Education is paramount in DeFi, and resources such as How to DeFi are so important. How To DeFi will help you make life-changing decisions as you build and use DeFi protocols and applications from this decade.
INTRODUCTION
DEFI SNAPSHOT
Total Locked Value (TVL), a measure of the amount of capital locked within DeFi protocols, grew at breakneck speed, surpassing the magic $1 billion mark in May 2020, ending the year with $15.7 billion TVL. DeFi TVL reached a staggering figure of 86.05 billion USD in April 2021, which shows the exponential growth of the crypto industry.1.
DeFi Summer 2020
The rise of Decentralized Finance (DeFi) surprised the crypto world during the summer of 2020, so much so that we refer to the period as DeFi Summer 2020. Liquidity Mining, a reward program that distributes the protocol's native tokens to users who provide . liquidity on the DeFi protocol, is not a foreign concept in DeFi.
DeFi Ecosystem
The story continued with the. "accidental" launch of the CRV token by Curve Finance in August 2020. Not to be outdone, Uniswap conducted a UNI token airdrop in September 2020, resulting in a windfall for all users using the Uniswap protocol interacted.
Rise of Gas Fees
Although the price of gas in 2021 is lower compared to DeFi Summer 2020, the price of ether is much higher in 2021, resulting in an increase in total transaction costs. The high price of gas and the rise in the Ethereum price has made many DeFi Dapps on Ethereum no longer economically viable for users to use without significant capital.
DeFi is Going Mainstream
Grayscale, one of the better-known digital investment funds, actively offers exposure to a DeFi asset (eg Chainlink) through equity-based funds. Centrifuge, one of the first “real world” companies to integrate with MakerDAO, includes non-digital assets as collateral through its Tinlake app.
Recommended Readings
DEFI ACTIVITIES
In this chapter, we'll look at the different ways you can participate in the DeFi ecosystem. We will further explain some of the key areas and activities of DeFi, such as
Yield Farming
Activities such as market creation, insurance underwriting and structured product creation were previously only accessible to institutions with a large capital base and specialized knowledge. In crypto slang, we refer to these investors as "yield farmers" and the yield opportunities as "farms".
Liquidity Mining
Let's assume a user has $1,000 worth of ETH and wants to join this liquidity mining program to earn SUSHI Tokens. Other types of liquidity mining programs have customizable names based on the intended use of the locked-in capital.
Airdrops
Nexus Mutual, a decentralized insurance protocol, has a Shield Mining program that distributes NXM tokens to NXM token holders who deploy their capital on specific protocols to open up more insurance coverage capacity. Hegic, a decentralized options protocol, issues rHEGIC tokens to option sellers and buyers to boost protocol activity.
Initial DEX Offerings (IDO)
Based on the price at the end of the IBCO, each investor will receive a portion of the tokens according to their share of the total invested capital. Smart pool controllers can change its parameters and introduce various features for sale, such as a decreasing price over time, as well as stopping any further replacements due to high demand or external vulnerabilities.
Yield Farming: Step-by-Step Guide
In this guide, we will farm SUSHI/ETH to get SUSHI token. We can exit the position by clicking "Remove", as shown in the image in step 8.
Associated Risks
Conclusion
SECTORS
DECENTRALIZED EXCHANGES
However, they have several weaknesses - the most notable being users of centralized entities who do not have custody of their assets. You don't have to go through the hassle of Know Your Customer (KYC) processes, nor are you subject to jurisdictional restrictions.
Types of DEX
Order Book Based-DEXs
That said, this is still possible on Ethereum Layer 2 solutions like xDai or high-throughput Layer 1 blockchains like Solana. The trade orders remain off-chain until they are matched, after which the trades are executed on-chain.
Liquidity Pool Based-DEXs
Automated Market Makers (AMMs)
The Constant Product Market Maker formula was first popularized by Uniswap and Bancor and is the most popular AMM in the market. This chart shows the Constant Product Mark Maker (purple line) and Constant Sum (red line) curves with a Stableswap Invariant hybrid curve used by Curve Finance (blue line) in the middle.
The Various Automated Market Makers (AMMs) Uniswap
Concentrated liquidity
Multiple pool fee tiers
Yearn Finance.6 The key difference between the two is in the pool fees, available trading pairs, and supported blockchains. The ratio of the three stablecoins in the pool is based on market supply and demand.
What are the differentiators between the AMMs?
