Sustainable Projects in DeFi

4 min readJul 31, 2021

Cutting out the traditional middleman — Banks

Traditionally, intermediaries like banks and stock exchanges were given the role to safeguard our transactions and are considered essential to perform required tasks such as storing and transferring money. However, due to their structure, they excluded more than 1 billion people from the financial market while charging high fees and delayed service times to those who use it.

DeFi or decentralized finance aims to rebuild the infrastructure of financial services by removing the need for third-party intermediaries such as banks to oversee these transactions. Similar to how Bitcoin has allowed individuals to move currency online without the need for a trusted institution to monitor the transaction, DeFi projects replicate simple financial services such as trading and lending by using software programs called blockchains.

This transition to a new digital financial ecosystem is fueled by the digital currency boom and has seen DeFi’s industry market capitalization rise 30 times to US$73 billion. In contrast, the total value locked (TVL) has multiplied by 100 fold to nearly US$100 billion, as can be seen in the figure below.

Research showed that in the past year alone, the largest DeFi projects with the most TVL were the fast-growing cryptocurrency start-ups aimed to disrupt and cripple financial intermediaries such as Aave, Compound, Uniswap and MakerDao.

Aave:

Aave is an open-source liquidity protocol and is non-custodial, meaning that Aave does not have control over the cryptocurrencies of its users. Through this project, users either participate as depositors or borrowers. Depositors provide capital to earn passive income on it while borrowers, on the other hand, choose to borrow digital assets from stablecoins to altcoins using their cryptocurrency as security to take out a flash loan. These ‘flash loans’ are Aave’s flagship products and are the first uncollateralized loan option in the DeFi space. Furthermore, Aave is considered a leader in the DeFi space as it ‘allows users to borrow and lend with more than 20 different cryptocurrencies, ultimately providing more choice to users than many of its competitors in the space’ such as Compound. (Vegaholdings)

Uniswap:

Uniswap is a trustless financial infrastructure that allows the swapping of tokens on Ethereum. It is basically a decentralized exchange. ‘It provides a user-friendly and low latency interface’ that is designed to function as a public good, meaning that Uniswap does not take any fees for itself. Moreover, the project has a strong governance structure and enables community ownership through its token, UNI. The project boasts the largest number of transactions, the highest liquidity and ‘is referred to as one of the most dominant DEX exchanges of the future.’ (Dollero)

Maker DAO:

With a total market capitalization of up to billions of dollars and its dominance over more than 21% of the DeFi sector, Maker is one of the most prominent DeFi projects. Furthermore, its status is boosted by its own stablecoin, DAI, which has become one of the most widely used stablecoin. This is because DAI makes money through interest rates on borrowing capital which can be used to make payments, trade and invest in other DeFi projects. DAI is created when a user deposits cryptocurrency into a Maker smart contract. These funds are entered into a collateralized debt position known as a ‘vault’ with a sum of DAI equal to the deposited crypto assets minus a maintenance margin. The Maker Protocol or the ‘smart contracts’ that power DAI is governed by token holders of Makers governance token, MKR. Maker itself is a cryptocurrency ecosystem with over 400 apps and services integrated with the DAI stablecoin, including wallets and other DeFi projects.

Although these DeFi projects may hold great promise, it is imperative to note that these DeFi projects are not without their setbacks. Most DeFi applications and protocols run on Ethereum and during peak activity periods are subject to high transaction fees and slow transaction times, creating congestion that negatively affects usability.

If Ethereum 2.0 can effectively tackle the issue of scalability, allowing them to create a network that could potentially process 100,000 transactions/minute, it will pave the way for mainstream adoption to take place and grant more people access to DeFi projects.

Another cause of concern is how regulators will react to these DeFi projects, with many applications encompassing a large unregulated grey area that could potentially face pressure from the governments. High margins do not drive decentralized Finance at its roots but instead focuses on returning control to users rather than intermediaries. Providing functionality and flexibility that these traditional centralized institutions did not. If DeFi takes the intermediaries out of the picture itself, will policymakers resist the change?