In this piece, I will be comparing some of the hottest projects in DeFi space.
This one, you won’t want to miss.
But first, before we dive in, what exactly is DeFi and why should you pay attention to it?
DeFi, the acronym for (‘Decentralized Finance’), which is also referred to by some as ‘Open Finance’ or ‘Distributed Finance’, is a system of open, permissionless, and interoperable financial products built on top of Ethereum.
More specifically, DeFi brings traditional financial products such as borrowing, lending, and banking services onto the decentralized Ethereum blockchain. The idea is to allow anyone with internet access to be able to lend, borrow, trade, and bank without relying on any trusted third parties or middlemen.
So, why should you pay attention to DeFi?
Because DeFi is the future of finance and it’s recognized as the fastest growing trend in blockchain and the decentralized web space.
In other words, there’s a lot of money to be made in DeFi, and NOW is the time to pay attention.
Now, something I want to bring to your attention regarding DeFi is Automatic Market Makers (AMMs).
What’s that you ask?
Let me start off by saying that Automatic Market Makers are becoming the hottest thing within DeFi itself as AMMs are absolutely critical for the digital asset/cryptocurrency sector to grow.
To put it simply, Automatic Market Makers (AMMS) in DeFi are coded smart contracts within DeFi protocols that make trades to make markets. These AMMs in DeFi use things like sophisticated bonding curves to determine what price they will execute a trade at, and then just do it.
Automatic Market Makers are what powers the decentralized exchange of tokens. They empower decentralized markets and are therefore an integral part of the foundation of decentralized finance (DeFi).
That said, let’s now take a look at some of the most promising and innovative AMM projects on Ethereum today:
Uniswap is a decentralized on-chain liquidity protocol that facilitates the automated token exchange on Ethereum through the use of liquidity pools instead of classic order books.
The protocol allows anyone to do two things:
1) to quickly swap between ETH and any ERC-20 token.
2) to earn fees by supplying any amount of liquidity (must supply an equal value of ETH and an ERC-20 token).
In doing these things, Uniswap provides liquidity for the decentralized exchange of ETH and ERC-20 tokens in a very efficient manner via the Uniswap protocol.
- Doesn’t have its own token
- ERC-20 swaps only
- ETH as a hub currency
- Anyone can add any ERC-20 tokens
- 50%/50% pools only
- Decentralized, fully functioning on a smart contract
Doesn’t have a token
Uniswap is a rare breed in the DeFi scene as it has no native token (yet). Rather, each liquidity pair is represented by a unique, freely-transferable ERC-20 token.
So, how do you profit from it?
You can profit from fees. Each trade facilitated through the Uniswap protocol has a 0.3% fee which is added to the relevant liquidity pool; and if you’re a liquidity provider in that pool, you get a share of the pool’s fees that’s proportionate to how much liquidity you provide.
ERC-20 swaps only
Like most DeFi projects, Uniswap only supports quick token swaps between ETH and any ERC-20 token.
However, the Uniswap protocol is an inherently agnostic piece of code, meaning it can be leveraged by other blockchain protocols or projects.
But for now, Uniswap is strictly leveraged for and built on top of Ethereum.
ETH as a hub currency
When providing liquidity to the Uniswap protocol via a ‘liquidity pool’, you must deposit an ERC-20 token along with an equal value of Ether because ETH is the hub currency.
For instance, say you want to provide liquidity to a DAI/ETH liquidity pool. You can deposit any amount of DAI you want, but an equivalent value in ETH must be deposited as well, ie. 225 DAI + 1 ETH (which is worth ~$225 at the time of writing).
Anyone can add ERC-20 tokens
Anyone can contribute any amount of ERC-20 liquidity to Uniswap liquidity pools. If the pool you want to contribute to is not listed, then you can simply create a market (i.e., liquidity pool) by supplying an equal value of ETH and an ERC20 token.
Uniswap liquidity pools contain 50% ERC-20 token and 50% ETH. In other words, for every ERC-20 token deposited in these pools, an equivalent value of ETH must be deposited as well.
Decentralized, fully functioning on a smart contract
Uniswap encompasses all of the same attributes and properties of Ethereum by leveraging fully decentralized and audited smart contracts built on top of Ethereum.
