DeFi Building Blocks — The Most Important Protocols In Decentralized Finance
Decentralized Finance, or DeFi, has emerged as one of the most exciting and revolutionary developments in the world of blockchain technology. By leveraging the power of smart contracts and decentralized systems, DeFi protocols aim to disrupt the traditional financial industry by offering open, transparent, and inclusive financial services to users worldwide.
In this blog post, we will explore some of the most important DeFi protocols that have gained significant traction in the market.
We’ll look at both user-facing solutions as well as infrastructure that enables all these user-facing protocols to exist. This is where we shall start because everything starts with infrastructure. We won’t go into the weeds with smart contracts or how blockchain works, but we’ll focus on protocols providing services that give utility to smart contracts and blockchain technology.
Ethereum and Ethereum Virtual Machine
We can’t speak about DeFi without starting with Ethereum. And while there are other DeFi ecosystems it’s clear that Ethereum and its scaling solutions (L2s and emerging L3s) i.e. ETH ecosystem, is still by far the most important in DeFi.
Ethereum is a decentralized blockchain platform that enables the creation of decentralized applications (DApps) and smart contracts. Ethereum’s native cryptocurrency, Ether (ETH), is used as both a digital currency and a means to pay for transaction fees and computational services on the network.
Ethereum is crucial for DeFi because it provides the foundational infrastructure for decentralized finance applications. DeFi relies on smart contracts to automate financial processes, including lending, borrowing, trading, and yield farming. Ethereum has the largest and the most active developer community and robust security features. Ethereum laid the foundation for the creation of a global and permissionless financial ecosystem.
Ethereum Virtual Machine
The Ethereum Virtual Machine (EVM) is a crucial component of the Ethereum blockchain. It is a decentralized and Turing-complete virtual machine that executes code on the Ethereum network.
Here’s an explanation of what the Ethereum Virtual Machine is and why it’s important for decentralized finance (DeFi):
- Virtual Machine: A virtual machine is essentially a computer within a computer. It’s a software-based emulation of a physical machine that can run programs and execute code. The EVM is specifically designed to run smart contracts, which are self-executing contracts with the terms of the agreement directly written into code.
- Decentralized Execution: The EVM is decentralized, meaning it operates on thousands of nodes (computers) spread across the Ethereum network. When you send a transaction to execute a smart contract, it’s processed by the EVM on these nodes, ensuring that the code execution is trustless and censorship-resistant.
- Smart Contracts: DeFi applications heavily rely on smart contracts to automate financial processes. These smart contracts manage assets, facilitate trades, and execute complex financial operations, all without the need for intermediaries like banks or brokers. Ethereum’s EVM is the platform where these DeFi smart contracts are executed.
- Interoperability: Ethereum’s EVM has become a standard in the blockchain industry. This has led to a high level of interoperability within the DeFi ecosystem, where different DeFi applications on different EVM-compatible chains can interact with each other and share data.
- Customization and Innovation: EVM has fueled innovation in the DeFi space, enabling the development of a wide range of financial services and products, including decentralized exchanges (DEXs), lending platforms, yield farming protocols, and more.
In summary, the Ethereum Virtual Machine (EVM) is the heart of the Ethereum blockchain and is critically important for DeFi. It provides a secure, decentralized, and programmable environment where smart contracts can be executed. All the biggest DeFi ecosystems are EVM-compatible.
Chainlink is a web3 services platform and a decentralized network of nodes that act as oracles. Oracles are a critical component in smart contracts and blockchain systems because they provide external data and trigger events in response to predefined conditions.
In simple terms, oracles enable smart contracts to interact with the real world, including fetching data from off-chain sources like market prices, weather conditions, sports scores, and more.
Chainlink’s decentralized network aggregates data from multiple sources, making it resistant to single points of failure or manipulation. Data providers and node operators are incentivized to provide accurate information through a reputation system and economic incentives.
Many DeFi protocols rely on real-time and accurate data to function properly, such as determining interest rates, collateral values, or price feeds for assets.
