DeFi Part 2: Popular Decentralized Finance Applications

In the first installment of the Intro to Decentralized Finance series, we covered the core foundations of DeFi, what centralized vs decentralized solutions like look, and the many benefits of this new sector of finance. 

With today’s installment, we’re going to materialize those ideas using real-world examples of what decentralized finance looks like in the wild. The goal is to build a concrete image of this transition in your mind and help you grasp its practical implications for your financial strategy. 

Table of Content

  • Popular Decentralized Finance Applications
    • Exchanges
    • Stablecoins
    • Yield Protocols
    • Decentralized Autonomous Organizations
  • The Future of DeFi Applications
  • Key Takeaways

In the early days of blockchain, your options were limited to buying Bitcoin and holding it in hopes of price appreciation. Today, however, you have thousands of decentralized finance services available across dozens of categories. 

To help you wrap your head around these options quickly, we’ve curated the most popular decentralized finance applications below. 

1. Decentralized Exchanges

An exchange is a platform that lets you, well, exchange your cryptocurrencies between all the different options that are available out there. 

These are the DeFi-equivalents of money exchangers from the traditional finance world. A real-time, living, and breathing market decides the exchange rate of all the different cryptocurrencies out there. For instance, as of this writing, you can exchange bitcoin for ether (Ethereum) at an exchange rate of roughly 1:14.

However, decentralized exchanges are a lot more than just crypto exchangers. These platforms offer a variety of financial tools, including loans, margin trading, and yield farming (we’ll cover this in a future installment). 

Some of the most popular decentralized exchanges include: 

  • Uniswap
  • Sushiswap
  • Pancakeswap
  • Serum DEX

A major drawback of DEXes (shorthand for decentralized exchanges) is that you cannot trade between fiat currencies (traditional currencies backed by the government) and cryptocurrencies. This means that you’ll have to acquire some cryptocurrencies through other sources to start using a decentralized exchange. 

Most people use Binance or Coinbase to buy their favorite cryptocurrency using credit cards and then deposit it into their wallet on a decentralized exchange. 

2. Stablecoins

There’s no denying it. Cryptocurrencies are some of the most volatile assets on the planet. It’s a market where double-digit swings in prices are nothing out of the ordinary. 

In such a chaotic environment, stablecoins bring some much-needed stability for cautious investors. These cryptocurrency assets are pegged to a fiat currency like the U.S. Dollar. 

For instance, Tether (USDT) claims to back each tether token with roughly one U.S. Dollar in its treasury. The result is that despite the ebbs and flows of the cryptocurrency market, USDT retains a price equivalent to one USD at all times. We’ve seen this tested and proven over the many crypto market crashes since the inception of this stablecoin. 

Some of the most widely used stablecoins include: 

  • Tether (USDT)
  • USD Coinbase (USDC)
  • Binance USD (BUSD)
  • TrueUSD (TUSD)
  • Terra USD (UST)

3. Yield Protocols

Active trading is not the only option to earn financial rewards within the decentralized finance ecosystem. There are many yield protocols available today that let you earn passive income through a variety of methods. 

For instance, you can automatically lend out your assets and keep virtually all of the interest. That’s because decentralization allows these protocols to charge minimal transaction fees and pass the profits on to customers. 

Another interesting venue for profit generation is liquidity pool rewards. As decentralized protocols don’t inject their own liquidity like centralized companies do (all assets for exchange are provided by users and not protocol creators), you can become a liquidity provider by putting equal amounts of two separate cryptocurrencies in a pool. In return, you get to keep the bulk of exchange fees proportional to how much liquidity you own. We’ll expand on this in a future article. 

Here are some popular protocols that can help you generate yields with your investments:

  • Compound
  • Aave
  • Yearn

The key point to remember here is that all of these platforms are automated. You won’t be dealing with people but software code. As a result, the risk of fraud is practically non-existent. 

4. Decentralized Autonomous Organizations (DAOs)

While a DAO isn’t strictly a financial tool, this novel application of blockchain is worth mentioning here because it could be the next biggest paradigm shift in finance and corporate coordination. 

The simplest way to understand a DAO is to think of it as an online community, but with a shared wallet. This is referred to as the treasury of the organization. A typical setup allows all stakeholders (members) of the organization to make important decisions through a consensus, which is achieved by voting on proposals put forward by other members. 

As a result, people from all over the world can come together and collaborate toward a shared vision without worrying about the integrity of any individual or group. Everything can be automated through smart contracts (blockchain code) and democratic votes. 

This is going to be the next frontier of decentralized finance, as people from diverse backgrounds can create sophisticated organizations without dealing with the endless barrage of legal issues associated with traditional finance. 

Here are some popular DAOs that you may have heard of: 

  • ConstitutionDAO
  • The Nouns Project
  • Friends with Benefits DAO
  • Flamingo DAO

The Future of DeFi Applications

The applications that we covered in the previous section are already making a massive splash in the finance world. Collectively, they are responsible for billions of dollars worth of transactions—every single day. 

However, there are also many promising applications of decentralized finance that have the potential to completely disrupt their relevant industries. For instance, with each passing month, we’re seeing mortgage and insurance platforms surface that are leveraging blockchain to bring innovation to these crucial sectors of the economy. 

Crowdfunding is another major sector where we’re seeing the decentralized finance world pick up the pace. Mirror and Juicebox are two rising DeFi platforms that are bringing innovators and social workers together into the blockchain-powered trustless economy. 

We’re also seeing DeFi vaults gain traction as they will serve as the investment funds of the decentralized world. These are operated through a combination of DAO and DeFi tools, thus allowing people to put their money in a reputable decentralized investment fund and reap the rewards that come with it. 

Key Takeaways

Here are the key takeaways from today’s article: 

  • Contrary to the mainstream narrative, the blockchain revolution is more than a vehicle for endless speculation. DeFi applications are steering the industry towards practical, real-world use cases that are already tackling multi-billion dollar industries. 
  • We’re still in the early stages of this transition as creators and visionaries are only beginning to explore the possibilities. We’ll see more and more unique applications emerge over the next few months and years. 

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