In doing this Uniswap is:
- Censorship Resistant - no one can stop it.
- Decentralized - no one controls it.
- Permissionless - anyone can use it.
- Secure - anyone can verify execution.
2. Bancor (BNT)
Bancor was the first smart contract Automated Market Maker platform to launch on Ethereum and it pioneered some of the key concepts used in DeFi today.
For instance, Bancor was the first project to use a mathematical bonding curve to calculate digital asset prices and to track liquidity provider contributions.
Like Uniswap, Bancor is a decentralized exchange (DEX) protocol on Ethereum that uses pooled on-chain liquidity, in which anyone can contribute to, for non-custodial token exchange.
- Has native token token $BNT
- ERC-20 & EOS swaps
- BNT as a hub currency
- Allows pools with single token exposure
Has native token token $BNT
Unlike Uniswap, Bancor has its own native cryptocurrency, Bancor Network Token (BNT), which plays an integral role in the functionality of the Bancor protocol through three primary use cases:
- Serving as an intermediary token that connects pools in the network and across blockchains.
- Serving as a staking token in Bancor Liquidity Pools, where stakers receive staking rewards in newly minted BNT. This acts as an incentive for users to add liquidity.
- Serving as a governance token, allowing BNT holders to vote on upgrades to the Bancor protocol.
ERC-20 & EOS swaps
The Bancor protocol is blockchain agnostic and currently supports both the Ethereum and EOS blockchains. Therefore, Bancor users can swap between hundreds of ERC-20 and EOS tokens as well as ETH and EOS themselves.
BNT as a hub currency
Bancor uses BNT as the hub currency (rather than Ether). This is perhaps Bancor’s biggest downfall as using BNT instead of ETH as the hub currency has proven to be quite troublesome.
Bancor launched during the 2017 ICO mania and did really great for a while, but when the bubble popped, BNT lost a tremendous amount of value which negatively affected the project.
Bancor is now making a strong comeback, but nevertheless, using Ether as the hub currency (as seen in Uniswap) is arguably better, mostly because of its large liquidity.
Allows pools with single token exposure
Bancor is introducing yet another pioneering concept in the realm of DeFi – Single Token Exposure. Bancor V2 introduces a new type of AMM that allows users to provide liquidity with 100% exposure to a single token.
In other words, liquidity providers no longer need to hold a separate reserve token when providing liquidity on Bancor. This is an extremely innovative feature as it allows token holders to provide liquidity without giving up their long position on the token.
3. Kyber Network (KNC)
Kyber Swap dashboard
Kyber Network is similar to both Bancor and Uniswap in that its DEX network is an on-chain liquidity protocol that enables token holders to contribute liquidity to Kyber token reserves.
Like the previously mentioned DEX protocols, Kyber doesn’t use order books. Instead, Kyber’s protocol automatically provides the user making the token swap with the best price from all the reserves in the network.
Kyber Network performs quick, easy, and secure token swaps in a decentralized and non-custodial fashion. The protocol can be easily integrated into dapps, vendors, wallets, exchanges, and more, making it one of the most widely adopted DEX protocols.
- Has native token $KNC
- ERC-20 swaps only
- Fees paid in KNC, then part of it is burned
- Hub token $KNC
- Easily integrated into dapps
Has native token $KNC
Kyber has its own native ERC-20 token, Kyber Network Crystal (KNC), which plays an integral role in Kyber’s on-chain liquidity protocol.
KNC has three primary use cases:
- Kyber Network liquidity providers must purchase KNC to pay for their operations in the network.
- Any dapp, wallet, vendor, exchange, and so forth earn a commission paid in KNC for every transaction they facilitate using Kyber’s on-chain liquidity protocol.
- Each transaction in Kyber Network has a fee that’s paid for in KNC and a portion of these fees are burned, removed from circulation forever.
ERC-20 swaps only
Unlike Bancor (which is blockchain agnostic), Kyber Network only supports the Ethereum blockchain, which includes token swaps between Ether (ETH), ERC-20 tokens, and non-fungible tokens (NFTs).