Chainlink is vital to DeFi for several reasons:
- Price Feeds: DeFi protocols often require price feeds for cryptocurrencies, tokens, and other assets to make accurate financial calculations. Chainlink provides secure and tamper-proof price oracles that DeFi projects can integrate to ensure accurate asset pricing.
- Lending and Borrowing: DeFi lending and borrowing platforms use Chainlink oracles to determine collateral values, liquidation thresholds, and interest rates. These data points are crucial for maintaining the stability and security of these platforms.
- Derivatives Trading: In DeFi, derivative markets rely on oracles to provide real-time data for underlying assets’ prices. Chainlink’s oracles ensure that derivatives are correctly priced and settled, reducing the risk of manipulation.
- Cross-Chain Compatibility: Chainlink also works across multiple blockchains, enhancing interoperability between DeFi projects on different networks.
- Risk Management: Chainlink’s decentralized oracles help DeFi projects manage risk by providing reliable data to assess and mitigate potential risks associated with market volatility.
In summary, Chainlink is essential to the success and functionality of many DeFi applications by providing decentralized, reliable, and secure access to real-world data. It helps maintain the trust and security required for financial transactions in the decentralized finance ecosystem, ultimately contributing to the growth and adoption of DeFi.
The Graph Protocol is a decentralized protocol for indexing and querying data from blockchains. It provides developers with the tools and infrastructure needed to efficiently access and retrieve data from various blockchain networks, making it an important component of decentralized finance (DeFi).
The Graph is important for the following reasons:
- Efficient Data Retrieval: The Graph allows developers to create and manage subgraphs, which are data schemas and indexing configurations for specific blockchain data sources. This enables DeFi applications to efficiently query blockchain data, making it easier to access information such as token balances, transaction history, and smart contract data.
- Real-time Updates: DeFi applications often require real-time data to make decisions and provide accurate information to users. The Graph continuously updates indexed data, ensuring that DeFi applications can access the most current and relevant information from the blockchain.
- Decentralization: The Graph is built on decentralized infrastructure, which means that it is not controlled by a single entity. This aligns with the principles of decentralization in DeFi, where trustless and censorship-resistant systems are preferred. The protocol relies on a decentralized network of indexers and curators, ensuring data availability and resilience.
- Interoperability: The Graph is blockchain-agnostic, meaning it can be used to index and query data from multiple blockchain networks. This is important in DeFi, where interoperability between different blockchain platforms is crucial for creating a seamless and connected financial ecosystem.
- Developer-Friendly: The protocol is designed to be developer-friendly, with a simple query language (GraphQL) that allows developers to request specific data from indexed subgraphs. This ease of use encourages the development of DeFi applications and services that can leverage blockchain data without the need for complex data infrastructure.
- Scalability: DeFi applications often experience high levels of activity, requiring scalable data infrastructure. The Graph’s decentralized network of indexers is designed to handle large volumes of data and queries, ensuring that DeFi applications can scale to meet user demand.
- Cost-Efficiency: By providing a standardized way to index and query blockchain data, The Graph can reduce the costs and time required for DeFi projects to develop and maintain their own data infrastructure. This cost-efficiency is particularly important for smaller projects and developers with limited resources.
In summary, The Graph Protocol is important to decentralized finance because it offers efficient and decentralized data infrastructure that enables DeFi applications to access, query, and present blockchain data in a reliable and user-friendly manner. It plays a critical role in the development and success of DeFi by providing the data backbone needed for various financial services, including decentralized exchanges, lending platforms, yield aggregators, and more.
Flashbots is not a protocol, but rather a research and development organization focused on improving the security and fairness of Ethereum’s transaction fee market. Specifically, Flashbots aims to address issues related to the “MEV” or “Miner/Maximal Extractable Value” in Ethereum and other blockchain networks.
