Blockchain Developer, Bitcoin & Crypto Enthusiast.
DeFi, or Decentralized Finance, is a movement for developing a suite of financial products in a decentralized world. We currently live in a world of CeFi, or Centralized Finance, where all the financial instruments are built and offered by large institutions having centralized control.
You might be thinking, what are these financial products anyways?
Imagine you have a thousand dollars in your pocket. What are the things you can do to grow your thousand bucks? You can buy some bonds, you can invest in the stock exchange, you can open up a savings account with a bank to earn interest, you can lend money to another person, you can use it as a collateral to borrow more money, and the list goes on.
Financial products are the kind of instruments specifically made to move and grow your money, and the economy in general. They don’t just include a term based savings account offered by your local bank, but a variety of different financial instruments that include securities, derivatives, interest-rate products, equities, foreign exchange, credit derivatives, commodities, etc.
Blockchain technology successfully made the currency decentralized, and now the DeFi movement aims to decentralize the CeFi ecosystem. The DeFi space involves a lot of moving parts, and goes beyond just the implementation of a currency or an ERC-20 token.
Since the last couple of years, many developments are happening in the DeFi space, and we are seeing promising projects disrupting different financial products, each one at a time.
This article reviews the three promising projects in the DeFi space that are hot in 2020.
CONTRIBUTE (TRIB Token)
Contribute project has been launched recently and is one of the big hits in the DeFi community. It drove millions of dollars right after the project was publicly launched a few weeks ago and is considered to be a success.
However, a lot of people are still confused on how it actually works, because it’s basically an amalgamation of many different processes and protocols. In this section, I will explain the project in an easily digestible format to curb your information appetite.
According to their whitepaper:
‘Contribute is essentially a decentralized capital coordination tool that incentivizes the creation of a perpetual interest-generating pool through smart contracts on the Ethereum blockchain.’
Sounds confusing? I know! Let’s dive a little deeper into a much simpler explanation.
The Contribute protocol is all about two things — Interest Pool and Liquidity Pool. It’s a genius mechanism where people deposit and lock their funds to create a liquidity pool, and the locked funds create a source of interest using the mStable lending platform.
People who provide liquidity also earn interest from the funds locked by them, and others on the network, which they call a perpetual interest-generating pool.
The Contribute platform is powered by TRIB tokens, and anyone who buys or sell these TRIB tokens need to pay a 10% fee to the Contribute smart contract. This fee is sent to the mStable lending platform to generate interest for the TRIB token holders, forever.
Contribute is backed by mUSD, which is a popular stablecoin offered by the mStable platform. To get started with the Contribute platform, there are two different ways:
- You can directly purchase TRIB from an exchange at a certain dollar amount. When you sell, you can get the same dollar amount back with the interest that was generated by the pool.
- You can buy mUSD and send it to the Contribute smart contract and you get a certain amount of TRIB tokens according to their Bonding Curve Formula (just a bit of mathematics). A total of 10% of your TRIB tokens are locked (which is the fee) and you get the remaining 90% of the TRIB tokens. The fee that you pay goes directly to the interest generating pool, where the interest is generated for all the TRIB token holders.
You might be wondering that instead of going through the mUSD route, why can’t I just buy the TRIB tokens directly from an exchange and earn an interest when I exit? Well, that can be the easier route but do remember that due to the limited supply of TRIB tokens, they are expensive.
The fee in this case is also called a ‘tax’ that is fixed at 10% and needs to be paid whenever you enter the ecosystem (through mUSD) or take an exit. The important thing to note here is that the Contribute smart contract is an automatic market maker (AMM), which means that it will always offer liquidity to buy back TRIB tokens from the market.
It sounds like a complex architecture but Contribute is basically a smart contract on the Ethereum platform that integrates with mStable for its functionality. One of the risks with Contribute is that it hasn’t gone through any independent security audit for its smart contract, which is also mentioned in their official whitepaper.
Another risk is that Contribute relies heavily on the mStable platform with an underlying mUSD asset backing. The interest rate depends heavily on the supply and demand of mUSD so all the fluctuations in the underlying asset will directly affect the interest rates offered by Contribute to the TRIB token holders.
According to CoinGecko, Contribute(TRIB) is currently trading at $2.01 and with a total market cap of $2,612,105 (29th September 2020).
