There are several DeFi protocols operating within the decentralized finance based on Ethereum. However, there are four in particular that deserve special attention. These protocols are used to create and operate DeFi platforms that provide financial services without intermediaries.
The most famous and used DeFi protocol is MakerDAO, which deserves a separate treatment, considering that not only is it the main player in decentralized finance today, but it is also the one responsible for the creation and management of the DAI decentralized algorithmic stablecoin. Of the other DeFi protocols based on Ethereum, the first one that deserves a special mention is Compound.
This is a protocol which has created a platform for loans without intermediaries, allowing both the lending of tokens in exchange for interest and the borrowing of tokens by paying interest.
New ERC-20 tokens, called cTokens, have been created thanks to special smart contracts on Ethereum, which make it very easy to lend or borrow tokens with simple swaps. For example, the cDAI token allows swapping with DAI so that DAI owners can lend their tokens to those who will use the cDAI tokens.
Not all wallets allow doing this, one that does is the Eidoo wallet, for example, which facilitates swapping DAI with cDAI in order to lend DAI in exchange for interest. So far Compound offers a total of 8 different cTokens, on which funds worth more than 200 million dollars have been locked: cDAI, cETH, cUSDC, cBAT, cWBTC, cSAI, cREP and cZRX.
In addition, according to defipulse.com, Compound is second only to MakerDAO in terms of locked assets. Each cToken allows for obtaining different interest rates, which also vary over time due to market fluctuations.
Moreover, those who lend their tokens thanks to Compound can withdraw them at any time, collecting the interest, in a totally autonomous and practically instantaneous way. If this is done via non-custodial wallets such as Eidoo, everything takes place without any intermediary, thanks to decentralized smart contracts on Ethereum.Those who want to obtain a loan thanks to Compound must lock tokens as collateral, allowing them to obtain a credit of up to 50–75% of the value of the tokens, depending on the underlying asset.
The Compound protocol additionally sets aside 10% of the interest as reserves, while the remaining 90% goes to the borrower. There are no fees, and the protocol does not have its own native token. This creates a real decentralized liquidity pool, based on a credit market without intermediaries built on the Ethereum blockchain, which allows issuing and obtaining loans in a disintermediate, autonomous and extremely fast way.
dYdX is a non-custodial, decentralized trading platform for experienced traders. It is based on the open-source protocol of the same name and allows users to lend and borrow, or perform margin trading on supported assets. On dYdX traders can enter long positions with leverage of up to 4 times the value of the collateral, and up to 3 times for short positions.
For now, it only supports ETH, DAI and USDC, but more tokens are expected to be made available in the future. As in the case of Compound, interest rates vary depending on the asset and the dynamic balance between supply and demand, with interest accruing continuously.
Borrowed funds must be secured by locking tokens with a value equivalent to 125% of the loan, and if this ratio falls below 115%, the loan is automatically liquidated.
Unlike Compound, however, loans and leveraged positions can remain open for up to 28 days, after which they are automatically closed. Furthermore, the liquidation involves a 5% penalty. The dYdX protocol sets aside 15% of the interest as an insurance fund. dYdX does not charge trading fees and does not have its own native token.
Fulcrum is another DeFi platform that allows loans and margin trading. It is based on the bZx protocol which allows trustless and permissionless transactions, without fees, but as with the previous ones, it allocates 10% of the interest accrued towards an insurance fund.
Recently, the bZx protocol has suffered a couple of attacks that forced its creators to suspend services to avoid further problems. The special feature of bZx lies in the fact that it also provides the possibility of obtaining the so-called “flash loans”, which are instant uncollateralized loans that open and close within the same transaction.
This way, since the borrowed funds are returned at the end of the transaction, there is no need to lock collateral to obtain them. Instead, it is sufficient to ensure that all borrowed funds are correctly and fully returned at the end of the transaction.
It was precisely these flash loans that were the target of the attackers, which, without actually hacking the protocol, managed to exploit some of the vulnerabilities to steal large amounts of ETH from the platform.
Similar to how Compound has cTokens, Fulcrum has iTokens, thanks to which it is possible to earn compound interest. Traders can open long or short positions with leverage up to 4x thanks to pTokens, whose value fluctuates depending on the performance of their operations. Both of these ERC20 tokens are freely transferable.
The bZx protocol also integrates with Kyber and Augur, and supports ETH, DAI, USDC, KNC, LINK, REP, WBTC and ZRX. bZx is also equipped with its own native governance token, BZRX, which is currently locked and used only to pay fees.
The fourth protocol that deserves special mention is Aave.
This is again a non-custodial open-source protocol based on Ethereum used to grant and obtain loans without intermediaries. Loans are granted through so-called aTokens, which start accruing interest as soon as they are purchased.
However, the interest flow can also be redirected to another address. Users can borrow different assets, with varying guarantee ratios and liquidation thresholds depending on the asset, as well as the liquidation penalty.
Interest rates vary continuously depending on supply and demand, although Aave also allows users to enter and exit a loan at any time at a stable rate that is less volatile, thanks to a special liquidity reserve. Aave also offers uncollateralized flash loans that must open and close in the same transaction.
Even Aave has a native governance token, LEND, and charges 0.25% commission on loans and 0.35% on flash loans. This revenue is used to burn LEND tokens to reward investors and affiliates.
In reality, there are also other interesting DeFi protocols, like Synthetix or Uniswap, but they are different and do not involve lending. As many as 22 are tracked on DeFiPulse, although they are still mostly dominated by MakerDAO, which holds almost 60% of all locked assets in this sector.
In fact, the first three protocols in terms of locked funds, MakerDAO, Compound and Synthetix, together hold 85% of all locked funds in DeFi, which however is still a very young and rapidly expanding sector.