While not a protocol in itself, Flashbots has developed tools and practices that are important to decentralized finance (DeFi) in the following ways:
- MEV Mitigation: MEV refers to the profit that miners and validators can extract from reordering, censoring, or front-running transactions on a blockchain. In DeFi, this can lead to issues like sandwich attacks, where malicious actors manipulate transactions to their advantage. Flashbots seeks to mitigate MEV by providing a more transparent and fair way for users and applications to submit transactions and compete for inclusion in Ethereum blocks.
- Transaction Privacy: Flashbots’ services include tools for users and DeFi applications to submit transactions privately. This helps protect sensitive information and strategies from being exploited by miners or front-runners. Privacy is a crucial concern in DeFi, where users often engage in arbitrage and trading strategies.
- Fairer Fee Market: Flashbots helps improve the predictability and fairness of transaction fee markets in Ethereum. This is essential in DeFi, where high network congestion can result in unpredictable gas fees. By allowing users to privately and securely submit transactions with specified fees, Flashbots helps users avoid overpaying or underpaying for transaction processing.
- Security Enhancement: DeFi applications are vulnerable to attacks related to MEV. By addressing MEV issues, Flashbots contributes to the overall security of DeFi protocols and reduces the risks associated with trading, lending, and other financial activities.
- Improved User Experience: Flashbots’ tools and practices can help DeFi users have a better experience when interacting with Ethereum. Users can have more confidence that their transactions will be processed fairly and privately, which can encourage greater participation in DeFi applications.
In summary, while Flashbots is not a protocol itself, it plays a vital role in the DeFi ecosystem by addressing issues related to MEV and transaction fee markets on the Ethereum blockchain. Its tools and practices enhance the security, fairness, and user experience in DeFi, making it an important component in the continued development and adoption of decentralized financial applications.
Filecoin is a decentralized storage and data retrieval network built on blockchain technology. It is designed to create a marketplace for decentralized storage services where users can store and retrieve data in a secure, efficient, and censorship-resistant manner. While Filecoin primarily focuses on storage, it is not directly a part of decentralized finance (DeFi) in the traditional sense.
However, it does have a big importance in the DeFi ecosystem:
- Data Storage for DeFi: Many DeFi applications require reliable and decentralized data storage solutions to securely store sensitive information such as user data, transaction history, or token holdings. Filecoin offers a decentralized and blockchain-based storage option that DeFi projects can use to ensure data integrity and availability.
- Decentralized Oracle Services: DeFi projects often rely on external data sources, provided by oracles, to make decisions and perform calculations. While Filecoin is not an oracle network, its decentralized storage infrastructure can potentially be used to store data feeds or historical price data used by DeFi oracles, enhancing the security and reliability of these critical services.
- Interoperability: Filecoin is designed to be interoperable with other blockchain networks, including Ethereum. This interoperability can facilitate cross-chain DeFi applications and services, allowing DeFi projects to leverage Filecoin’s storage capabilities while still operating on their preferred blockchain.
- Secure and Immutable Storage: DeFi projects can benefit from Filecoin’s secure and immutable storage solutions to store critical contract code, historical transaction data, and other important information. This enhances the overall security and transparency of DeFi applications, making them more trustworthy for users.
In summary, Filecoin is playing an increasingly important role by providing a secure, decentralized, and censorship-resistant storage infrastructure. This can be particularly useful for DeFi projects looking to enhance data security, reduce reliance on centralized data providers, and ensure the long-term availability of essential information, ultimately contributing to the robustness and trustworthiness of the DeFi ecosystem.
While there are plenty of other noteworthy DeFi infrastructure players to mention, let’s switch gears and look at user-facing DeFi protocols that create the backbone of DeFi.
We’re including Metamask because it has played a crucial role in the DeFi space for early users interacting with the DeFi protocols. We are well aware that there are a number of wallets that provide a better UX today, but Metamask is still the most popular self-custody wallet and deserves a mention.
