What is DeFi? The Beginner’s Guide to Decentralized Finance
DEFI is a blockchain-based financial application ecosystem, usually using smart contracts. The purpose of the DEFI is to provide open-source, transparent financial services to anyone who can verify transactions if necessary, operating without being supervised by a central authority.
Users maintain complete control over goods and transactions through decentralized applications. Decentralized applications are known as dAPPs. If the traditional transaction system has one or more intermediaries that build trust and control transactions, such as the bank you work with and the payment processor the bank works with, these intermediaries generate additional costs; in the case of DEFI the intermediary is removed.
Currently, most DEFI applications are built on the Ethereum network. Still, more alternative public networks are expected to appear in the future that offers higher speed, scalability, security, and lower costs. In addition, DEFI tokens can facilitate various financial services, from loans and mortgages to complicated asset and contract trading, but without the need for old bureaucratic procedures to complete these transactions. We will try to find-out the top 3 DEFI currencies to analyze and consider for potential transactions by looking closely at the decentralized finance sector.
Algorand is a decentralized network built to solve the “blockchain trilemma”, meaning it simultaneously achieves many transactions per second, security, and decentralization.
The project appeared in 2017 under the leadership of Professor Silvio Micali. Algorand was designed to be a network or platform with the core of fast payments, although, at the moment, it has not achieved its goal of being the fastest network; the team announced that by the end of the year, it intends to increase the speed up to 45 times.
The consensus mechanism used (protocols to ensure that all nodes in a blockchain are synchronized with each other and to establish an agreement on what transactions can be made and added to the blockchain) is a unique variation of Proof of stake, called Pure Proof of stake, which is a more inclusive and democratic option. The consensus mechanism ensures that all participants are subject to the same rules and decides what their contribution is.
The structure of the protocol is based on two layers. On the first layer, you can create tokens and smart contracts with more straightforward functionalities, and the second layer is for more complex smart contracts, so for decentralized application developers. The division of smart contracts into two different layers allows the simplest ones to be processed faster on the first layer without being slowed down by complex applications.
As Algorand already has smart contracts implemented, we already have a mature dApps system. All these attributes make Algorand a DEFI perspective project. Their native currency is Algo, with a maximum supply of 10 billion and about 5.2 billion in circulation.
Uniswap facilitates the automatic trading of decentralized tokens. Uniswap gained momentum in 2020 as an AMM (automated market maker), solving the liquidity problem that other decentralized exchanges (DEXs) faced. Almost 50% of the DEFI market is capitalized by Uniswap even if Ethereum is still the most famous DEFI protocol. On this platform users can trade ERC20-based tokens and earn a fee on every transaction by being market maker to enable the exchange of tokens. Uniswap enables users to transact without intermediaries, and in this way reducing the transaction cost. Uniswap has many useful features, such as user-friendly operations, low fees, full ownership and control of private keys, integration into an external wallet, and increased liquidity contributing to Uniswap’s record-time triumph.
Uniswap launched its UNI token in September 2020
Cosmos is an ecosystem of several blockchains, which can communicate with each other through a general intercommunication protocol, only IBC. This decentralized network of independent blockchains was conceived by Jae Kwon in 2014 when he founded Tendermint Inc, and in 2016 he co-authored Cosmos WhitePapper with Ethan Buchman. In 2017 he was the Fundraiser of their token, ATOM.
The architecture of the ecosystem differentiates it from other DeFi projects because Cosmos places more value on the sovereignty of the blockchains that are part of the network, in the sense that it deals independently with security and each blockchain has its own validation nodes.
Cosmos technology has four major elements:
1. Tendermint, the consensus mechanism of the Proof of stake type, requires a number of validation nodes identified by a public key. The consensus voting process takes place in rounds, where each round has a leader proposing a block, then the validators vote in stages whether to accept that block or move on to the next round. Each leader is chosen from a list of validators in proportion to their voting power. Cosmos is just one of many platforms built around the Tendermint protocol.
Blockchains that use Tendermint are considered to be among the most secure and scalable. They reach 10,000 transactions per second on an irregular basis and continue to be operational even if a third of the validation nodes are offline or trying to corrupt the network. Probably the most important thing is that Tendermint offers the ability to request custom, secure and scalable blockchains in just a few hours. Starport, for example, a solution created by the Tendermint team, allows the creation of a Cosmos blockchain in just a few commands in max 1h.
2. The Cosmos SDK is an open-source framework used to create blockchains over the Tendermint layer. Cosmos SDK is based on modules that can create a blockchain or an application if put together by a developer or a team of developers. The goal is to create an entire ecosystem of modules that allows developers to build without having to code each piece.
3. The third piece of the Cosmos puzzle is the Cosmos IBC or Inter Blockchain Communication protocol. Through the IBC protocol, any Tendermint blockchain can communicate with another blockchain if the IBC protocol is also implemented by it. At the moment, there are already 28 Cosmos blockchains that have been communicating with each other for over 6 months, and the volume of operations between them per month is over 3 million transactions.
4. The fourth essential protocol for any DEFI ecosystem is Gravity DEX. It was built using the IBC protocol and is an AMM-type DEX that allows you to swap any tokens in the Cosmos network or rather connect any blockchain to the Cosmos hub for a decentralized token swap. The native currency of the Cosmos is the Atom, with an infinite maximum supply defined by annual inflation. Supply can be defined or limited by the government if ATOM holders initiate and vote on this proposal.
What are the best DEFI tokens to invest in?
Investors around the world who are looking for the most profitable DEFI cryptocurrencies to buy can’t get a final answer here, but there is a good reason for this.
The DEFI secotr is going through a period of accelerated growth. New projects having a large investment potential are launched on the market every month, offering new investment opportunities through these cryptocurrencies. It is advisable to do your own detailed analysis and document yourself from as many sources as possible if you make decisions involving your money. Given that the crypto market can be very volatile identify DEFI tokens that you believe have potential and trade it on a trusted platform.