Today, crypto has fundamentally changed the perception of the value of fiat money and created significant competition for standard payment systems. Until recently, earning money from digital assets was limited to a few areas: trading, investing in potentially profitable projects, participating in airdrops, and the classic “buy and hold”. Despite the innovation and clear superiority of crypto over fiat, many aspects of the classic financial system were still missing.
So, a robust technological ecosystem is essential for the full development of the cryptocurrency economy and its various elements. Currently, decentralized finance is driving the discovery of innovative solutions and the recreation of traditional financial models without relying on a third party.
This material aims to highlight the top DeFi companies and stocks to watch this year, while also providing an overview of why the DeFi ecosystem is rapidly growing within the crypto industry.
What is decentralized finance?
Now decentralized finance refers to an ecosystem of DeFi applications developed on various blockchains. The most popular DeFi projects are created on the ETH blockchain. There are also systems on BTC based on Rootstock (smart contracts in the Bitcoin network). The goal of decentralized finance is to move the existing financial system to blockchains, making it accessible and open to the world. To help newcomers get up to speed, let’s review the basics:
Decentralized finances goal is to bring together all the benefits of the existing system (in the form of interest rates on deposits, lending opportunities, and insurance) while replacing various agents and intermediaries with smart contracts.
DeFi is distinguished from the ordinary system by greater efficiency, availability, and transparency. For example, DeFi projects offer the possibility of P2P lending, where a person from anywhere in the world can take out a loan or deposit existing assets.
The efficiency of these projects is that they eliminate brokers from their routine work. The work of the banker or insurer in the decentralized system is done by a smart contract, which resolves possible disputes.
So the guarantor of reliability is the blockchain on which this or that project is built (as we mentioned above, it is mostly ETH blockchain). All relationships here are built and regulated by smart contracts, and this is incredibly convenient.
A DeFi wallet is a digital wallet that allows users to store, send, and receive various digital assets used in decentralized finance protocols.
Use of smart contracts
In the past, if you wanted to make a deal with a person whose integrity you were not sure of, the only way out was to find a broker who could protect you with his authority, for a fee, of course. Today, everything is much simpler.
So, smart contracts are self-executing digital contracts built on blockchain technology. They are essentially programs that automatically execute the terms when certain pre-defined conditions are met. Such contracts are a key component of Web3 because they enable trustless and decentralized transactions between parties without the need for brokers.
Today, Web3 represents a new era of the Internet that is more transparent, and user-owned. It is also built on blockchain, which enables secure and tamper-proof transactions without the need for mediators such as banks or other institutions. This has the potential to democratize access to various services and create new models of governance and social organization. Current projects are developing in several directions:
Special platforms, one part of which specializes in lending, the other in providing interest income from deposits.
Platforms for risk management (an alternative to insurance).
Platforms for the creation, management, and trading of derivatives, where the basic instruments are tokens.
In addition, most projects publish everything from capitalization and collateral to transaction lists.
What is the distinction between crypto and DeFi?
Crypto/DeFi are related concepts, but they are not the same. For example, the first term refers to any digital asset designed to be used as a medium of exchange, store of value, or unit of account. Crypto is based on technology that enables secure and transparent transactions without the need for middle parties.
DeFi, on the other hand, specifically refers to decentralized financial apps based on the same technology. These applications are designed to be accessible to anyone with an Internet connection and are often built on top of existing networks. This category also includes decentralized exchanges, lending and borrowing platforms, and other tools that allow users to interact with each other in a decentralized way.
So while crypto refers to a broad category of digital assets that include tokens and coins, DeFi is specific to the system that focuses on building decentralized applications.
Is DeFi the best solution?
DeFi Web3 projects expand opportunities for crypto enthusiasts by offering new models and ways to make money from their assets. Among the new opportunities is the ability of a digital currency to multiply just by having it. We’re talking about Proof of Stake and other passive income options.
For example, liquidity pools. It could be said that liquidity pools are locked tokens that facilitate efficient asset trading and allow investors to generate income from crypto ownership. Also, a liquidity pool is an automated market maker that provides liquidity to prevent significant fluctuations in asset prices. AMM is an innovation that allows trading without the need for order books.
We should also mention the possibility of obtaining passive income through Proof of Stake. Crypto staking is a process by which owners of certain assets can receive rewards for keeping their coins in a wallet. With Proof of Stake, an investor earns profit simply by storing tokens in the wallet or on a special platform for a contractually agreed time. Thus, the Proof of Stake algorithm appears to be an alternative to simply holding assets in a wallet, which is analogous to a bank deposit in the crypto industry.
But DeFi is still a relatively new technology, and there are several risks associated with it. For example, smart contract vulnerabilities can lead to hacks and other transaction security issues. Also, the regulatory environment for DeFi is still evolving. Whether this is the best solution depends on the specific use case and individual risk tolerance. While it has the potential to create a more accessible system, it is important to thoroughly understand the potential drawbacks.
What are the top DeFi stocks to watch this year?
In this article, we’ll provide a summary of some of the most promising DeFi stocks to watch in 2023. We’ll also evaluate the potential for both short-term and long-term investment, taking into account current market conditions:
MATIC, the token that powers Polygon, is a leading scaling platform for Ethereum’s dApps and a major driver of the ecosystem. With a current price between $1.20 and $2, MATIC is an affordable option for investors interested in short-term or long-term positions, depending on their investment strategies.
CoinBase remains one of the most popular and talked about public companies in the DeFi space, as it continues to dominate as one of the leading exchanges. Given the high volatility of both COIN and the broader crypto industry, investors may want to consider short-term strategies for the coming months of 2023.
The price movement of RIOT is closely tied to that of Bitcoin, providing traders with valuable insight into market patterns and helping them determine their short-term options. Although RIOT is an attractive option for investors, it is high-risk and may not be suitable for long-term investment.
For traders and investors looking to diversify their stock portfolio, Canaan Inc. could be a potential competitor to RIOT. With a 52-week range of $3.50 to $39.10, Canaan Inc. may be an attractive option for day or swing traders who are willing to monitor the stock closely and manage its risk profile.
As with any emerging vertical or sub-vertical in the financial markets, only time will tell which companies (and currencies) will emerge as leaders in both the short and long term.
Top DeFi development companies to watch in 2023
Here are some of the top companies leading the way in the DeFi space:
Uniswap allows users to exchange tokens without the need for an order book or centralized authority. It is known for its user-friendly interface and low fees, making it a popular choice for traders.
Aave is a lending platform that allows users to lend, borrow and earn interest on a variety of crypto. It is known for its innovative flash loan feature, which enables users to borrow funds without collateral.
GMX is a derivatives platform that operates across multiple chains, including Avalanche, Arbitrum, and BNB Chain, offering users the ability to trade futures, perpetual, and options with up to 25x leverage. The platform boasts over $400 million in TVL and offers over 20 trading pairs.
MakerDAO is an autonomous organization that operates the Maker protocol, a platform for creating and managing the Dai stablecoin. Dai is widely used in the DeFi space for trading, lending, and other financial apps.
So, DeFi represents an emerging segment of the crypto industry that has the potential to transform the way we access and use financial services. Today, DeFi protocols offer several benefits, including higher returns, greater security, increased accessibility, and novel investment opportunities.