DeFiat — You might be wondering if this is a new kind of Decentralized Fiat currency or something similar? The name sounds familiar but the project has no correlation with the actual Fiat currency, but it presents a model that is totally opposite to what Fiat money and modern monetary theory is all about. Let’s discuss that a little bit before I explain the DeFiat project.
The modern monetary theory and fiat currency model has one major problem. It’s inflationary in nature and over the years, the interest rates have sunk to the zero bound, and wealth inequality has been increased. In fact, the dollar has lost over 96% of its value since 1913, which means that the today’s dollar would be worth less than 4 cents back in 1913.
A fiat currency, like a US dollar, has no fixed supply. The supply of a fiat currency is largely driven by interest rates which creates permanent inflation and temporary deflations. Due to this behaviour, the fiat currency is a good ‘medium of exchange’ but not a very good ‘store of value’.
A lot of different blockchain platforms limit their supply of tokens to a certain number to reduce future inflation but in reality, it creates a lot of fluctuations in the prices, purely based on the supply and demand model. This behaviour affects the DeFi space in general because too many fluctuations and loss of value won’t create a stable ecosystem, and this is what DeFiat aims to solve with its platform.
According to the whitepaper, ‘DeFiat (DFT) is the first token with fully-embedded governance, loyalty discounts, and deflationary mechanisms at its core. Decisions made on the DeFiat network are voted on, and fully orchestrated by DFT holders. Each time a transaction occurs on the network, a fee is distributed to network participants and tokens are burned to reduce supply and increase scarcity.’
DeFiat didn’t just include the deflationary mechanism in its platform, but also the proper independent governance along with loyalty discounts. Lets discuss each one of them to understand the DeFiat ecosystem more clearly.
Deflationary DeFiat (DFT) token
DFT is a native token on the DeFiat platform. The DFT token holders can participate in the governance decisions, use financial applications on the platform, and represent ownership in the network that grants them the voting rights to take part in governance.
Now here is the real part, this DFT token is ‘Truly Deflationary’ in nature. The supply is fixed at 500,000 DFT tokens and it implements a deflationary burn structure at a rate of 0.1% per transaction, which means that 0.1% of the total transaction amount is burned permanently to create scarcity.
This burn rate and fee can also be voted by the governing council is visible on-chain. In fact, the community has been asking for an increase in the burn and fee rates recently, so a decentralized voting is planned soon.
DeFiat Loyalty points
Have you ever used a coupon to redeem a discount while making a purchase? DeFiat has a similar model. They believe that the loyal users in the ecosystem should be rewarded. This is why they have created a secondary ERC-20 token called DFTP that is awarded to users upon interacting with the DeFiat Ecosystem.
DFTP can be earned in two different ways, by either making a DFT transaction or by participating in the voting for governance decisions. The primary purpose of DFTP is that you can get a discount on all the future transactions and burn fees, and your transactions will go through the DFTP smart contract to avail the discounts. It should he noted that the discount levels are determined through the DeFiat governance.
At the heart of DeFiat ecosystem is the multi-tiered community governance mechanism. The DFT token holders can participate in the governance where they can vote and earn economic incentives. The voting process can change the elements in the DFT and DFTP token state-machine-variables, and can control DFTP creation, token burning, and fee rate mechanisms.
This multi-tiered community governance mechanism has four different levels, which creates redundancy and provides more security to the entire ecosystem. It starts with the User at a level 0 and goes all the way to the Mastermind at a level 3.
The following table contains the actions they can take and the responsibilities that they have.
DeFiat Services and AnyStake Protocol
The DeFiat ecosystem will contain a lot of financial services that are called ‘DeFiat Services’. Currently, two of them will form the basis for the DeFiat services, i.e., Native DFT Staking and Unified-Staking Protocol.
Through Native DFT Staking, users can earn yield on their DFT holdings based on network and trading activity. Not only that, DeFiat ecosystem will have the functionality where the network participants can stake not just DFTs but any ERC-20 tokens using the Unified-Staking Protocol (AnyStake).
The DeFiat services ecosystem is still at a very nascent stage but as the project grows, more and more services will be added that will take the benefit of DeFiat’s governance, loyalty and the underlying deflationary token that can hold and retain value.
They recently opened up their solution to ‘as a service’ to be used by third party projects, but this is still in the test phase as of now, however, it will really accelerate the usage of adoption of the Defiat platform.
According to CoinGecko, DeFiat (DFT) is currently trading at $3.20 and with a total market cap of $759,299 (29th September 2020).