Pool Fees
Uniswap provides the full trading fee to LPs, while Curve splits the trading fee equally between the protocol and the LPs. For Balancer and Bancor, trading fees are variable and controlled by the pool creator.
Liquidity Mining
Pool Weightage
Associated Risks of using AMMs
Price Slippage
Minimum received is the minimum number of tokens you will receive based on your slip tolerance. Price impact is the premium you have to pay, which is reflected in the displayed price.
Front-running
Impermanent Loss
The graph below shows the opportunity cost you will get if you hold your tokens outside the pool and inside the pool. Thus, trading pairs that trade within a small price range (e.g. stablecoins) are less exposed to permanent losses.
Notable Mentions
DEX AGGREGATORS
This is where DEX aggregators help traders with the best price execution across the various DEXs. DEX aggregators look for the most cost-effective transaction routes by pooling liquidity from different DEXs.
DEX Aggregator Protocols 1inch Network
Other notable features include limit orders and the ability to select Pathfinder's routing process and choose between receiving maximum returns or minimizing gas costs. Other notable features include limit orders and Matcha's recent support of the Binance Smart Chain network and the Polygon network.
DEX Aggregator’s Performance Factors
Smaller transactions may not need to rely on different liquidity pools because a single liquidity pool is the most optimal route.
Which DEX Aggregator offers the most value?
DECENTRALIZED LENDING & BORROWING
If you're not careful, you can fail to pay your loan and lose your collateral. By using your cryptocurrencies as collateral, you can borrow from and make use of these protocols.
Overview of Lending & Borrowing Protocols Compound
In Compound, interest rates are expressed as Annual Percentage Yield (APY), and interest rates vary between funds. Compound derives interest rates through algorithms that take into account supply and demand for funds.
Protocols Deep Dive
Compound: Part of the interest paid by the borrower goes to its reserve, which acts as insurance and is managed by COMP token holders. Cream: A portion of the interest paid by the borrowers to suppliers goes to Cream's Reserve Protocol and is distributed as a reward to CREAM token holders.21.
Lending and Borrowing Rates
DECENTRALIZED STABLECOINS AND STABLEASSETS
In our How to DeFi: Beginner book, we found that stablecoins are an essential part of the crypto ecosystem. Our beginner's book covered some of the key differences between the centralized stablecoin Tether (USDT) and Maker's decentralized stablecoin Dai (DAI).
Centralized Stablecoin Tether (USDT)
Decentralized Stablecoin DAI
Recent events have given further credence to its legitimacy, such as Coinbase's listing of Tether. Maker has tried to solve these problems using several methods, such as its Peg Stability Module solution.
How do we resolve the stablecoin issue?
This has led to scenarios where the price of DAI surged above the $1 peg because it couldn't keep up with demand, such as the infamous Black Thursday run and the launch of Compound for liquidity mining.30. However, it is clear that the demand for DAI is still scaling with the demand for leverage, rather than the demand for a more decentralized transaction medium.
What are Algorithmic Stablecoins and Stableassets?
There are two ways to categorize the various decentralized algorithmic stablecoins: .. b) Are partially/fully secured by their own native token (FRAX, sUSD and UST). Algorithmic stablecoins can be further divided into different categories - the main subcategories being rebase and seigniorage models.
Rebase Model
This is a key criterion because reliance on native-issued assets as collateral creates recursive value, requiring algorithmic functions to regulate the price. If the price of AMPL trades 5% or more below the $1 target, the rebasing will reduce units in wallets holding AMPL.
Seigniorage Model
Conversely, if the price falls below $1, the protocol enters a contracting phase where users will not receive any reward. When BAC is above $1, the protocol enters an expansion phase where users can receive newly generated BAC from the Board's DAO by setting BAS.
How has Algorithmic Stablecoins fared so far?
To overcome this, algorithmic stablecoins have offered eye-catching incentives in the form of extremely high liquidity mining rewards. Algorithmic stablecoin launches effectively became a game of musical chairs, as profiteers had little incentive to commit and proactively contribute to a single community, quickly moving on to other algorithmic stablecoin clones.
Why has FRAX succeeded?
Most algorithmic stablecoins were designed with a somewhat cooperative community in mind, but failed to incentivize users to support the system during contractions or even counter price manipulations by larger players. Additionally, algorithmic stablecoins are mostly traded on automated market makers such as Uniswap, which has amplified volatility due to its constant product market characteristics.
