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Financial systems enabled by blockchain technology are called decentralized finance, or DeFi. These are often associated with Ethereumit’s blockchain and all other cryptocurrencies built on this network. DeFi participants aim to eliminate the need for an intermediary such as a regulator and to disrupt legacy financial systems.
Several DeFi protocols such as SushiSwap (CRYPTO:SUSHI) and Aave (CRYPTO:AAVE) allow users to stake their cryptocurrencies and earn a passive income stream. According to Statisticalthe amount of cryptocurrency held in global DeFi markets increased from US$1.62 billion in 2017 to US$100.5 billion in October 2021. In January 2022, this figure fell to US$81 billion U.S. dollars.
Here we take a look at two DeFi protocols that have gained popularity in this space.
A cryptocurrency that is also a decentralized exchange, SushiSwap was launched in August 2020. Valued at a market capitalization of US$808 million, the total value locked on the SushiSwap platform is US$2.23 billion. The price of the SUSHI token has risen 440% in the past 16 months, but is still down 86% from all-time highs.
SushiSwap is an automated market maker, allowing users to trade cryptocurrencies. These transactions are processed using smart contracts. SushiSwap has liquidity pools where users can lend their digital assets, a process known as cryptocurrency staking.
Unlike centralized exchanges such as Coinbase, users do not need to create an account on SushiSwap. You must connect your wallet to the SushiSwap app and use it to trade, exchange, lend or borrow cryptocurrencies. Thus, you must have cryptocurrencies in your wallet to trade on SushiSwap because the DEX does not allow you to purchase digital assets through a debit or credit card.
SushiSwap is also a governance token. It provides SUSHI token holders with voting rights to vote on protocol development proposals. Additionally, if you stake your token on the DEX, you will also receive a percentage of the swap fee, which will diversify your earning potential.
Launched in 2020, Aave is probably the largest DeFi protocol in the world, with a total locked value of US$8.91 billion. The AAVE token has gone from the ICO (Initial Coin Offering) price of $1.76 to its current price of $130. Valued at a market capitalization of $2.01 billion, Aave is the 54th largest cryptocurrency in the world.
It offers a wide variety of products to users, which has allowed Aave to expand its ecosystem at a rapid pace over the past two years.
Let’s say an investor has invested $10,000 in the BTC token. But due to some financial emergency, the user now wants to liquidate some of that investment. Thus, the investor can either sell part of the BTC token or apply for a personal line of credit from traditional banking partners.
Generally, payday loan interest rates are expensive and predatory. Thus, investors can now pledge their cryptocurrency tokens to Aave and receive a loan in the form of digital assets such as AID which are pegged to the US dollar. DAI can be transferred to a crypto exchange such as Coinbase from where you can withdraw money via fiat currencies.
The investor is eligible to borrow up to 75% of the amount of the pledged cryptocurrency and instead pay a lower interest rate (around 4%).
The insane takeaway
We can see that DeFi protocols are expanding their product range and providing financial services at a much lower cost than traditional financial players.