MetaMask is a popular wallet and browser extension that allows users to interact with decentralized applications (DApps) on various blockchain networks, with a primary focus on Ethereum. It serves as a bridge between web browsers and the Ethereum blockchain, enabling users to manage their digital assets and connect to DeFi protocols for transacting.
MetaMask is important for DeFi for several reasons:
- Connectivity: Metamask is by far the most integrated wallet in the DeFi space. Its browser extension integrates seamlessly with web browsers like Chrome and Firefox, ensuring accessibility.
- Wallet and Key Management: MetaMask acts as a non-custodial wallet, meaning users have full control of their private keys. This aligns with the core principle of self-custody in DeFi, where users retain ownership of their assets and are not reliant on third-party custodians.
- Interoperability: MetaMask supports all the most important EVM-compatible blockchains.
- Executing Transactions: Users can review and confirm transactions before sending them, reducing the risk of errors. It also provides a customizable gas fee setting, allowing users to adjust transaction fees based on their preferences.
- Security Features: MetaMask includes security features such as password protection and seed phrase backup. It also provides options for users to set up hardware wallet integration for added security.
- Community and Developer Support: MetaMask has a large and active user community, and it is widely adopted by DeFi projects. This means that it’s usually possible to receive help and information for any bugs that people experience.
In summary, MetaMask is a critical tool for DeFi participants as it offers a secure gateway to the decentralized finance ecosystem. Its wallet capabilities, browser integration, support for Ethereum and its tokens, and extensive compatibility with DeFi applications make it a vital component for anyone looking to engage with DeFi services while maintaining control of their assets.
Uniswap is the biggest, the most liquid, and by far the most important decentralized exchange (DEX) in DeFi.
Uniswap is important for decentralized finance (DeFi) for several key reasons:
- Decentralized Trading: Uniswap operates as a decentralized platform, meaning it allows users to trade cryptocurrencies directly from their wallets without relying on a centralized intermediary. This aligns with the core principles of DeFi, promoting trustless and peer-to-peer trading.
- Liquidity Provision: Uniswap relies on liquidity pools, which are smart contracts holding reserves of various tokens. Users can contribute tokens (liquidity) to these pools and, in return, earn fees from trading activities. This mechanism incentivizes liquidity providers, fostering liquidity in the DeFi ecosystem.
- Trading Pairs: Uniswap has by far the most trading pairs in DeFi making it possible for traders to get access to a wide selection of projects (invest or trade tokens). It’s the go-to place for new projects to create trading pairs for their tokens and for traders and investors to get early access to newly listed pairs.
- Permissionless: Anyone can create a liquidity pool for any token pair on Uniswap without needing approval or permission. This open and permissionless nature encourages innovation and the listing of a wide range of tokens, enabling users to trade both popular and niche assets.
- Automated Market Maker (AMM): Uniswap employs an AMM model, which means that prices are determined algorithmically based on the ratio of assets in the liquidity pool. This model eliminates the need for order books and allows for continuous trading, even during periods of low liquidity.
- Innovation Catalyst: Uniswap has played a significant role in driving innovation in the DeFi space. Its success has inspired the development of other DEXs and DeFi projects forking their code, leading to a vibrant and competitive ecosystem that benefits DeFi users.
In summary, Uniswap is important for DeFi because it provides a decentralized and accessible platform for users to trade a wide range of tokens, earn fees by providing liquidity, and participate in the vibrant DeFi ecosystem. Its innovative approach to liquidity provision and trading has had a significant impact on the development and adoption of DeFi, making it a cornerstone project in the decentralized finance space.
Compound is a decentralized lending and borrowing platform that allows users to earn interest on their digital assets or borrow against them. Using the Compound protocol, users can deposit funds into liquidity pools and earn returns based on the supply and demand dynamics of each asset.
Borrowers can then utilize these pools to obtain loans without the need for intermediaries. The interest rates within Compound are determined algorithmically, based on the supply and demand for each asset.
