptocurrency pair in the pool of the DeFi platform, you will get back LP Tokens. If you stake that LP Token, you will get rewards on that DeFi platform; the more liquidity you provide, the more rewards you get.

Decentralized lending & borrowing

Different from traditional borrowing and lending. Decentralized lending & borrowing on DeFi platforms aims to provide loans without intermediaries. And borrowers can get a loan through P2P decentralized platforms. In addition, DeFi lending protocols allow lenders to gain profit from their supply of the cryptocurrency.

Margin trading/derivatives

In traditional finance, a derivative is a financial transaction contract between two or more parties based on the future value of an underlying asset. That is, people will trade on the importance of another entity, not directly owning it. Profits are generated based on the spread and price movements of the underlying asset.

A derivative is a type of contract whose value is a derivative of the performance of an underlying entity such as an asset, commodity, index, or interest rate. In DeFi, decentralized derivatives are derivatives of the performance of the underlying crypto-assets and are used as a financial tool to help users hedge against the possibility of substantial price fluctuations from the crypto market.

Aggregator

Low liquidity is a challenge for DeFi protocols, different models have been adopted to help solve this problem, such as incentivizing token holders to deposit their tokens in the asset pools and earn rewards generated from the trading activities; another solution is DEX aggregators (Arda, 1Inch Exchange, ParaSwap,…) which using complicated algorithm to get the best prices for users by liquidity from different DEXs, not only a single DEX, allows users to access a wide range of trading pools through a single interface.

The role of the Aggregator was born to save users time and increase the efficiency of cryptocurrency transactions.

Summary

DeFi is a financial revolution that is in the early stages of development and will be able to expand dramatically in the future. DeFi offers an open financial platform where third parties no longer dominate participants.

And if you want to keep up with the updates in the DeFi space, let’s take a look at our DeFi Handbook Free Ebook as a takeaway, and follow our AshSwap DeFi 101 series to have all the info you need.