Best DeFi Platforms on Ethereum

Want to jump straight to the best DeFi Platforms on Ethereum? First you will need some ETH which you can buy on eToro, Uphold and WeBull.

Ethereum (ETH) is the second-largest cryptocurrency by market capitalization and the most well-known altcoin in the crypto space. 

As a Layer 1 blockchain, Ethereum acts as the underlying infrastructure in a blockchain-based system. In other words, you can think of Ethereum as a publicly shared global computer network. It doesn’t run on a single device but instead runs simultaneously on thousands of devices around the world.

The main idea behind Ethereum is that developers can create and launch decentralized applications (DApps) that run across a decentralized network instead of a centralized server. This is done through the use of smart contracts, which refer to programs stored on a blockchain that facilitate the exchange of assets between two parties when predetermined conditions are met.

DApps built on Ethereum can be developed for a variety of purposes, but one use case stands above all else: decentralized finance (DeFi). Ethereum’s DeFi ecosystem is the largest DeFi ecosystem in the entire cryptocurrency world and is a forefront of innovation in the space. The following article will discuss what DeFi is, how it works and, most importantly, the best DeFi platforms on the Ethereum blockchain.

What is DeFi?

DeFi is short for decentralized finance, an umbrella term for a variety of financial applications in blockchain positioned to disrupt financial intermediaries. 

Financial institutions serve as transaction guarantors in the modern financial environment. This setup gives these institutions immense power because your money flows through them. DeFi aims to increase accessibility to financial services for all people, no matter who or where they are, by removing the power that banks and institutions now have over the money, financial services and financial goods used in society. DeFi has the potential to create more free, efficient, open and fair financial markets that are accessible to anyone with an internet connection.

How Does DeFi Work?

DeFi uses cryptocurrencies and smart contracts to provide services that don’t need intermediaries. These smart contracts are programmed to perform various functions in a permissionless manner.  In this way, a smart contract can execute financial transactions from one stakeholder to another without any intermediary involvement or time loss.

Users from anywhere in the world with an internet connection can lend, borrow and trade using peer-to-peer networks that verify and record financial actions in distributed financial databases. A distributed database is accessible across multiple locations and supported by blockchain technology. Through a revolutionary combination of game theory and cryptography, blockchain technology secures chains of transactions by significantly disincentivizing malicious activity. 

Use Cases for DeFi

DeFi has numerous applications, including:

• Trading: Make peer-to-peer trades on certain crypto assets, eliminating the need for any kind of brokerage.
• Obtaining a loan: Get a loan instantly without filling out paperwork, including extremely short-term flash loans that traditional institutions can’t provide.
• Lending: Lend your crypto and earn interest and rewards every minute, not just once a month.
• Buying derivatives: Make long or short bets on crypto assets.
• Saving: Put some of your crypto into savings accounts alternatives to earn superior interest rates to that which you’d typically get from a centralized bank.
• Stablecoins: Buy stablecoins that peg cryptocurrencies to a supposedly stable underlying asset such as the U.S. dollar, potentially providing a safe haven from the inherently volatile cryptocurrency market.

Best Decentralized Exchanges on Ethereum

Decentralized exchanges (DEXes) are peer-to-peer marketplaces that enable stakeholders to execute transactions without the need for an intermediary. DEXes eliminate counterparty risk, preserve user privacy and offer access to new and obscure cryptocurrencies that are not commonly provided by centralized exchanges (CEXes). Here are some of the best DEXes on Ethereum:

Uniswap

Uniswap is a DEX protocol — an automated liquidity protocol to be more precise — built on Ethereum. Making trades does not require the use of an order book or a central hub. Instead, Uniswap gives users the ability to conduct trustless, highly decentralized and censorship-resistant cryptocurrency trades among themselves.

Making trades does not need the use of an order book or a central hub. Instead, Uniswap gives users the ability to conduct trustless, highly decentralized and censorship-resistant cryptocurrency trades among themselves. In exchange for maintaining liquidity, providers are rewarded with a portion of the trading fees, along with newly minted UNI, the native token o the Uniswap protocol.

SushiSwap

SushiSwap is an Ethereum-based DEX protocol that operates under an automated market-making (AMM) model. In other words, there is no order book on SushiSwap; instead, buying and selling crypto is facilitated by smart contracts.

SushiSwap began as a fork of Uniswap. The platform leveraged Uniswap code to build its foundation and introduced some key differences — most notably, rewards that are distributed in SUSHI tokens and a yield farming platform. Similar to Uniswap, users are rewarded with SUSHI for providing liquidity. 

Best Derivative DeFi Platforms on Ethereum

Crypto derivatives function like traditional derivatives in the same way that a buyer and a seller enter into a contract to sell an underlying asset. Assets are sold at a predetermined time and price. Here are some of the best derivative platforms on Ethereum:

dYdX

Founded in 2017, dYdX is the leading derivatives protocol on Ethereum. The platform focuses on perpetual trading for over 35 cryptocurrencies including Bitcoin (CRYPTO: BTC), Ether (CRYPTO: ETH) and Cardano (CRYPTO: ADA). 