Here’s why Compound is important for DeFi:
- Lending and Borrowing: Compound enables users to lend their cryptocurrency assets to the protocol and earn interest on those assets. At the same time, it allows other users to borrow those assets by providing collateral. This lending and borrowing functionality is fundamental to DeFi as it allows users to earn passive income on their holdings and access liquidity without relying on traditional banks or intermediaries.
- Interest Rates: Compound uses a dynamic interest rate model that adjusts borrowing and lending rates based on market conditions. This approach helps maintain stable interest rates while ensuring that borrowers can access liquidity and lenders can earn competitive yields. This is crucial for efficient and fair lending markets within DeFi.
- Collateralization: Borrowers on Compound must provide collateral in excess of the value they borrow, reducing the risk of default. This collateralization mechanism enhances the security of the protocol and minimizes the risk of financial instability.
- Liquidation: To further mitigate risk, Compound includes a liquidation mechanism. If a borrower’s collateral falls below a certain threshold due to price fluctuations, it can be liquidated, ensuring lenders are repaid even in volatile markets.
- Integration with Other DeFi Protocols: Compound is often integrated with other DeFi projects and services. For example, assets supplied to Compound can be used as collateral on other lending platforms or for yield farming strategies. This interoperability enhances the utility of Compound within the DeFi ecosystem.
- Innovation Catalyst: Compound has played a pivotal role in inspiring the development of other DeFi lending and borrowing protocols, contributing to the overall growth and innovation in the DeFi ecosystem.
In summary, Compound is an essential DeFi protocol that provides users with the ability to lend, borrow, and earn interest on cryptocurrency assets in a decentralized manner. Its innovative approach to lending and borrowing, dynamic interest rates, collateralization, and liquidation mechanisms make it a cornerstone project in the DeFi space.
MakerDAO is widely regarded as the pioneer of the DeFi movement, launching the first decentralized autonomous organization (DAO) on the Ethereum blockchain. At the heart of MakerDAO is the creation and management of the DAI stablecoin, which is pegged to the US dollar.
DAI is generated by users locking up collateral, typically in the form of Ethereum, in a smart contract known as a Collateralized Debt Position (CDP). Through this mechanism, users can access decentralized loans while maintaining the stability of the DAI token.
Here’s why MakerDAO is important for DeFi:
- Stablecoin Issuance: MakerDAO’s primary function is to issue and maintain the DAI stablecoin. DAI is important for DeFi because it provides a stable unit of account and medium of exchange within the ecosystem. It allows users to participate in DeFi without being exposed to the volatility of cryptocurrencies.
- Collateralized Debt Positions (CDPs): To create DAI, users lock up cryptocurrency assets (e.g., ETH) as collateral in MakerDAO’s CDPs. These CDPs are smart contracts that ensure over-collateralization to mitigate risk. Users can borrow DAI against their locked-up assets, providing liquidity while retaining ownership of their holdings. This mechanism is crucial for DeFi liquidity and asset management.
- Governance and Decentralization: MakerDAO has been at the forefront of the DAO (decentralised autonomous organization) movement, where MKR token holders have voting rights to make decisions about the protocol.
- DeFi Building Blocks: DAI, being a stablecoin, is a fundamental building block in DeFi. It is used as a trading pair on decentralized exchanges, a unit of account for DeFi lending and borrowing platforms, and a means of settling transactions and value transfers across DeFi protocols.
- Risk Management: MakerDAO includes risk management mechanisms such as liquidation and auction processes to ensure that CDPs remain over-collateralized. These mechanisms reduce the risk of insolvency and help maintain the stability of DAI and are replicated as a model by other DeFi applications.
In summary, MakerDAO is important for DeFi because it provides the ecosystem with a decentralized stablecoin (DAI), promotes responsible collateralization of assets, and operates with a governance model that pushes the idea of decentralization. DAI, along with the MakerDAO ecosystem, serves as a foundation for various DeFi applications and services, enabling users to access decentralized financial services with reduced exposure to cryptocurrency price volatility.
