BeInCrypto takes a look at the five most popular DeFi categories making headlines this alt-season. The cryptocurrency market appears to be in full swing.
1. Decentralized Exchanges (DEXs)
A decentralized exchange (DEX) is a type of cryptocurrency exchange that facilitates peer-to-peer transactions without the need for a central party. They are essentially a series of smart contracts programmed to automate the exchange of two or more crypto-assets, instantly and without a managed order book.
DEX’s are the backbone of the Decentralized Finance (DeFi) space and have recently taken off. The most popular DEX, Uniswap (UNI), launched as far back as 2018 and serves a variety of so-called “swaps.”
Other examples include the UNI-fork SushiSwap (SUSHI), Venus, and Binance DEX, which operates on the Binance Smart Chain.
2. Lending/Borrowing
Last year, new projects emerged in the DeFi space, allowing cryptocurrency users to borrow or lend crypto-assets. The process, known as staking, requires crypto hodlers to commit their assets to a platform for a period of time. These crypto-assets are then lent to borrowers, who pay interest.
The majority of lending platforms require borrowers to offer other assets as collateral. The interest goes towards the upkeep of the platform and to the lenders in the form of returns.
The Annual Percentage Yield (APY) measures the likely returns of a staking platform for one year. DEXs also use staking to ensure liquidity for swaps. Examples of lending platforms include Aave (AAVE) and Compound (COMP).
3. Derivatives
Derivatives are a newer addition to the DeFi space. These are contracts whose value is linked to an underlying asset. Futures, a type of derivative, allow parties to agree upon a purchase price of an asset at a particular time in the future.
Options, as the name suggests, provide the option to do so but not the obligation. In the DeFi space, cryptocurrency holders can use derivatives to track certain values such as Total Value Locked (TVL), price inflation, or even gas fees.
For example, an interesting but somewhat complex collaboration between UMA and Yam proposes to collateralize the price of Ethereum Gas.
4. Leveraged Staking
Additionally, some DeFi platforms now allow users to borrow to stake. This is a way to maximize income for liquidity providers who provide assets for a platform.
However, like any normal leveraged position, users have to pay interest on borrowed assets and manage the associated risks like impermanent loss.
Nevertheless, platforms like the recently launched Alpha Homora v2 are extremely popular, having nearly $200 million staked four days from launch.
5. Insurance
Finally, the DeFi world is extremely experimental. And as shown on Thur Feb 4, exploits still occur. Rapid development can leave users exposed.
However, the DeFi space is also insurable. Cover Protocol is probably the most famous insurance provider for platforms. It allows users to invest in insurance policies through staking.
However, even these are prone to mistakes, with COVER itself suffering an exploit not too long ago. Nonetheless, there are other competitors, such as the newly launched Bridge Mutual and the appropriately named DeFi Insurance Protocol.
It’s definitely a space to watch.
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