DeFi Protocols

Decentralized Finance (“DeFi”) refers to the large range of financial services available via blockchain technology. These services operate peer-to-peer, eliminating intermediaries. DeFi services are able to do so because blockchain tech provides new and innovative ways to perform the functions performed by intermediaries in traditional finance, primarily in providing “trust.” Trust that money or assets that were supposed to be exchanged have been exchanged; trust that contract terms have been fulfilled.

Because these protocols eliminate the middlemen, transactions are in most cases faster and less expensive than they are via traditional financial institutions. Many types of transactions can now take place via DeFi, governed by smart contracts, which are digital agreements that automatically execute if contract terms have been fulfilled.

Popular types of protocols

Four popular types of DeFi protocols enable Borrowing/Lending, Staking, Asset Management, and Insurance. We recently discussed borrowing and lending protocols; to see that discussion, please go here. Today, we’d like to quickly touch on the other three other protocol types.

Staking

A fundamental element of proof-of-stake (PoS) blockchains are validators. Validators are network participants who stake (or lock) a certain quantity of native coins to participate in the verification of new blocks of data being added to the network. In exchange for participating in the validation of new blocks, validators earn staking rewards. Staking offers crypto holders a way of putting their digital assets to work. As validators, they can earn passive income without needing to sell their tokens. This is referred to as direct staking. The most popular cryptocurrencies that can be staked are Solana (SOL), Ethereum (ETH), Terra (LUNA), and Cardano (ADA).

One of the issues with direct staking is that the high balance requirements to become a validator are often beyond the means of many coin holders. For example, to become a validator on Ethereum requires staking 32 ETH. However, any digital asset holder can participate in the staking process by delegating their holdings to DeFi staking protocols that optimize delegation to maximize return and reduce staking risk. 

Liquid staking protocols like Lido and Socean take the staking concept one step further by solving the issue of locking the staked asset. In these protocols, underlying invested assets remain locked while participants receive a token representing their ownership share of the stake pool. These tokens are liquid and can be used in other DeFi protocols for utility and additional returns without sacrificing the staking rewards earned by the underlying staked asset.

Asset management

The asset management sector of DeFi aims to provide services such as yield optimization and portfolio management in a non-custodial, decentralized fashion, with no need for active managers. DeFi asset management’s focus is to make investing cheaper, safer and more accessible. They often connect to a wide variety of DeFi protocols making for a seamless experience for investing across them, with automated collateralization, rebalancing and liquidations. DeFi users can manage their investments across the entire protocol ecosystem with easy-to-use management dashboards. Key advantages of DeFi asset management are that the protocols are:

• Non-custodial: You don’t have to share your private keys or transfer your funds, which enables you to maintain close control of your assets.
• Composable: Because they are open source, DeFi asset management protocols can interact with other protocols to execute complex investment strategies, enabling you to access opportunities across the entire DeFi ecosystem.
• Automated: Smart contracts automate all investment processes, such as portfolio rebalancing, yield farming, and liquidity provision, lessening costs, increasing speed, and reducing the risk of human error.
• Transparent: DeFi asset management services operate transparently, enabling you to monitor their investments and protocol performance.
• Trustless: These protocols work without intermediaries or a central authority, leading to lower cost and more security.

Some popular DeFi asset management protocols are Zerion, DeFi Saver, and Yearn.finance, and Nested.

Zerion is a smart, social web3 wallet. Built on Ethereum, it is a non-custodial DeFi portfolio tracker and NFT management suite that enables you to manage your tokens and trade crypto from a single wallet across multiple blockchain networks. Zerion’s app lets you track your DeFi assets, execute trades, lend, invest, and borrow, all inside the app. It automatically tracks all your crypto, no matter where it is, providing an overview of your entire portfolio in one place. It also finds the best crypto prices from different DEXs, enabling you to swap tokens at the best available price.  

DeFi Saver is a one-stop dashboard for managing your DeFi positions across protocols. It enables you to combine various DeFi actions, create unique protocol interactions, and execute them in a single transaction. DeFi Saver supports some of the largest DeFi protocols on Ethereum, such as MakerDAO, Aave, Liquity, Compound, and Reflexer. It also has an automation feature that provides automatic liquidation protection and leverage management for collateralized debt positions based on settings you define.

Yearn.finance offers a suite of products to help you maximize your lending and yield farming earnings on your crypto assets. It automatically moves your funds among lending protocols to optimize your yield. It also enables you to deposit your crypto assets and follow custom-built investment strategies using Yearn’s autonomous code, much like a managed mutual fund.

Nested is a user-centric platform that makes DeFi easy to use, simplifying the management of a diversified portfolio. It lets you build, manage, replicate, and monetize portfolios. Using NFT technology, it enables you to create Nested portfolios -- specific investment portfolios assembled from various tokens. It also has a social component, allowing users to create their own Nested portfolios or copy those of traders they wish to emulate.

DeFi insurance

DeFi insurance acts as a safety net for the DeFi ecosystem, protecting users from risks that are unique to DeFi. Risks such as hacks, smart contract exploits, or stablecoin depeg losses. Like everything else in DeFi, DeFi insurance operates on transparent, blockchain-based decentralized platforms and is powered by smart contracts.

Insurance pools are crowdfunded, with funders sharing the premiums and the yield earned on the pool, but also bearing the risk of payouts when there's a triggering event. Different protocols have different verification processes for deciding which claims should be paid.

Popular DeFi insurance protocols are Nexus Mutual, Etherisc, InsurAce, and Bridge Mutual. 

DeFi is data extensive and complex

If you want to play in the DeFi arena you need good, clean, up-to-date, comprehensive DeFi data. Amberdata connects to all the essential blockchains and markets, offering a complete view of DeFi protocols, crypto markets, blockchain networks, and more. Our real-time and historical data covers spot and derivatives prices. We also provide DEX trading data, as well as on-chain data from the leading networks and protocols. 

Our unified API and data services provide a single integration point for obtaining a complete view of the entire crypto economy.  We deliver comprehensive digital asset data and insights from blockchains, crypto markets, and DeFi, giving financial institutions critical crypto market data or DeFi data for research, trading and analytics, risk management, derivatives analytics and compliance. 

To learn more about Amberdata, please contact us to book a demo.