Perpetual trading is dYdX’s flagship product, which enables users to trade open markets with nonexpirable contracts. Unlike traditional derivative platforms, dYdX perpetual is offered as a decentralized, noncustodial product that provides synthetic exposure to a wide range of crypto assets. In the case of dYdX, perpetual contracts are Ethereum-based ERC-20 tokens.

Synthetix

Synthetix was developed from the ashes of the 2018 bear market along with Uniswap and a few other Ethereum-based DeFi platforms. It currently is one of the leading DeFi platforms on the Ethereum blockchain.

Synthetix enables the issuance of synthetic assets on Ethereum. A synthetic asset is a kind of derivative product — it gives you a way to get exposure to an asset without owning it. Synthetix uses decentralized price oracles to track the price of underlying assets. 

As opposed to being backed by the underlying asset, each synthetic asset is collateralized by SNX (the platform’s native token); Synthetix recently added ETH as supported collateral. The system works with over-collateralization. Every synthetic asset is collateralized by more value than it represents. 

Best Lending DeFi Platforms on Ethereum

DeFi lending enables lenders and investors to issue deposit fiat or loans for interest through a decentralized application system. Here are a few of the leading lending platforms on Ethereum:

MakerDAO

MakerDAO is a crypto lending platform built on the Ethereum blockchain with crypto-collateralized stablecoin DAI (one of the largest stablecoins in the cryptocurrency market), which is pegged to the US dollar. The platform allows users to borrow funds (denominated in DAI) in return for depositing Ethereum-based tokens as collateral. 

Like all peer-to-peer lending platforms, MakerDao must have a low-volatility asset with which to transact. DAI solves this problem by providing a currency that follows the stability and value of the U.S. dollar, creating low-volatility trading pairs and a safe haven asset in a decentralized manner.

Aave

Aave is an Ethereum-based lending platform where users can lend and borrow a variety of digital assets, from stablecoins to altcoins. The Aave protocol is governed by AAVE (the native governance token of the Aave protocol) holders.

To be more precise, Aave is an algorithmic money market, meaning loans are obtained from pools instead of being individually matched to a lender. The interest rate fluctuates depending on the use rate of the assets in a pool. If almost all the assets in a pool are used, the interest rate will increase to entice liquidity providers to deposit more capital. Conversely, if few assets are used, the interest rate charged will decrease to entice borrowing

Best Liquid Staking Platform

Liquid staking is a relatively new and explosive category in the DeFi space, currently largely dominated by Lido. Liquid staking enables users to stake their tokens without having to lock up assets nor maintain staking infrastructure. 

Lido

Lido (LDO) is a secure liquid staking solution for Ethereum and other proof-of-stake (PoS) cryptocurrencies. Lido issues 1-to-1 tokenized versions of staked assets to users. In doing so, users have access to liquidity for their staked PoS tokens, enabling them to take part in other DeFi on-chain activities for added yields while still earning staking incentives on Lido.

When users deposit PoS assets to Lido, their tokens are staked on the PoS blockchain via Lido protocol. It is a staking pool smart contract that controls token minting and burning, funds delegation to node operators, and user deposits and withdrawals. It also sets the costs for staking rewards.

Best Yield Aggregator Platform

A yield aggregator refers to a collection of smart contracts (also known as a protocol) that pools investors’ funds and invests them in a range of yield-producing products and services by interacting with their respective protocols. 

Yearn Finance

Yearn Finance is one of the leading yield aggregator platforms on Ethereum and is also deployed on Fantom and Arbitrum.

CeFi vs DeFi

DeFi provides a myriad of powerful tools for users but it can't do everything and isn't always the best option. For example, government regulation makes it so that DeFi platforms can't let you purchase cryptos with USD. This is why centralized exchanges like eToro, WeBull, Gemini and Uphold are still important tools for so many crypto investors. Before you can use any of the best platforms on Ethereum you usually have to buy some Ether from a centralized exchange first.

Some CeFi platforms are also competitive with crypto staking dApps offer similar or even better staking rewards. For example, Uphold lets you stake a wide range of cryptocurrencies with extremely competitive rates up to 25% APY.

What is the Future of DeFi?

With Web3 on the horizon and sidechain and Layer 2 scaling solutions like Arbitrum, Optimism and ZK-Sync growing, DeFi projects on Ethereum have ample opportunity to showcase their utility and make a strong comeback from the 2022 bear market.

While more people are using DeFi applications, it’s difficult to say whether DeFi will go mainstream anytime soon. DeFi technology is experimental, new and isn’t without serious problems such as scalability. If developers can continue to rectify these problems, as exemplified by the Ethereum Merge, the potential behind the Ethereum DeFi ecosystem is boundless. If you want to take part, be sure to understand not only the rewards but the risks before getting started.

Frequently Asked Questions