In 2020, due to the economic crisis triggered by the spread of COVID-19, the world financial system is facing more and more problems. The authorities of major powers implemented quantitative easing monetary policies, which led to a decline in the value of the currency, and the public lost confidence in the currency. At the same time, the profit margin of bank deposits has also fallen to the lowest level.
At the same time, alternative products to traditional banks are now becoming more and more popular. These include decentralized financial products: cryptocurrency exchanges, wallets, and lending, trading and deposit services. Their most significant advantages are high interest deposit rates, which can bring huge profits to holders in just a few months, and instant loans that can be borrowed without documents or customer verification.
Although the demand for DeFi products is growing substantially, inexperienced users may find it difficult to master emerging decentralized solutions in operation. The analysis of the leading DeFi services in the market reveals the difficulties that novice users may face and the true feasibility of decentralized finance.
MakerDAO: trading, lending and saving
MakerDAO is the earliest DeFi protocol on the market. It allows users to use its native DAI stablecoin to borrow, trade and earn savings. DAI stablecoin is pegged to the U.S. dollar on a one-to-one ratio. MakerDAO often reminds people of banks because it issues loans with cryptocurrency as a guarantee, but does not require documents, inspections or a good credit history. Users can use ETH or any of the 10 cryptocurrencies accepted by the platform to pledge and obtain a certain amount of DAI.
After the loan, DAI can be used for any purpose, but mainly for investment. If you want to repay the loan, you need to repay the same amount of DAI you received before, plus a little interest. If the price of ETH rises during this period, users will profit, because the amount of collateral in ETH will increase based on its dollar price.
How easy is it to get a mortgage in MakerDAO? To borrow assets, users only need to have an active crypto wallet of MetaMask, Ledger, Coinbase, Trezor, WalletConnect or D'cent with a balance of at least $40. However, the total loan amount is always limited by the 150% mortgage ratio. In other words, the loan amount cannot exceed 66% of the collateral. Simply put, the borrower can get 66 cents by depositing 1 yuan.
In general, the platform is very convenient to use, but searching for the right tool can be a bit difficult, because the user interface is messy and it keeps redirecting to the mirror page. For example, the platform service is located on the Oasis decentralized application, and the deposit interest rate will only be displayed after connecting to the wallet and completing the registration transaction.
Since there are only two currencies available for deposits, namely DAI and ETH, this makes usability low. In addition, MakerDAO will be clear to any user who has interacted with encrypted exchanges before.
Aave: Unsecured instant loan
Aave allows users to use loans as a cryptocurrency guarantee and provide crypto to earn interest. The interface design is more reasonable and clear, the website is unified and streamlined, and supports more than 10 wallets.
Aave has 19 currencies to choose from, providing flash loans without any collateral, but it needs to return the loan and pay interest in the same block. Only experienced arbitrage trading experts can participate in such operations, who know how to make money from the difference in currency exchange rates in the short term.
Guaranteed loans do not seem to be as attractive as lightning loans, because their guarantee ratio is relatively low, only 50%-75%, which is two to four times lower than the guarantee ratio of other DeFi loan software.
However, Aave's borrowers are free to choose stable or floating interest rates. Stable interest rates will not change in the short term, but they can be adjusted in accordance with market dynamics in the long term. Floating interest rates are determined according to the supply and demand situation in the Aave platform. The first option is best for planning interest payments, while the second option is most suitable for flexible income management, because changes in floating interest rates will significantly affect the status of the loan over time. Switching between interest rates is an effective financial planning method.
There is no fixed repayment period for the loan, but if the repayment is delayed, the interest will increase, and the collateral will eventually be liquidated and sold. Therefore, it is important to monitor the liquidation threshold. The deposited funds can also be withdrawn or transferred to loan collateral as needed.
Aave provides conditions for making money from deposits. Supporting 20 currencies and high interest rates make the platform attractive to the majority of users. For example, the annual rate of return of BAT is as high as 40%, while the rate of return on US bank deposits is only 1%.
Aave adheres to the concept of providing choices, not only in terms of products, but also in terms of cooperation with different audiences. Aave's Discord channel can provide 11 different languages and provide technical support options.
Compound: Project as its name
The Compound platform rewards its users for providing loans and accepting loans. In order to get the most benefits, users often deposit and loan on the platform and put them back as deposits.
After Compound started to reward lenders and borrowers with Yuansheng COMP tokens, it gained a second life, thus popularizing yield farming on the platform and making borrowing profitable because COMP tokens completely cover certain market conditions The interest, and the interest itself is provided by the token growth accumulated by all platform users. In short, the borrower is paid for borrowing some assets.
Although this project only supports 7 currencies, the interface is quite intuitive, with the lending and deposit panels on the same page. When selecting the deposit interest rate, users can make loans for all supported mortgage currencies except Tether (USDT).
Compound is different from its competitors in that it accommodates a large number of cooperative projects from third-party developers, such as Instadapp and TokenSets, which provide more liquidity. However, the lower deposit rate of 12.42% per annum reduces the value of the platform. Some restrictions may also apply to restrictions on the amount of funds entered-for example, Bitcoin (BTC) loans must not exceed 40% of the cryptocurrency.
Unlike Aave, because the platform does not support services, it is easier for users of Compound to get answers from community members or open sources.
Instadapp: Bringing refinancing into the DeFi field
Instadapp is a wallet where users can perform lending, margin trading, exchange and interest income transactions based on smart contracts. However, the platform itself only provides currency trading services. If users want to make loans or deposits, they must resort to MakerDAO, Aave, Compound and Curve services.
Nevertheless, Instadapp provides a convenient integrated interface that highlights many features of the service. In a unique service, debt refinancing capabilities from Compound to MakerDAO are presented in a very intuitive way. People can obtain loans or deposits through three steps: registering a wallet, sending a confirmation transaction, and conducting a transaction, just like the application described above.
There is actually nothing special about Instadapp’s customer service. The support service in Discord will reply within a few hours every day, and the FAQ section is quite detailed.
Yearn.finance: A reliable product lineup, some of which are still in the testing phase
Yearn.finance is an aggregator of credit and liquidity mining such as Aave, Compound, DyDx and Fulcrum. It will automatically create an optimal balance to achieve maximum profitability. However, unlike Instadapp, the platform has its own token, which is used to periodically rebalance users' funds to choose the most profitable lending service.
For Yearn.finance users, an additional benefit is the YFI token reward that guarantees the use of platform services. YFI is the governance token of the platform and is only issued to users who use yToken to provide liquidity. Through YFI, the project strives to issue the most highly decentralized digital asset. There is no pre-sale, pre-sale, or distribution of the asset to the team. All modifications are made through online suggestions and voting by YFItoken holders.
Despite being an aggregator, Yearn has a strong product lineup, providing integrated services for working with cryptocurrencies in terms of transactions, loans and even insurance. Its Yinsure.finance service provides deposit insurance to deal with unexpected situations such as severe exchange rate fluctuations or hacking of the platform.
The disadvantage is that Yearn.finance’s description of its products is poor, and users are often forced to turn to its Discord channel to find answers, or to the Telegram community with 7,000 people, and its administrators will respond quickly. Most Yearn-ecosystem products are in the testing phase and run in testnet mode. This leads to low service stability, page load time lag, and wallet authorization reset.