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When it comes to the network effect, the Et hereum blockchain is still the undisputed King of DeFi!
Many of the most innovative “blue chip” DeFi protocols are found there,
and have cemented their place at the heart of the crypto industry.
Here, we’ll take a look at the top 3 Ethereum DeFi protocols in terms of their total value locked.
One of the first ever crypto lending protocols, MakerDAO,
distributes and manages DAI, a decentralized stablecoin that’s soft-pegged to the US dollar.
It was created in 2015 by Danish entrepreneur Rune Christensen and launched in December 2017,
attracting early attention from Andreessen Horowitz,
whose a16z crypto investment fund chose MakerDAO as its first project.
Maker’s MKR token has two functions: firstly, it’s the platform’s governance token,
granting the right to propose and vote on protocol changes.
Secondly, MKR 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,
the Maker Protocol liquidates its contents. 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.
MKR token holders don’t receive any dividends or fee rewards,
with the idea being the token’s value will increase along with the success of DAI.
In July 2021, Christensen announced that Maker had become fully decentralized,
and that the Maker Foundation, which launched the platform, would formally dissolve. Considering
that Maker is still the number one DeFi app by total value locked, that’s a huge achievement!
Next up is Curve DAO, a decentralized exchange for stablecoins and synthetic assets. Curve
employs multiple smart contracts to manage user-funded liquidity pools,
and enables traders to execute stablecoin swaps with a very low slippage rate,
which is extremely important for those trading large amounts.
The CRV token is paid as a reward to liquidity providers, both on Curve
and other lending protocols. CRV tokens can also be “vote-locked”, which means they can’t
be traded for a defined period of time, but that holders can participate in governance
and boost their staking rewards, which are paid in veCRV tokens, by up to 2.5 times.
2021 was a good year for the CRV token because of the so-called “Curve Wars”, where many DeFi
projects were competing to accumulate and lock up huge amounts of CRV tokens. This was done
so they could have a greater say into where all of those veCRV rewards were distributed.
Deep liquidity is hugely important in DeFi,
and Curve is still the number one provider of liquidity in the crypto space!
Rounding up the top 3 is Aave. Launched in 2017,
it’s one of the most well known borrowing platforms in crypto.
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.
Aave also offers a few more innovative services,
like flash loans - uncollateralized loans that must be repaid within one block transaction.
Flash loans give crypto users a quick and relatively simple way to do things like arbitrage
trading, where they take advantage of the same asset being priced differently on other platforms.
Also, in January 2022, Aave launched Aave Arc, a permissioned DeFi liquidity pool for a select
group of whitelisted financial institutions, including Celsius, CoinShares and Wintermute.
In terms of tokenomics, staked AAVE tokens earn a portion of transaction fees and receive platform
discounts, as well as governance powers in proportion to the sum of their balance.
AAVE is designed to be deflationary, as a portion of transaction fees are burned.
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