Aave is a non-custodial money market protocol that enables users to deposit their assets into liquidity pools and earn interest. Aave has introduced several innovative features, including flash loans, collateral swapping, and Aave’s own stablecoin GHO.
Flash loans allow users to borrow assets without requiring any collateral, as long as the loan is repaid within the same transaction. Collateral swapping, on the other hand, allows users to switch collateral types within a loan position, providing greater flexibility and minimizing liquidation risks.
Here’s why Aave is important for DeFi:
- Lending and Borrowing: Aave enables users to lend their cryptocurrency assets to the platform and earn interest on those assets. Simultaneously, it allows other users to borrow those assets by providing collateral. This core function of lending and borrowing is vital for DeFi as it provides users with liquidity and the ability to earn passive income on their holdings.
- Wide Range of Assets: Aave supports a wide range of cryptocurrencies and tokens, making it accessible to users with diverse portfolios. Users can lend and borrow assets like Ethereum, stablecoins, decentralized finance tokens, and more. This asset variety enhances the utility of the platform within the DeFi ecosystem.
- Interest Rate Market: Aave uses a unique interest rate model, which adjusts interest rates based on supply and demand for specific assets. This dynamic interest rate mechanism ensures competitive rates for borrowers and attractive returns for lenders, promoting a more efficient lending market within DeFi.
- Flash Loans: Aave introduced the concept of flash loans, which are uncollateralized loans that users can access for a single transaction within a single Ethereum block. Flash loans enable sophisticated DeFi trading strategies, arbitrage opportunities, and capital efficiency, contributing to the innovation and liquidity of the DeFi space.
- Security: Aave places a strong emphasis on security. It has undergone extensive audits and smart contract testing to ensure the safety of users’ funds. Additionally, Aave actively rewards users who participate in its governance process and contribute to the security of the protocol.
- Grant program: Aave (like Uniswap and others), operate a grants program which helps to kickstart new projects in DeFi.
- Cross-Platform Integration: Aave’s AAVE tokens are often integrated with other DeFi projects and services, allowing users to use AAVE as collateral on various lending platforms or for yield farming strategies. This interoperability enhances Aave’s utility in the broader DeFi ecosystem.
In summary, Aave is important for DeFi because it provides a secure, decentralized platform for lending, borrowing, and earning interest on cryptocurrency assets. Its unique features, dynamic interest rates, flash loans, and active community governance make it a significant contributor to DeFi’s growth and innovation, offering users a trusted and flexible platform for managing their assets within the decentralized finance ecosystem.
Curve Finance is a decentralized exchange (DEX) specifically designed for stablecoin trading. It aims to optimize liquidity for stablecoins, allowing users to trade stablecoins with low slippage and tight spreads. Curve achieves this by utilizing advanced bonding curves and liquidity pools that are specifically tailored to stablecoins. This makes Curve an ideal platform for users looking to swap stablecoins with minimal price impact and to maximize their efficiency.
It plays a crucial role in the DeFi ecosystem for several reasons:
- Stablecoin Swapping: Curve specializes in the exchange of stablecoins, such as USDC, DAI, USDT, and others. These stablecoins are essential in DeFi for providing stability and acting as a bridge between cryptocurrencies and traditional assets. Curve allows users to swap one stablecoin for another with minimal slippage, meaning they can get a fair value without causing significant price changes during the trade.
- Low Slippage: Curve is known for its low slippage rates compared to other decentralized exchanges (DEXs). This is because it focuses on assets with similar values (e.g., various USD-pegged stablecoins), reducing the potential for large price fluctuations during trading.
- Liquidity Pools: Curve facilitates liquidity provision by allowing users to deposit stablecoins into liquidity pools in exchange for Curve tokens (CRV). Liquidity providers earn fees from trades within these pools, which incentivizes them to provide liquidity to the platform. Curve’s innovative bonding curve model ensures that liquidity providers are well-rewarded for their participation.