DEXtoken protocol (DEXG)
The Dextoken protocol aims to build the next generation DeFi infrastructure that will help create a complete ecosystem around the DeFi space. The Dextoken protocol is developed and launched by the Flowchain Foundation. Before discussing the awesomeness of the dextoken protocol, lets first discuss a little historical background to understand the true vision behind this platform.
Back in 2018, the Flowchain Foundation launched a whitepaper titled ‘The Tokenized Hardware Whitepaper’, that gave a blueprint for hardware tokenization in the real world. They also proposed a decentralized digital asset trading platform in the same whitepaper, called the DEXToken.
They soon realised that in order to fulfil their vision, there must be a proper way to evaluate the token price by systematic token price valuation methods, so they established the Tokenomics Research Center in the mid 2019 and later that year, they published an academic paper titled ‘Volatility effect on the adoption and valuation of tokenomics’.
They noticed that in order to realise the results of this research in a reliable and effective manner, they need to put together an Automated Market Maker (AMM), and this is where they took the inspiration and started building Speculative AMM which now sits at the core of the dextoken protocol. Now let’s dive a little deeper into the Dextoken protocol and the Speculative AMM.
The cryptocurrency trading market right now is prone to over speculative behaviour and high volatility which causes excessive price fluctuations resulting in huge investor losses.
It all comes down to the question of who sets the price?
In a free market, the pricing power should be held by the community, driven by the traditional model of supply and demand. In the crypto world, if there is a strong demand for a specific token, the community should have a strong pricing power but unfortunately, that’s not the case.
The reality is that in the crypto world today, majority of the pricing power is held by whales, exchanges, and speculators who are in the minority. They benefit from over speculation causing high volatility, resulting in huge losses for the majority of investors in the crypto ecosystem.
These whales, exchanges and speculators become the biggest market makers who set the price by killing a free market phenomenon. To solve this problem, the Flowchain Foundation proposed Speculative AMM, which is a priceless automated market maker that solves the issue of over speculation and reduce significant price fluctuations.
This is achieved by a universal price valuation model based on a robust economic and quantitative trading framework. This enables the blockchain network to determine the theoretical price of a token that is reasonable and also takes the underlying blockchain properties into account.
Uniswap has a Constant Product AMM algorithm, where the demand and order’s quantity affects the token prices, and the slippages are raised exponentially. The Speculative AMM on the other hand provides a reasonable price conversion model, resulting in low volatility and very smooth price slippage, as you can see in the graph below.
Dextoken ecosystem and DEXG
The Dextoken ecosystem consists of many components, lets discuss each one them separately.
Universal Price Model
This universal price model is part of the speculative AMM to curb over speculations in the market and smoothening out the price fluctuations.
DEXG will be developed to become a ‘perfect token’ gradually under this universal price model. A perfect token is the one that has lower volatility and is prone to over speculative behavior from the market forces.
Speculative AMM uses the Universal Price Model discussed above, to automatically adjust prices through arbitrage trading. It will be used in both the DEXToken, Token Swap Exchange and the Decentralized Exchange.
The dextoken protocol has an off-chain computation and issuance technology, that can provide minted token redeem and user withdrawal capabilities. This will happen first time in the AMM world.
AMM to Off-Chain Trust
With AMM, all the off-chain transactions can be done, verified and audited by the on-chain smart contract. There won’t be any kind of reliance on oracles or third party services to verify and audit the off-chain transactions.
DEXG token holders will get a portion of the exchange’s transaction fee profit. These DEXG token holders can also vote for the governance and the evolution of the Speculative AMM specifications. They can also stake DEXG in staking pools to earn more rewards.
Flowchain Foundation will launch a suite of different products, that include, Token Swap Exchange, Decentralized Exchange with Fast Orderbook and Staking Pool.
DEXG is the governance token used on the Dextoken ecosystem. DEXG provides 20,000 DEXG for initial liquidity offering to the community via Uniswap, and 2,000 – 140,000 tokens will be distributed by Staking Rewards. DEXG didn’t have any presale or ICO, and everyone will obtain DEXG tokens in the market price.
According to CoinGecko, Dextoken Governance (DEXG) is currently trading at $97.79 and with a total market cap of $1,955,750 (29th September 2020).
The DeFi space is moving and growing very fast, and we are seeing suite of different products, protocols and solutions by different companies that are helping us make a smooth transition from the traditional CeFi world to the DeFi ecosystem. These three projects that we have discussed in this article are one of the finest in the DeFi space, and we hope to see more of them in the coming future.