Ethereum introduced decentralized application development where developers could create new blockchain services and products that did not require a centralized figure.
These included platforms for crypto gambling at the best crypto casino. It also gave rise to a new kind of finance, decentralized finance (DeFi). Many new DeFi projects have attempted to move away from centralized financial services and instead created user-focused borrowing and lending platforms and novel ways to earn passive income.
Let us look at what DeFi is, its new developments, and several new DeFi projects and DeFi cryptos that have furthered this popular sector.
What Is Decentralized Finance?
Decentralized Finance (DeFi) is an alternative to traditional financial services. These platforms and protocols do not rely on central institutions like banks. Instead, they rely on blockchain technology, specifically smart contract implementations, to provide their users with financial services.
Accordingly, the DeFi sector has several advantages over traditional finance.
Firstly, they are developer-friendly. This means that developers can program new DeFi protocols and offer new services to their users in a short time. Because DeFi utilizes smart contracts, developers have more flexibility when launching a protocol. They can finetune it according to community demand.
Secondly, DeFi also leverages the blockchain for added security. Blockchain technology is immutable. This means that bad actors cannot change verified transactions. Blockchain requires consensus from a network of nodes, creating a trustless environment where audibility and security come first.
Thirdly, Ethereum is a highly programmable blockchain. It is also built so that multiple applications on the network can communicate with each other. This means that numerous DeFi offerings can build layers on each other and support third-party applications.
Lastly, DeFi protocols allow users to have full custody of their assets. They can store their crypto holdings in third-party wallets. Furthermore, users do not have to wait for service verification. Most services do not require centralized permission. Users can usually access loans or receive benefits instantly.
New Developments In Decentralized Finance
The DeFi sector has seen massive growth since the beginning of 2021. Many venture-capital firms have started funding DeFi projects. Banks have also begun considering adding their services to these projects because they can receive higher interest rates. This is particularly true in the USA, where bank rates have been at 0% since the COVID-19 pandemic. DeFi projects allow banks to leverage financial services not regulated by the federal government.
Even though DeFi is garnering positive attention from financial institutions and crypto enthusiasts, there is still risk involved. Many DeFi projects do not have adequate backing and rely on liquidity providers (LP) to keep their services afloat. Some of these projects have longevity in the market, but they mainly do not earn enough revenue to lower the risk of LP pullout.
Furthermore, other new DeFi projects have been taking advantage of the current popularity of the sector. They do not have a distinct protocol and copy-paste other services with malicious intentions. They launch a token and ask users to buy the token, in turn raising its value. Then the creators sell off their share of the tokens (usually a significant proportion) and run away with the money.
This leaves the token holders with a bunch of useless tokens. These rug-pulls have become common in the crypto world, and DeFi is no different.
A few new DeFi projects have been attempting to move away from liquidity mining programs. They are beginning to develop novel methods of ensuring liquidity on their platforms. This ranges from offering users incentives to lock away native tokens in staking pools to acquiring liquidity themselves. They purchase stablecoins against their native tokens and offer bonds to their users.
Furthermore, other projects offer NFTs to users that stake their holdings on the platform. This allows users to earn income from selling these NFTs and earning rewards on their staked tokens.
Lastly, due to DeFi’s risk of scams and low liquidity projects, other projects have begun offering decentralized insurance to users. These services minimize the risk of investing in the sector and provide another avenue for staking rewards.
What Are The New DeFi Projects To Look Out For?
The Colony project is a DeFi focused fund. It provides funding to developers seeking to launch new DeFi projects. The Avalanche Foundation, a popular smart contract platform, funds the project. Colony is community-driven, and it offers support and services to new projects. The community has a say over which projects to fund, the structure of Colony, and has authority over various other aspects.
Furthermore, Colony provides liquidity to existing Avalanche projects. It buys and stakes Avalanche’s native token, AVAX. It also buys community chosen Avalanche projects to create an index.
Moreover, Colony will give back to the community through various programs. It will use its investments to fund airdrops and staking rewards.
The Colony has a 2-pillar structure. The first pillar relates to the early stages of new project development. The Colony core team will research and analyze new projects and send the results to the Investment Committee for approval. This will allow developers to focus on development and not funding.
Moreover, the 2nd pillar relates to a Decentralized Autonomous Organization (DAO) accelerator. Here the community controls half of the Colony’s capital. This will be 10% for a validator program. 10% into the index. 30% for liquidity for DeFi application on Avalanche.
Lastly, The Colony’s token, CLY, will power governance and liquidity in the DAO. CLY holders will have voting rights for fund distribution, receive staking rewards, and liquidity provider rewards. They will also receive new token airdrops from early-stage new DeFi projects.
Aave is a decentralized borrowing and lending platform on the Ethereum network. It leverages smart contracts to automate deals between users. Users can receive interest in lending crypto. Borrowers can receive instant loans.
Aave supports 31 different cryptocurrencies. This includes stablecoins like DAI and metaverse tokens like MANA.
It also has two kinds of native currencies.
The first is AAVE. This is a governance token. It allows users to vote on platform upgrades and the direction of the platform. AAVE has a limited supply of 16 million tokens. Three million tokens rest in a reserve contract for program development.
