Cryptocurrency has evolved into much more than just a new version of digital cash or payments. It is now a new financial ecosystem built using blockchain’s globally accessible, censorship-resistant, non-haltable, and autonomous platform. Here we introduce the basics of decentralised finance and how users can unlock the full potential of their crypto.
- DeFi — Short for decentralised finance, DeFi is an umbrella term for financial applications that do not have any central point or authority
- Dapps — Decentralised applications (dapps) are a type of application that typically runs on a decentralised network; they are usually open-source software powered by smart contracts
- DEX — A decentralised exchange (DEX) is a peer-to-peer (P2P) marketplace where users can trade digital assets without the need for an intermediary
- Liquidity Pool — A liquidity pool is a pool of funds locked in a smart contract. It allows users of a decentralised platform to buy and sell their digital assets
- Yield Farming — Yield farming, occasionally referred to as liquidity mining, is the process of providing your assets to a protocol to receive rewards
Introduction to Decentralised Finance (DeFi)
DeFi is an abbreviation of ‘decentralised finance’. Decentralised financial software built on top of a blockchain enables the creation of services that are much like standard centralised financial services, with the added benefit of being decentralised. This means that users interact with smart contracts and code rather than a central authority, such as a bank.
To illustrate, picture an individual who intends to lend their excess capital, and another who intends to borrow money for their business. Traditionally, they would have to go through a centralised financial institution, such as a bank. On top of that, the bank also has the power to decide whether the individuals are eligible for the services.
DeFi, however, eliminates the entire discussion process, as both the lender and borrower only need to interact with a smart contract. The terms and conditions of the transaction will have already been predefined in the smart contract. This transforms a rather demanding procedure into a decentralised one that can be fair to all users.
These decentralised and autonomous systems can be referred to as decentralised apps (dapps) and they are the backbone of DeFi. These protocols in which users are able to unlock the potential of DeFi are important as they allow for the smart contracts to do the work, instead of a traditional central financial institution.
The challenge of a robust DeFi ecosystem is that it must incentivise the security of the platform as well as its usage. To further understand a DeFi ecosystem, it’s important to understand dapps and how they play a major role in DeFi.
You may also be interested in: How to Use DeFi — A Beginner’s Guide
What Are Decentralised Apps (dapps)?
Dapps are usually — but not necessarily — run on a blockchain. The interface of a dapp should look no different from any website or mobile app we use today. Dapps are able to provide the same support as a typical regular app can, but they have the added benefit of enjoying all the advantages of decentralisation.
Dapps may run on top of existing public blockchains — for instance, Cronos or Ethereum. Any changes in data or information on a blockchain involve the participation of all nodes. Not a single entity has the authority to delete or modify the status or the information once it’s posted on the network. This transparency allows dapps the advantage of having no single point of failure, being censorship-resistant and autonomous.
Dapps typically have the following characteristics:
- Data and information are kept on a public and decentralised blockchain (or P2P network)
- Usually involves cryptocurrencies
- Not controlled by a single centralised authority. Any changes to be introduced in the dapp are typically decided through the use of a voting system by the community, such as a government system or a decentralised autonomous organisation (DAO)
- They have no central point of failure and cannot be shut down due to the absence of a centralised server
What is a Decentralised Exchange (DEX)?
One of the most common dapps that users will find is the decentralised exchange (DEX). A DEX is a vital part of any DeFi ecosystem as it facilitates a core function within DeFi, which is the ability to exchange tokens. These decentralised exchanges offer users a more decentralised service than a standard centralised exchange (CEX). DEXs are Automated Market Makers (AMM), which work differently than traditional order books where the CEX will connect buyers and sellers to perform transactions. Instead, AMMs use liquidity pools to allow for trades.
Another feature worth noting is that, on a centralised exchange, users will only have access to the tokens that an exchange provides; whereas, on a decentralised exchange, users have access to virtually any token, since any user is able to provide liquidity.
What is a Liquidity Pool?
