DeFi, or decentralized finance, has been quite revolutionary in the financial industry. It has created opportunities for a new era of financial operations outside of the traditional banking sector. However, the question that many are asking is, what makes DeFi go around? The answer lies in DeFi protocols, the backbone of this revolutionary movement. In this blog, we’ll look into what DeFi protocols are, how they function, and which ones will dominate the industry in 2024. If you wish to venture into decentralized finance or are planning to collaborate with a DeFi development company, this guide will be of immense help to you.
TABLE OF CONTENT
What are DeFi Protocols?
DeFi is an ecosystem of applications or smart contracts that are rule-based algorithms that control the functioning of decentralized applications. Such protocols enable different financial services, including lending, borrowing, trading, and getting royalties on crypto assets, without a central figure. In simple terms, DeFi refers to decentralized finance protocols that are self-executing and manage transactions on the blockchain.
Unlike conventional financial systems where you transact with the help of banks or brokers, DeFi lets you use decentralized applications (dApps) to engage with financial services directly. These protocols are often developed as open-source software, which makes it possible for anyone to check the code.
How Do DeFi Protocols Work?
DeFi protocols are built on blockchain systems, primarily on Ethereum, although newer platforms like Binance Smart Chain, Solana, and Avalanche are also gaining traction. These protocols are based on smart contracts, contractual agreements that automatically execute the terms of the agreement.
When you engage with a DeFi protocol, lending your cryptocurrencies, the smart contract pairs you with a borrower, determines the interest rate of the loan, and executes the terms. All of this occurs directly, cutting out middlemen and thereby lowering costs and speeding up transactions.
An important feature of most DeFi protocols is their reusability, or “Money Legos,” which means that DeFi protocols can interoperate seamlessly. For instance, one can borrow funds on one protocol, sell the funds on another protocol, and stake them for rewards on yet another protocol within a few minutes. The decentralized finance protocols are connected, and this makes the ecosystem highly flexible and strong.
Top 8 DeFi Protocols in 2024
The DeFi market is still developing, and new protocols appear quite often. However, some have emerged in 2024 as innovative, secure, and widely used by users. Here are the top 8 DeFi protocols to keep an eye on this year:
1. Uniswap
Uniswap is among the leading DeFi protocols, and it established itself to pave the way for decentralized exchanges (DEX). It enables users to exchange one cryptocurrency for another without having to go through a broker. Uniswap has recently upgraded itself and is still leading in liquidity provision and user-friendly interfaces.
2. Aave
Aave can be recognized as one of the top lending and borrowing platforms. Its peculiarities include flash loans and a vast list of supported assets, making it a favourite among DeFi users. In 2024, the DeFi player Aave has remained relevant due to various developments, such as the integration of multiple chains.
3. Compound
Compound is another top lending protocol that enables users to earn interest on the crypto or borrow against the crypto. It works through the formation of committees and the management of money and fluctuating interest rates. Another significant aspect of Compound’s native environment is the governance token called COMP, which plays the role of decentralized governance.
4. MakerDAO
MakerDAO is behind the creation of DAI, a decentralized stablecoin designed to be pegged to the USD. It enables one to commit Ethereum or other tokens as collateral to create DAI. MakerDAO has been helpful in anchoring the DeFi market, specifically during periods of high volatility.
5. Curve Finance
Curve Finance is a DEX that is specially designed for stablecoins. It has a small slippage and a fee, which makes it the best place to exchange stablecoins like USDC, DAI, and USDT. By 2024, DeFi platforms such as Curve have integrated with other DeFi protocols, meaning that Curve will have more liquidity and usefulness.
6. SushiSwap
SushiSwap emerged as a clone of Uniswap but has since expanded to become a one-stop-chain for DeFi services. It provides services like staking and yield farming and a platform for launching new tokens. The active community and constant updates have made SushiSwap relevant within the sphere of DeFi competitors.
7. Yearn Finance
Yearn Finance is a yield aggregator that works to constantly optimize your tokens and ensure they’re earning as much as possible. Its vaults or investment strategies are intended to yield maximum profitability to farming and staking services. Yearn is constantly evolving and operates on a community level, so it is one of the best options for DeFi community members.
8. PancakeSwap
It is known as the first DEX operating on the Binance Smart Chain, with significantly lower fees and faster transactions compared to those on Ethereum. It is also a staking platform and yield farming platform, and it has a lottery system in place, allowing it to be a multi-functional platform for DeFi.
Can DeFi Displace Traditional Financial Systems?
The rise of decentralized finance has raised questions as to whether decentralized finance could replace traditional financial systems. Despite these benefits, DeFi also has some drawbacks, including fee issues, transparency, and accessibility, along with limitations like scalability, the absence of clear legal frameworks, and security issues.
Traditional financial systems are well established; they have been in place for over 30 years of infrastructure and regulation. Thus, despite DeFi solutions gradually entering the market and gaining popularity, it is still impossible to predict the complete ousting of traditional finance. However, DeFi can complement traditional finance by providing different solutions to issues, such as cross-border payments, lending, and asset management.
Should You Use DeFi Protocols?
If you are familiar with the technology and comfortable navigating the complexities of blockchain technology, DeFi has many ways to earn money. They enable you to earn better returns on your virtual coins and participate in decisions affecting the platforms and financial services that could be restricted within the centralized frameworks.
But as we discussed earlier, DeFi is not an immunity to risks. These protocols are decentralized, which suggests if there is an issue like a hack or a smart contract malfunction, then there is no one to contact. To invest profitably or develop DeFi, it is necessary to invest time in research, diversify, and, if necessary, cooperate with a reliable DeFi development company.
Summing Up
DeFi protocols are not only disrupting a traditional sphere; they are, in fact, creating a new one – the sphere of decentralized finance. As we have seen, the top 8 DeFi platforms of 2024 include a vast range of services that compete with centralized financial systems and allow users to have more extensive access to the platform, its operations, and new opportunities. No matter if you are willing to lend, borrow, swap, or invest, it is crucial to understand these protocols if you are navigating through the DeFi sphere.
We at Webmob Software focus on DeFi development while offering companies the opportunity to benefit from decentralized finance. As one of the top DeFi development companies, we can create solutions that fit your business needs and objectives to help you have a competitive edge in this evolving sector. Whether you are seeking to embed the best DeFi protocols in your app or create novel decentralized apps from the ground up, our team is here to help.
Are you willing to go to the next level of your business with innovative decentralized financial services? Get in touch with us now to find out how our top-notch DeFi development services can enable you to succeed in a decentralized economy.
Nitin Gupta, the CEO of WebMob Software Solutions, is a visionary leader renowned for his innovative approaches to leveraging emerging technologies to transform businesses globally. Under Nitin's guidance, WebMob has evolved into a pioneer in fintech, catering to esteemed clients across Europe, APAC, and the Middle East. As a thought leader, he continues to drive WebMob towards new heights of success, cementing its reputation as an industry leader in the IT sector.