The second, ATokens, are interest-bearing coins. Lenders receive these tokens after they stake their holdings. They cash in these to receive interest on their staked tokens. ATokens also have a 1:1 peg with the asset they deposited for loans.
Furthermore, Aave has a feature, Aave Pay. Here users in Europe can instantly send funds in fiat currency to other accounts with their cryptocurrencies. These users can also get a flash loan against their crypto in fiat currency.
Moreover, Aave has a variable interest rate for loans. It uses an algorithm to keep interest rates as close as possible to market value. Lenders can also stake their holdings with Aave staking. It acts as insurance against crypto volatility. For example, users can receive up to 30% back on the lost value if a token crashes.
Lastly, Aave has liquidity pools. Users can connect their Ethereum wallets to Aave and receive interest on the crypto they stake on the protocol.
Risk Habor is a marketplace for risk management in the DeFi sector. It can protect new DeFi projects against cyber-attacks and hacking. It recently received $3.25 million in seed round funding. Framework Ventures, Coinbase Ventures, Digital Currency Group, and others have participated in the funding round.
Risk Harbor offers depeg protection for UST, which is an algorithmic stablecoin. It adjusts its supply to maintain its value to the US dollar.
The UST can lose its 1:1 peg to the US Dollar. Risk Harbor protects UST holders by checking the average price of UST to USDC over an hour.
Now Risk Harbor’s protocol will allow UST holders to swap their tokens for USDC if the UST value falls below a specific threshold. This means that Risk Harbor’s protocol determines whether claims are approved or not.
Furthermore, Risk Harbor also assesses claims related to Anchor. This yield farming protocol allows UST deposits. Risk Harbor can protect users that stake UST on Anchor. aUST holders can redeem the token for other derivatives if it is below a particular value.
Moreover, Risk Harbor currently has $2 million in liquidity in its claims pool. DeFi projects can buy protection for their capital. Other investors can underwrite a project’s protection in exchange for a premium. They stake their funds in a protection pool.
Lastly, claimants receive their claims within three blocks (45 seconds) after a hack. There are also no additional fees for performing actions on the protocol. Underwriters can also withdraw their funds if it is not underwriting an outstanding policy.
Users can deposit funds into the protocol. The deposit becomes collateral for a loan a user receives. The protocol then takes the collateral and puts it in a Yearn’s vault to earn yield. This yield, in turn, pays off the loan automatically. Yields from the vault can be up to 12% APY. Users receive 50% of their collateral as a loan.
Alchemix currently only supports the DAI stablecoin. Users need to deposit their DAI into the protocol and receive one alUSD stablecoin for every 2 DAI they deposit. Users can use an Alchemix feature, Transmuter, to exchange their alUSD for DAI.
Additionally, users can also stake their alUSD in liquidity pools. These include the alUSD Pool. Here users can receive ALCX. This is the protocol’s governance token. ALCX holders can participate in Alchemix DAO governance proposals.
Other pools include an ALCX pool for ALCX rewards, an ALCX/ETH Sushiswap pool for ALCX rewards, and an alUSD3CRV pool for ALCX rewards.
The protocol currently supports Metamask, Zapper, Sushiswap, Paraswap, Curve, Rari Capital, Defipulse, and FTX.
Moreover, Alchemix underwent a security audit by Certik. The protocol’s roadmap includes adding more currencies like ETH and wBTC. They are also looking to include other collateral types, specifically stablecoins.
Lastly, Alchemix is an active community. This means there is much interest in this new kind of protocol. Yearn has increased its DAI limits from $100 million to $300 million.
BENQI is a liquidity market protocol on the Avalanche platform (a network for many new DeFi projects). Users can lend and borrow crypto. They can also earn interest with their crypto.
BENQI utilizes Avalanche’s fast transaction speed. It can process up to 4,500 transactions per second. Here users can supply and withdraw liquidity in several pools. Additionally, users can also stake their crypto as collateral in the liquidity market.
Additionally, BENQI acts as a bridge between the Avalanche and Ethereum networks. This gives Ethereum users a cheaper alternative to acquiring and providing liquidity.
Currently, the BENQI team handles the protocol’s governance, but it will soon launch a DAO. BENQI will launch its Qi token. This governance token will allow holders to vote on changes to the protocol.
Moreover, users receive the Qi Token when they stake their crypto. For example, they would receive QiwBTC or QiUSDT. These tokens remain in the user’s wallet and accrue interest.
Lastly, BENQI is looking to launch flash loans with its protocol upgrade. It has already received private and public funding worth over $6 million.
New DeFi projects have opted to develop their platforms and protocols on the Ethereum blockchain. They attempt to provide financial services and sidestep high gas fees. Others have moved to Avalanche with its fast throughput and have created bridges to Ethereum.
Some projects have made a novel approach to providing insurance and loan repayments. These projects are moving away from being liquidity mining promoters but have started using their protocols to solve liquidity issues.
To conclude, the DeFi sector is thriving with new protocol developments and seed funding from investment firms and the crypto community. 2022 might be the year for DeFi.