In spite of growing competition, the Ethereum blockchain remains the King of DeFi. Many of the most venerated DeFi protocols are found there, and have been on our radar for a while.
Here, we’ll take an updated look at 3 of the best-known and used applications that make up the Ethereum DeFi ecosystem, including the ERC-20 tokens they utilize.
Aave (AAVE) is a decentralized finance protocol for lending and borrowing cryptocurrency. The platform was launched in 2017 as ETHLend and rebranded in September 2018, and is now one of the major players in the Ethereum DeFi space. It was founded by Stani Kulechov, a serial entrepreneur.
Aave enables users to borrow or lend about 20 cryptocurrencies at fixed or variable interest rates. Among its services is flash loans, uncollateralized loans that must be repaid within one block transaction.
Lenders earn interest by depositing digital assets into liquidity pools. Borrowers use crypto assets as collateral to take out loans. Loans may be repaid with the same asset borrowed, including interest, or with funds deducted from the collateral deposited.
In January 2022, Aave launched Aave Arc, a permissioned DeFi liquidity pool for a select group of whitelisted financial institutions. Aave Arc is a DeFi liquidity market compliant with anti-money laundering (AML) regulations, with all participating institutions required to provide KYC verification. Initial whitelisted institutions included Anubi Digital, Celsius, CoinShares, GSR, Hidden Road, Ribbit Capital and Wintermute.
Tokenomics: Staked AAVE tokens earn a portion of transaction fees and special Safety Incentives. In the event of a shortfall (from a smart contract bug, failure of an asset used as collateral or incorrect Oracle data in case of a market downturn), part of the staked AAVE can be liquidated to cover collateral as required. Full details are available here.
AAVE token holders also receive governance powers in proportion to the sum of their balance.
AAVE is designed to be deflationary, as a portion of transaction fees are burned. Holders receive discounted fees and can participate in platform governance.
Maker (MKR) is the utility token of MakerDAO, the open-source decentralized organization and software platform that manages DAI, a stablecoin that’s soft-pegged to the US dollar, and Maker Protocol, which allows users to issue DAI. It was created in 2015 by Danish entrepreneur Rune Christensen and launched in December 2017.
The project attracted early attention from Andreessen Horowitz, whose a16z crypto investment fund chose MakerDAO as its first project. In an interview with Bitcoin Magazine, Ethereum creator Vitalik Buterin called MakerDAO one of the “most interesting” projects running on the chain, and it was arguably the first DeFi blue chip that emerged in the crypto space.
All DAI transactions can be viewed on the Ethereum blockchain, while MKR transactions can be tracked at Mycryptoview.
Tokenomincs: MKR token holders don’t receive any dividends or fee rewards, the idea being that the token’s value will increase along with the success of DAI.
MKR has two functions: First, it’s the Maker Protocol governance token, granting the right to propose and vote on proposals changes.
Second, it ensures the stability of DAI, the value of which is secured by collateral deposited into a “vault” whenever new DAI tokens are issued. If the vault balance is insufficient to fully collateralize all outstanding DAI, the Maker Protocol automatically initiates liquidation of its contents and uses the proceeds to cover its obligations.
However, if vault liquidation isn’t sufficient, new MKR tokens are issued to cover the shortfall. On the other hand, if the amount of DAI created from an auction exceeds what is needed for full collateralizations, the excess is used to buy back and burn MKR tokens.
Curve (CRV) is a decentralized exchange (DEX) for stablecoins that uses an Automated Market Maker (AMM) to provide liquidity. Built on the Aragon platform, it employs multiple smart contracts to manage user-funded liquidity pools.
Curve’s interface is simple but effective, and takes inspiration from the Windows interfaces of the mid-to-late nineties. Full Documentation on using this site can be found here.
Important note: The legitimate Curve website URL is https://curve.fi/. Beware of fake phishing sites that will request your Ethereum wallet’s secret recovery phrase.
Tokenomics: The Curve DAO has no access to users’ staked CRV tokens. Currently, CRV serves three functions:
It’s paid as a reward to liquidity providers, generated from trading fees. Curve liquidity pools are also made available to other lending protocols, such as the Compound cPool, earning additional interest on top of the normal trading fees.
CRV tokens can be “vote-locked” (or “vote-escrowed”), which means they can’t be traded for a defined period of time. Holders of vote-locked CRV receive veCRV in exchange; the longer the lock, the more veCRV received. Vote-locked veCRV lets holders participate in Curve DAO governance and also “boost” their staking rewards up to 2.5 times, depending on the lock time.
That completes our list of the top three DeFi protocols on Ethereum, according to their total value locked. It will be interesting to see if any other projects can break into the top 3 over the coming years.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.