A guide to the most prominent DeFi protocols and how to use them to earn yield on the blockchain.
DeFi, or decentralized finance, has grown more popular over the last two years. There are now thousands of DeFi applications, each providing services and investments directly on the blockchain. This article breaks down how you can pick and choose a DeFi app that best fits your needs.
There are many different types of DeFi applications. This article details the most popular apps in DeFi, the services they offer, and how you can invest with them.
One way you can gauge how popular a decentralized application is is by how much “TVL” it has. TVL stands for “total value locked” and refers to the total dollar value on the platform.
Don’t let the “locked” in the term deceive you. Generally, money and assets can leave the platform at any time.
Let’s go over some of the DeFi applications with the most TVL according to DefiLlama, a website that tracks information on DeFi protocols.
MakerDAO is a protocol that allows you to use your crypto assets as collateral to take out loans in their stablecoin, DAI. In other words, you can lend MakerDAO your ETH in order to borrow a certain amount of DAI. This way, you can spend your ETH but still benefit from its price appreciation.
You can also borrow DAI to create additional leverage on your ETH. You can create leverage by giving MakerDAO your ETH to borrow DAI and use it to buy more ETH or other crypto assets. Doing so gives you extra exposure to the crypto market, so you earn more if prices appreciate.
However, leverage is risky, and if the price of your assets falls instead of rises, the leverage will have the opposite effect, causing you to lose twice as much or more.
At the time of writing, MakerDAO is the biggest DeFi protocol, with more than $8 billion of total value locked (TVL). If you like the platform and believe it will do well in the future, you can invest in its governance token, MKR.
Lido is a liquid staking provider for Ethereum and other blockchains. When you stake your assets on a blockchain, you can no longer do anything with those assets until you unstake them. Liquid staking derivatives fix this by staking your tokens for you and giving you tokens representing those staked assets.
For example, if you stake Solana (SOL) with Lido, you receive stSOL representing your staked SOL. You can trade stSOL and do almost everything else you can do with your regular SOL, including lending and borrowing against it. This allows you to stake and borrow with the same asset, which would be impossible otherwise.
Lido has a governance token called LDO that allows you to vote on governance proposals regarding the Lido platform.
Aave is a lending and borrowing platform supporting Ethereum, Polygon, Avalanche, Arbitrum, Optimism, and a few other blockchains. Aave allows you to deposit and earn sustainable interest by lending your assets to borrowers. While Aave and Maker both enable you to borrow assets, Aave supports more cryptocurrencies than Maker.
Maker only allows you to deposit ETH and mint DAI, but Aave supports assets such as USDC, MATIC, AVAX, and more. This means you can engage in many complex strategies, such as borrowing MATIC against your USDC and staking it.
Aave’s token (AAVE) is a governance token that allows you to vote on governance proposals. Users can also earn a share of protocol fees by staking AAVE to help secure the protocol.
Curve is a decentralized exchange (or “DEX”), sometimes called a stableswap protocol. Curve is unique because it only supports swapping between stablecoins and other assets with a 1:1 value. One reason people may use Curve is if they need to use a different stablecoin than the one they have. For example, if you have USDT but want to deposit liquidity into a liquidity pool that supports ETH and USDC, you can swap your USDT for USDC with Curve.
Curve is better than similar stablecoin exchanges because it gives you as close to a 1:1 rate as possible. This design results in low fees and minimum price impact on large trades.
Curve has a token, CRV, which you can buy or earn by depositing liquidity onto their platform. This token’s primary benefit is that it allows you to vote on where further CRV emissions go. Many protocols buy CRV in order to vote to have more CRV directed to their stablecoin pools.
Uniswap is the largest DEX on Ethereum. It now also supports Polygon, Arbitrum, Optimism, and Celo and can host any token on these blockchains. It offers cheap fees, fast settlement times, and better prices than centralized exchanges like Coinbase and Binance.
You can also provide liquidity on Uniswap, meaning provide both assets in a pool that other people can use for swaps. For this, you can earn swap fees and potentially other token rewards. Uniswap also has a governance token, UNI, which you can use to partake in Uniswap governance.
Convex finance is a complex protocol to understand. It builds on top of Curve to help liquidity providers and stakers of the Curve DAO’s token (CRV) earn added rewards. They do this by providing more tools for both parties.
For example, because Curve gives bonus LP rewards for those who have CRV staked, Convex will allow CRV stakers and Curve LP providers to team up and earn both parties more rewards than if they were to provide alone.
Additionally, because the voting power of CRV is valuable, Convex also allows protocols to ‘bribe’ CRV holders to vote how they want. They do this by providing tokens to Convex, who then gives them to CRV stakers. Convex is a unique protocol that is somewhat hard to understand, but it is popular because of its value proposition to the Curve platform and its participants.
There are plenty of different DeFi applications. If you went through the above then you can clearly see that each of dApp does something different. The apps that we listed above are arguably the most blue chip in each category and should be some of the first protocols to consider to use if you are looking to do the following:
Lending is a simple one. Deposit and earn. Similar to a money market account these rates depend on the pools and amounts being borrowed to pay out a fair true yield to its lenders, and have the borrowers pay this very same yield.
DEXs are the decentralized version of a centralized exchange such as the NASDAQ. They allow users to trade assets directly on the blockchain with no intermediary, an important feature in the world of crypto.
DEXs are one of the most powerful categories of dApps. Swapping tokens to and from allow you to join different communities, and use different apps. This is an essential part of DeFi. You will most likely end up using a DEX if you are an active crypto user.
The Convex protocol demonstrates how powerful and complex DeFi strategies can be. While they take time to research and understand, DeFi protocols offer a unique way to earn interest and yield on your assets. The world of DeFi is full of interesting financial tools you can use and potentially invest in. While we only went over a few of the most prominent protocols, you can use DefiLlama to examine the hundreds of protocols across many chains that are out there.
Crypto and DeFi applications can be some of the most powerful financial applications we have ever seen, and the meta is going to continue to change. What we have listed above might not be the best or most blue chip DeFi apps forever. Right now these are a few of the apps that we would recommend you taking a look at before you begin your DeFi investing journey.