- Vote escrow tokenomics: Curve introduced vote escrow tokenomics. VE is a mechanism used in decentralized governance systems to encourage long-term commitment in exchange of accumulating voting power.
- Yield Farming and Incentives: Many DeFi projects integrate with Curve to offer yield farming opportunities (CRV plus their own native token) and accumulate voting power in the Curve ecosystem. This incentivizes participation in the ecosystem.
- Reduced Impermanent Loss: Curve uses stablecoins, which experience minimal price volatility compared to other cryptocurrencies. This reduces the risk of impermanent loss for liquidity providers, making it an attractive platform for yield farming.
- Interoperability: Curve is often integrated with other DeFi protocols and platforms, allowing users to access stablecoin liquidity seamlessly across the DeFi ecosystem. This interoperability is essential for DeFi’s growth and usability. Clip Finance’s strategy router utilises Curve’s stablecoin swaps as well.
In summary, Curve is important for DeFi because it provides a specialized and efficient platform for stablecoin swapping and liquidity provision. Its low slippage, reduced impermanent loss, and integration with other DeFi projects make it a critical infrastructure component within the decentralized finance ecosystem. Curve’s governance structure also ensures that the community can influence its direction and development.
We can’t talk about DeFi building blocks without mentioning stablecoins. There wouldn’t be functional on-chain finance without stablecoins.
Stablecoins are cryptocurrencies that are designed to maintain a stable value relative to the underlying asset, typically a fiat currency like the US Dollar (USD). They are a fundamental building block of decentralized finance (DeFi) for several important reasons:
- Price Stability: The primary purpose of stablecoins is to provide stability in the volatile world of cryptocurrencies.
- Risk Mitigation: DeFi platforms and users face substantial risks due to the price volatility of cryptocurrencies. Stablecoins reduce this risk by allowing users to transact and hold assets in a predictable and stable value unit.
- Liquidity: Stablecoins serve as a bridge between the crypto world and the traditional financial system. They provide a way for users to easily move in and out of cryptocurrencies and DeFi applications without going through the friction of converting to and from fiat currencies on centralized exchanges.
- Trading Pairs: Stablecoins are commonly used as one side of trading pairs on decentralized exchanges (DEXs). These pairs allow traders to move in and out of volatile assets while using a stable reference point.
- Lending and Borrowing: DeFi lending and borrowing protocols like Compound and Aave use stablecoins as the primary lending asset. This allows users to earn interest on their stablecoins or borrow funds without being exposed to price volatility.
- Stable Yield Farming: Many DeFi yield farming strategies require users to provide liquidity in stablecoin pairs, allowing them to earn rewards without the risk of impermanent loss associated with volatile assets
- Collateral: Stablecoins are often used as collateral in DeFi platforms. Users can lock up their stablecoins to mint other tokens or borrow assets, which can be a useful strategy for managing their financial positions.
- Global Access: Stablecoins are accessible to anyone with an internet connection, making them a valuable tool for accessing a stable currency for individuals in regions with unstable fiat currencies or limited access to traditional banking services.
- Diversification: For DeFi users seeking to diversify their portfolios, stablecoins offer a way to reduce exposure to the often correlated price movements of cryptocurrencies.
In summary, stablecoins are crucial for DeFi because they provide the stability and predictability needed for various financial activities within the decentralized ecosystem. They serve as a foundational layer that enables users to navigate the world of cryptocurrencies while managing risk and accessing a wide range of DeFi services.
DeFi is still in a very early stage, and there will be tons of other crucial protocols and important infrastructure players to emerge. The above selection is not conclusive, but the mentioned protocols are without a doubt some of the biggest contributors to making DeFi possible.
We’re working on making Clip Finance one of those building blocks for the ecosystem and builders. The unique infrastructure Clip has built enables creating numerous innovative yield solutions for people looking to use the best products that DeFi has to offer.
Clip Finance is just beginning and you can be part of our success story. If you’d like to join us on this journey, follow us on Twitter , join our Discord, or become an early investor by minting our NFT.