November 16, 2020
Decentralized Finance, or DeFi as it is popularly known, is one of the major catalysts for the bull run seen in the cryptocurrency industry in 2020. At the moment, DeFi is the “in thing” in the crypto space, much like how ICOs were making the waves back in 2017.
According to a crypto metric site, DeFi Pulse, there was more than $1 billion trapped in DeFi protocols as of June 2020. Fast-forward to the end of August, investors had poured a whopping $9 billion worth of cryptocurrency into DeFi smart contracts.
In this article, we will be taking a deep-dive into the DeFi sector, Blockchain APIs, and how developers can create DeFi applications using blockchain APIs. Without further ado, let us look at what decentralized finance is all about.
What is DeFi?
DeFi refers to a specific class of financial product that lords decentralization above anything else and attracts investors to partake in it through highly incentivized mechanisms.
The DeFi sector comprises an assortment of non-custodial financial products erected around a culture of highly-experimental and highly-lucrative crypto projects that have caught the attention of top companies and venture capitalists.
Here’s How DeFi Works
Some of the most popular DeFi projects are lending protocols, like Aave, Maker, and Compound. These projects are protocols that allow you to borrow large amounts of cryptocurrencies swiftly, provided you can prove the loan will be repaid when due. These protocols also help you earn interest from lending out cryptocurrencies.
There are DeFi protocols like Uniswap, a decentralized exchange that allows users to trade any Ethereum-based token they desire or earn rewards when they add liquidity to a token’s market.
There are also synthetic DeFi assets like Synthetix’s tokenized stocks or Maker’s decentralized stablecoin, DAI, whose value is algorithmically set by the protocol. Other services port Bitcoin to Ethereum in a non-custodial manner or provide decentralized price oracles, which allows synthetic assets to adequately peg themselves to their non-synthetic counterpart.
Leading DeFi Protocols
Listed below are some of the major DeFi protocols in the industry at this moment:
1- Decentralized Lending Protocols and Yield Farming
Aave, Compound, and Maker are the top DeFi lending protocols with several untapped billions of dollars in their smart contracts. As mentioned earlier, the basis of this protocol involves borrowing or loaning out cryptocurrencies. Meanwhile, all the major protocols are based on Ethereum, which means that users can loan out or borrow any ERC-20 token. Also, lending protocols are all non-custodial, meaning that no entity has control over the tokens, not even the creators of the protocols.
2- Decentralized Exchanges and Liquidity Providers
Decentralized exchanges are among the most popular types of DeFi protocols, with Uniswap being a major example. As of the end of October this year, Uniswap recorded a daily trading volume of $426 million. This amount was a more substantial amount than that of Coinbase, a centralized exchange, which recorded a total of $348 million in cryptocurrency trades. Other major decentralized exchanges include Balancer, Bancor, and Kyber.
3- Decentralized Stablecoins and Synthetic Derivatives
Centralized stablecoins promise very exciting prospects for investors looking to come on board, given that they are usually pegged to a real-world asset like the US dollar. However, centralized stablecoins are only as good as the host company, and given the human factor involved, a lot could go wrong. This was what inspired the rise of decentralized stablecoin, which is pegged to a complex and self-sustaining algorithm. A good example of a decentralized stablecoin is DAI, which is created by Maker.
DeFi for Bitcoin
It has been observed that more Bitcoin holders are going into DeFi by “locking up” their holdings in exchange for tokens that can be utilized on DeFi platforms. However, almost all Decentralized Finance platforms are built on the Ethereum blockchain. So, how do you integrate Bitcoin into Ethereum-based DeFi platforms? Here’s how.
How Bitcoin DeFi Works
Bitcoin Decentralized Finance simply allows the cryptocurrency—which operates on its blockchain—run on Ethereum’s completely different and separate blockchain. This operability is usually not possible because of the difference between both blockchains. To get it to work, Bitcoin is converted into a currency that represents BTC and doubles as an Ethereum-based token. Then, the BTC is locked into a smart contract and can be used on the network. Voila!
This operation is a relatively new undertaking and there are just a few companies offering services in the field. A few of the leading companies include Wrapped Bitcoin (WBTC), RenVM, and RSK
As of September 2020, it was reported that about $1 billion worth of Bitcoin had been converted to Ethereum-based tokens. This is a good indication as to how rapidly the practice is growing, and it is largely as a result of the booming DeFi sector.
What are APIs?
Simply put, Application Programming Interface, or API as it is popularly known, is an interface used in distinguishing different user applications. For example, a mobile app that lets you book reservations, order a cab ride, buy food or groceries, or check an exchange rate most probably uses a specific API. The API, in this case, communicates the request to a server that contains the required data and transmits the result back to your mobile device.
Nowadays, APIs are used mostly in software development, usually for mobile or web apps.
Why are APIs important?
Listed below are a few reasons why APIs can be pivotal tools in the cryptocurrency industry:
1- APIs can be used as private and secure online transaction mechanisms.
2- APIs are simple and easy to use in completing day to day transaction processes.
3- They can make trading cryptocurrencies like Bitcoin very lucrative, considering the kind of information they can provide in real-time. Most crypto exchanges use customized APIs.
4- They can be very valuable for crowdfunding and investment platforms or ICOs as a form of merchandise.
Blockchain API is an interface that interacts with a blockchain node or a client network directly or through a different service. A good example of a blockchain API is an interface between a Bitcoin exchange and a user app that collects data from it.
Blockchain APIs have very valuable potentials when used in combination to solve an assortment of global industrial problems. In the DeFi sector, a very persistent problem is data availability. Developers working on DeFi projects require instantaneous data availability to operate efficiently. Given its functionalities, APIs could become a major game-changer in the Decentralized Finance sector.
Decentralized Finance Challenges
One of the most common setbacks many developers face while sourcing DeFi data is the process of decoding different smart contracts. This is because sourcing DeFi data involves several protocols, which becomes challenging given that each protocol has multiple contracts embedded in it.
Another challenge faced by developers sourcing data comes when a protocol gets an update, which requires them to individually maintain the smart contracts in the traditional method.
The DeFi ecosystem today is not as small as it was a year ago, as DeFi projects continue to grow at an exponential rate. To stay updated with the current growth level, developers have to be able to access all the data that comes with DeFi protocols in real-time. With blockchain APIs, accessing data becomes a walk in the park for developers.
Blockchain APIs can procure unfettered data from multiple DeFi protocols, including Compound Finance, DDEX, Aave, bZx, dYdX, MakerDAO, and many more.
Apart from Decentralized Finance protocols, blockchain APIs can also help developers source and access data from various Ethereum blockchain-based tokens (ERC20 tokens) like ETH, USDC, ZRX, DAI, SAI, WBTC, LINK, TUSD, USDX, along with many others.
With blockchain APIs, DeFi developers can feed the much-needed data into their DeFi protocols. Without Decentralized Finance data from APIs, developers will struggle to build meaningful DeFi projects. That said, APIs are very integral for the DeFi industry.
In summary, the DeFi space is in a boom at the moment and is still growing at an exponential rate. That said, with more DeFi projects coming online, good leverage for them would be the adoption of blockchain APIs to gain access to unfettered DeFi data.