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The creation of blockchain and
cryptocurrencies have brought a slew of proposed changes to our economic system.
The immutable ledger system, after all, offers many features that have
traditionally been performed by people – people who can make mistakes, people who
can forget things and people who can be corrupt.
It is then not a surprise that
DeFi has grown quickly among the largest blockchain-based systems: It pretends
to completely overhaul our financial systems so we no longer have to depend on
banks, with their biases and double-standards, for everything. Instead, with
blockchain and intelligent use of smart contracts, most transactions that would
require a financial institution these days can be automated.
How does it work?
Different DeFi providers will offer
different services, so there isn’t a single standard. Among the more common
features, partly due to the lower need for external infrastructure or legal
arrangements is distributed cryptocurrency exchanges – much like Uniswap,
which has been slowly growing over the last year.
There’s one thing that all DeFisystem depends on, however, and that thing is liquidity pools.
What is a liquidity pool?
DeFi systems are entirely
automated, and they rely on the community itself to work. While a traditional
bank usually handles the funds from its customers’ savings accounts or
fixed-term deposits to provide services like loans and mortgages for other
customers, that’s not an option on DeFi systems. Hence why liquidity pools
exist.
Liquidity pools are exactly what
their name says: They’re the funds of the DeFi system, and where any services
rendered come from. Unlike with banks, however, DeFi systems don’t have
investors to fund, so these pools come from users on the blockchain.
The way this works is, users
deposit some of their crypto on liquidity pools to help fund and boost the DeFi
system of their choice. Depending on the liquidity pool the user will have
certain restrictions – be it on amount, type, or quantities of crypto he can
deposit – and in exchange, the user gets a small amount of money fromtransactions on the pool. It’s a bit like having a savings account at the bank,
except that the interest rate here isn’t set and depends on how much use the
pool sees.
Which liquidity pools are best?
Usually, the overall best
liquidity pool for a person will depend on that person – which tokens they own,
how much they own, and however they wish to invest or deposit them. However, as
with everything, there are certain pools and DeFi systems that are currently
more popular than others. A few of them are:
Uniswap
Already mentioned above, Uniswap has
grown quickly over the last year to become the largest decentralized, fully
automated crypto exchange in the world. While it only supports Ethereum-based
ETH and ERC-20 tokens (so no Bitcoin here,) it’s a very popular system among
traders in the Ethereum network.
Uniswap charges 0.3% of every
transaction on token exchanges and then distributes these earnings among all
liquidity providers for that given trading pair, usually by adding them to the
pool itself. Its only requirement is that cryptocurrencies must be deposited in
pairs of equal value, as single-crypto deposits are not allowed.
dYdX
Another decentralized exchange,
dYdX is known mostly among traders due to its ease of use and open support for
leverage trading – allowing for instant, seamless trading that doesn’t depend
on offer and demand, although it does depend on existing liquidity.
Some of dYdX’s most commonly
touted features besides the decentralized exchange itself are 10x leverage on
ETH collaterals, support for Bitcoin
futures, and lending of crypto tokens.
Curve Finance
Curve Finance brings its own
twist to the DeFi environment, making it particular enough to be featured here.
Specifically, Curve is a specialized trading exchange that deals exclusively on
stablecoin trading. While it might sound weird to have an exchange where people
can essentially trade USD for other USD, the wide array of existing stablecoins
all have different uses, as not all exchanges or traders accept just any
stablecoin – many have their own preferences.
Curve’s interface isn’t as flashy
as that of other exchanges, instead going for an old-fashioned look. However,
that doesn’t make it particularly difficult to use since some of the features
that other exchanges see as needs, such as price charts, Curve can do without.
And while its use is somewhat niche, it has still managed to become one of the
main examples of DeFi in our current blockchain landscape.
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