Also, compared to other DEX swaps platforms, it is more strict when it comes to erc-20 tokens they list.
Fees paid in KNC, then part of it is burned
Every transaction facilitated through Kyber’s protocol has a fee paid for in KNC, in which a portion of this fee is burned and removed from Kyber’s KNC circulation forever.
As of June 2020, 6,905,890.04 KNC fees have been collected and a total of 4,964,383.61 KNC has been burned.
Hub token KNC
Like Bancor, Kyber Network uses its native KNC token as the hub currency for Kyber’s on-chain liquidity protocol. Kyber Reserves (liquidity contributors) are required to purchase KNC to pay for their operation in the network. Reserves must hold some KNC tokens to pay for network fees whenever they facilitate a trade.
Easily integrated into dapps
Kyber Network can be easily integrated into a wide array of dapps, websites, wallets, payment gateways, exchanges, and more. The protocol’s instant token exchange service gets integrated directly into the application logic to provide a seamless token swap experience.
Some notable Kyber Network integrations include wallets like MyEtherWallet (MEW), Enjin, and Coinbase; DeFi dapps like ETHLend, bZx, and MelonPort; exchanges like Uniswap, Oasis, and DutchX; and payment systems like Wisepass, Daonomic, and Decentraland.
4. Balancer (BAL)
Balancer is one of the latest projects to hit the DeFi scene as it’s native $BAL token only just started getting distributed to liquidity providers on June 1, 2020. However, the Balancer project initially started in early 2018 as a research initiative by BlockScience.
So, what is it?
Balancer is a non-custodial automated portfolio manager, liquidity provider, and price sensor that may very well be the most innovative thing to launch on Ethereum DeFi since the likes of Bancor and Uniswap.
Balancer’s powerful DeFi framework generalizes Uniswap’s bonding curve to a multi-dimensional surface to allow Balancer token pools to hold several different tokens, each of which with its own defined share of the total value in the pool.
What’s more, these pools are essentially self-balancing index funds, where instead of paying fees to portfolio managers to rebalance your portfolio, you collect fees from traders who rebalance your portfolio by following arbitrage opportunities.
- Weighted token exposure, ie (80%/20%) or (95%/5%)
- $BAL token earned atop of swap fees
- A Balancer Pool is a self-balancing index fund
- Two types of pools: shared and private
Weighted token exposure, ie (80% / 20%) or (95% / 5%)
Balancer allows any ERC-20 token holder to provide liquidity to a Balancer pool with 100% of their assets.
Balancer pools can contain 2 to 8 different tokens with any custom %-distribution of value for each of them (ie. 80% BAT / 20%LINK or 95% ETH / 5% DAI, or 8 different tokens with 12.5% distribution each, etc.).
$BAL token earned atop of swap fees
As of June 1, 2020, 145K BAL is distributed to Balancer liquidity providers each week. These BAL tokens are distributed to liquidity providers based on how much liquidity they contribute. The liquidity incentive program is planned to last the next 4 years.
Balancer liquidity providers earn this distributed BAL atop of the swap fee, which occurs whenever someone performs a trade that utilizes the pool’s liquidity.
A Balancer Pool is a self-balancing index fund
With Balancer, liquidity providers are rewarded for providing liquidity to the protocol all while their deposited tokens (like an index fund) are continuously rebalanced for them.
In traditional index funds, you need to pay fees when rebalancing your portfolio, but in Balancer, you get paid for providing liquidity while your fund is continuously rebalanced for free.
Two types of Balancer pools, shared and private
Balancer has two types of pools, 'shared' and 'private', each with different parameters.
Shared pools have fixed parameters so that anyone can add liquidity to them without the pool creator indirectly stealing liquidity from other liquidity providers.
Private pools are very flexible; tokens can be removed/added, weighted token exposure can be changed, and the swap fee can be adjusted. However, only the pool creator can add liquidity to the fund.
I hope you enjoyed these 4 DeFi project comparisons and now have a better understanding of how they differ and what they offer.
Also, let me know what you think about these DeFi projects? Which one do you like best? What other DeFi projects are you interested in? Let me know in the comment section below.