A DEX does not operate in the same way as a CEX. A DEX will typically employ liquidity pools to facilitate trades. A liquidity pool is a pool of two tokens that are usually locked in a smart contract. When users swap their tokens, they are swapping them with the liquidity pool. The advantage to this is that there is no order book required, and there is no pairing of buyers and sellers needed. Instead, there is a big pool of funds, and users are able to trade their tokens with it at any given time.
What is Yield Farming?
To make DEXs work, there are typically fees that a user incurs on every trade. For example, on VVS Finance there is a 0.3% fee on every trade. Users deposit their assets into a liquidity pool and earn a return on this investment because they receive a portion of the fees generated on the platform. This is known as a form of yield farming.
Examples of Dapps and Their Functions
Here are some of the most popular dapps that can be found on the Cronos blockchain. They can be accessed easily through the DeFi Wallet App. These apps are a great way to dip your toes into DeFi and start learning how everything works. Visit the DeFi Wallet App and start learning!
Founder: Anonymous team
Category: Automated market maker decentralised exchange
Website: MM Finance
What is MM Finance?
MM Finance (MMF) stands for Mad Meerkat Finance and is one of the leading protocols on the Cronos blockchain. It is a DEX, so it does not have a centralised service provider or an order book matching mechanism. Instead, MM Finance automates transactions between cryptocurrency tokens on the Cronos blockchain through the use of smart contracts. It pools liquidity from liquidity providers who supply the system with tokens for a proportional share of transaction fees.
The AMM portion of MM Finance allows for the liquidity to be provided to the exchange, and it operates through automated trading methods.
MM Finance handles a large volume of trades on the Cronos blockchain. Users can visit MM Finance and find different yield farming opportunities. MM Finance has over 20 different farms where users can supply liquidity and earn rewards.
Since MM Finance does not have an order book, it relies on pooled liquidity. MM Finance allows users to provide liquidity to earn fees, which are generated by charging users 0.17% per swap.
Founder: Peter C. Vaky
Category: Automated market maker decentralised exchange
What is VVS Finance?
VVS Finance, which stands for ‘very, very simple’ finance, is a dapp designed to bring various types of protocols to the masses. This platform is built on the vision to provide a gateway into the DeFi space through an easy-to-use interface. Users on the platform can swap tokens and earn high yields while paying cheap transaction fees with minimal slippage.
VVS Finance, like MM Finance, is a DEX. VVS Finance has fine-tuned its tokenomics using an automated market maker (AMM) to determine the price of specific digital assets. With this, the protocol incentivises all parties within the ecosystem to ensure long-term growth and the sustainability of the platform.
According to the litepaper, VVS has six key features:
- Bling Swap: An algorithmic system that allows users to swap specific tokens across a variety of liquidity pools for a better price
- Liquidity Provision: Allows users to become a liquidity provider (LP) by depositing tokens into a liquidity pool in exchange for a CRC-20 LP Token as proof of proportional ownership
- Crystal Farm: LPs can stake their LP tokens in the ‘Crystal Farm’ to receive VVS tokens
- Glitter Mine: Non-LP users can stake their VVS tokens to receive VVS or partner tokens in rewards
- Initial Gem Offering: Allows LP token and VVS token holders early access to new project tokens in the Cronos blockchain ecosystem
- Analytics: Users have access to the analytics and data of the VVS Finance protocol
Founder: Gary Or
Category: Decentralised money market
What is Tectonic?
Tectonic is a DeFi protocol that aims to provide cross-chain money market services. This protocol, which is built on the Cronos blockchain, intends to simplify the process of lending and borrowing for both investors and users.
The Tectonic algorithm relies on over-collateralisation to protect its lending platform. More precisely, the platform has a collateral factor to determine the amount of money borrowers must lock in. Each cryptocurrency has a different collateral factor, which represents how much a user can borrow. For instance, if wETH has a collateral factor of 75%, it means the user can borrow $750 worth of a cryptocurrency for every $1,000 locked in. However, the collateral factor for each asset is subject to change.
MMF, VVS, and Tectonic can all be accessed through the Crypto.com DeFi Wallet.
Due Diligence and Do Your Own Research
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