The Next Generation of Algorithmic Stablecoins and Stableassets
When the price of FEI falls below $1, the protocol taxes FEI sellers (whose tax is then burned and removed from inventory), and additional FEI is awarded to buyers (on top of their initial purchase). When the price of RAI is below the floating peg, the system raises the peg.
How will these new Algorithmic Stablecoins and Stableassets fare?
- Collateralization
- Trader Incentives/Disincentives
- Emergency Powers
- DECENTRALIZED DERIVATIVES
Algorithmic stablecoins and stableassets are designed to influence market behavior to maintain the peg price. Successful algorithmic stablecoins and stableassets take longer to prove themselves, especially in times of crisis.
Decentralized Perpetuals
Perpetual Protocol is a decentralized protocol that offers perpetual contract trading, allowing users to open up to ten times long or short positions on various cryptoassets. Comparison between Perpetual Protocol and dYdX (Layer 1) Factor Perpetual Protocol dYdX (Layer 1) Contracts support BTC, ETH, YFI, LINK,.
Decentralized Options
Using the platform's interface, users can adjust the terms of the options they want to buy, such as the strike price and expiration date. The first version, Opyn V1, allows you to create American options in the form of oTokens by locking 100% of the underlying asset as collateral.
Synthetic Assets
DECENTRALIZED INSURANCE
What is Insurance?
How does Insurance work?
Law of Large Numbers
Risk Pooling
Does Crypto need Insurance?
DeFi Insurance Protocols
If the vote is in line with the result, 20% of the premium of the policy will be shared among these members on a pro rata basis. If there is no damage at the end of the policy period, the 10% premium will be refunded.
Comparison between Nexus Mutual and Cover Protocol
We must remember that the coverage protocol has been operational for less than a year (as of April 2021). As a result, Cover Protocol's covers are more expensive than those of Nexus Mutual due to less capital efficiency.
CATEGORIES
DECENTRALIZED INDICES
One way to get cryptocurrency exposure in your investment portfolio without constantly monitoring the performance of individual currencies is to invest in passively managed portfolios such as decentralized indices. As of April 1, 2021, the decentralized indices industry is growing rapidly, with on-chain ETFs worth approximately $234 million in AUM.54 It's not far-fetched to imagine that figure reaching trillions of dollars in the next few years.
DeFi ETF Landscape
DECENTRALIZED PREDICTION MARKETS
Prediction markets are markets created for participants to bet on the outcomes of future events. Proponents of decentralized prediction markets believe that centralized platforms put users at a disadvantage.64 Standard practices include high transaction fees, deferred withdrawals, and account freezing.
How do Prediction Protocols work?
Market-Making
Each payout is based on where the price falls within the range relative to the outcome. However, the closest answer to the $200k hit price will receive the highest payout amount in proportion to the size of their bets.
Resolution
Prediction protocols recognize this and rely on humans to ensure the accuracy of the information. Unlike conventional prediction markets, prediction protocols are decentralized and do not have the means to monitor and regulate each market.
Prediction Market Protocols Augur
If there is a dispute, users who wagered on the winning outcome will receive a share of the REP that was wagered on the losing outcome. Users who bet on the losing outcome will not receive any fees and will lose all of their REP tokens.
What are the other key differences between Augur and Omen?
DECENTRALIZED FIXED- INTEREST RATE PROTOCOLS
Although there is an abundance of lending protocols and return aggregators that offer interest to lenders in the crypto industry, relatively few of them offer fixed interest rates. Furthermore, some FIRPs do not offer fixed interest rates at all, but rather create an environment that facilitates fixed interest rates.
Overview of Fixed Interest Rates Protocols Yield
The protocol will rank the bids from the lowest interest to the highest interest. The lending protocol's variable earnings are then distributed from the lowest interest bids to the highest interest bids, with any excess income spilling over to the floating pool.
Which FIRP should I use?
- What kind of promises are they making?
- How do they intend to maintain that promise?
- How dependent are they on external agents to maintain that promise?
- DECENTRALIZED YIELD AGGREGATORS
For example, Yield requires relatively even ratios between lenders and borrowers to keep interest rates fixed. If there is an inactive community or a disproportionate amount of user profiles and liquidity (eg more lenders than borrowers for Yield or more participants in Tranche A than Tranche AA for Saffron Finance), FIRPs may not be able to support their fixed interest rates. degrees.
Yield Aggregators Protocols Yearn Finance
WBTC/BADGER UNI LP
Comparison of Yield Aggregators
