Beginner’s Guide to Ethereum DeFi Ecosystem
Launched in March 2015, the Ethereum blockchain has morphed into a household name in the cryptocurrency industry. From NFTs to DeFi to GamFi, it’s almost inevitable to do without Ethereum. Most of the top platforms on the crypto industry verticals run on Ethereum’s blockchain. However, this article aims at exploring Ethereum’s DeFi ecosystem.
Decentralized Finance (DeFi) is a global alternative to traditional finance, or what you know as the “banking system.” So, DeFi brings the functions of conventional finance into the blockchain using smart contracts. Smart contracts enable developers to create programs that run when conditions are met.
Make no mistake — Ethereum would never have existed without Bitcoin as a forerunner. That said, I think Ethereum is ahead of Bitcoin in many ways and represents the bleeding edge of digital currency. - Fred Ehrsam
Through smart contracts, developers can create decentralized applications (dApps) that perform most of the functions of traditional banking. Some functions include lending, borrowing, insurance, staking, trading, etc. Most of the top DeFi apps you know and use are built on Ethereum.
At the time of writing, Ethereum has a monthly average of 59.6% DeFi TVL by chain, followed by the BNB chain and Solana. And by category, Ethereum is equally dominating most categories, as shown in the graph below. To truly understand, you must first understand the Ethereum blockchain.
Ethereum is an open-source, decentralized global platform for money and applications. Its vision is to create a scalable, secure, and sustainable platform for mobile applications. Ethereum uses the Proof-of-Work (PoS) consensus, which validates transactions to prevent manipulations.
Although, Ethereum’s PoW is not scalable and energy-efficient. That’s why they’re transitioning to the Proof-of-Stake (PoS) consensus, which is scalable, sustainable, and more secure. Ethereum’s PoS is set to go live later this year.
Let’s look at some DeFi categories and Ethereum’s leading apps without further ado.
DeFi Categories and Ethereum’s Dominance
Decentralized Exchanges (DEXes)
By definition, a decentralized exchange is a peer-to-peer marketplace where users trade and exchange cryptocurrencies without the need for a third party or central authority. There’s no single central authority on a DEX. Every activity is facilitated algorithmically by smart contracts.
Uniswap is the largest decentralized exchange protocol built on the Ethereum blockchain. The platform connects buyers and sellers to trade and swap tokens using an automated market maker (AMM). Users earn rewards on Uniswap by providing liquidity, lending, and staking tokens.
Sushiswap, a fork of Uniswap, is the second-largest DEX built on Ethereum. Both exchanges have similar functionalities. The main difference is in their fee tiers, liquidity mining, margin trading, and reward for new tokens. Other Ethereum-blockchain DEXes are Curve Finance, Convex Finance, and Balancer, to mention a few.
Lending
With massive lending platforms like MakerDAO, Aave, and Compound on the Ethereum blockchain, they’re also dominating the DeFi lending category. MakerDAO is the first and largest lending platform in DeFi. MakerDAO’s DAI stablecoins played and are still accelerating global adoption of DeFi as a tool for transactions.
Aave is another lending giant in crypto. Here, users earn interests and rewards by depositing their crypto assets into a liquidity pool. Aave and Compound finance have similar functionalities and capabilities. Although they have some slight differences, ultimately, they’re the kings of crypto lending.
Derivatives
A crypto derivative is an agreement that coordinates the purchase or sales of a crypto asset based on a pre-determined future time. There are three primary functions of a crypto derivative: risk management, speculations, and leverage.
After seeing the perpetual trading boom in 2019, dYdX became the first DeFi protocol to trade perpetuals. dYdX is a DeFi exchange providing financial instruments to users such as margin and spot trading, perpetuals, lending, and borrowing. They’re built on the Ethereum network.
We can’t draw the curtains on crypto derivatives without mentioning Synthetix. They’re one of the first DeFi protocols to launch on the Ethereum blockchain. Synthetix enables users to trade tokenized financial instruments such as commodities, stocks, cryptocurrencies, and gold.
Yield Aggregator
In crypto, risk exposure is almost inevitable because crypto tokens and the market are volatile. Yield aggregators, or auto-compounders as they are fondly called, were developed to help users manage risk, increase earnings and minimize transaction gas fees.
Yearn Finance is like the ‘amazon’ of yield aggregators. They’re an Ethereum-based auto-compounder that gives users the best returns by aggregating offerings from Aave, Compound, and Curve. Here, users can choose among the available funds that’ll help optimize their earnings.
Instadapp is the next Ethereum-based yield aggregator on our list. Instadapp uses advanced DeFi strategies to maximize the DeFi experience and rewards for its rewards. Like Yearn Finance, they aggregate earnings from top decentralized exchanges and platforms.
Liquid Staking
With liquid staking, users can stake their tokens in DeFi and remain in control of their funds. Both the users and the PoS networks benefit from liquid staking. Users increase their earnings, while PoS networks increase their liquidity and security.
Lido finance is the primary liquid staking network on Ethereum. Lido finance lets users use their tokens as collateral for lending and yield farming. They’ll get returns for locking up or staking their tokens on the network. Lido finance is also supporting other blockchain networks, which means you can also stake Solana’s Sol, Polygon’s Matic, and Polkadot’s Dot on Lido finance.
Middleware
A middleware is a type of software application that delivers a unique method of communication between two or more applications within a distributed network. It connects applications through APIs, remote procedure calls, messages, and databases.
The most popular Ethereum-based middleware application is Nansen.ai. Basically, Nansen.ai is an analytics platform that combines on-chain data with wallet labels. It analyses millions of Ethereum wallets, their activities, and tons of on-chain data points.
Wrapping Up
Essentially, the platforms mentioned above are not the only platforms in those DeFi categories. There are tons of others, but these are the top ones and were hand-picked to bolster the theme of this article. I have no affiliation with these platforms.
Here’s the thing, to understand DeFi, you need to understand the Ethereum blockchain. You can check out their resources to further explore the Ethereum DeFi ecosystem.
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