Introduction to Decentralized Finance (DeFi)
Whether you’re a newcomer or a veteran in the crypto ecosystem, you must have heard of Decentralized Finance (DeFi). This concept aims to automate the various financial mechanisms from traditional finance through decentralised smart contracts,
in DeFi the economy does not pass through a third party, here are its simplest features:
- Lending: making tokens available
- Borrowing: borrowing tokens
- Swap: exchange one token for another
- Staking: placing your tokens in a smart contract to generate more tokens
Lending or borrowing tokens will always be done with a more or less variable rate depending on the service used, this rate also fluctuates depending on the liquidity available and the duration of the operation.
Swaps can be more or less advantageous depending on the protocols used and as for staking, the number of tokens recovered will vary depending on the number of tokens placed. The bigger your share, the bigger your reward will be.
There are other, more complex features:
- Liquidity mining: recover the costs related to a liquidity pool by depositing the associated token pair in the smart contract
- Yield farming: recovering a reward linked to a liquidity pool
- Vesting: a form of liquidity mining, stacking or yield farming but which blocks rewards for a given time.
The first two features are often closely related, while Liquidity Mining recovers transaction fees, Yield Farming can offer other types of rewards and its these use cases that are most used in the Non-Fungible Tokens space. Here are some examples of NFT projects that have utilised different mechanisms for their project.
Cometh.io is one of the first NFT projects to use the power of DeFi to launch its game. The only way to acquire your first Cometh ships was to buy them with $DUST tokens and to acquire these, it would be necessary to stack another of the project’s tokens, $MUST.
Once the ships have been obtained, the game can begin. The goal is simple to understand, succeed in placing your ship in the right orbit, enabling you to mine the comets. Except that in practice, it is obviously not so easy, but worth it as for every comet mined, rewards in $MUST are delivered.
Each ship has its own particularities: speed, mining efficiency and size.
We wrote an article about Cometh so you could easily understand the different mechanics from the game, so don’t hesitate to go and read it!
For users looking to understand deeper the world of DeFi, Aavegotchi is the perfect project! The team behind it are veterans of the crypto and NFT ecosystem and they wanted to maximize what was possible to put on-chain.
To summon a Gochi, several steps were necessary:
- Have $GHST to buy a portal
- Open the portal to invoke 10 Gochis randomly generated by Chainlink’s RNG algorithm
- Among these 10 Gotchis, choose one, associated with a crypto. For example, if a Gochi is correlated to the USDT, USDt is required to finalize the invocation.
And once the Gochi has been summoned, the magic really begins! Because the USDT that was used to invoke the Gochi are in essence “stacked’’ in the Gotchis. It is therefore NFTs that serve, thanks to the Aave protocol, to generate interest according to the associated collateral.
The world of Aavegotchis has grown enormously in one year and there are still many steps on the roadmap and we wrote several articles on the subject in collaboration with their team. To better understand this complex project in more detail, we invite you to read our articles:
Also, the community has been very active in participating with the development of the project, with several ancillary tools have been put in place by and for the community:
- Ghst.gg: a veritable Swiss Army knife gathering all the tools necessary to analyze the universe of Aavegotchi
- Gotchi Vault: allows you to place your Gotchis in a chest to feed them every day and improve rewards
When it was updated to version 3, the famous Decentralized Exchange (DEX) Uniswap started using NFTs and not to play games or collect images. The chosen use is completely innovative in the sector, Uniswap NFTs are utilised to optimize transaction-related gains for those who deposit liquidity in the various pools.
Until then, by depositing a liquidity pair in the DEX, there was no defined limit and users can now set one to optimize the recovered fees.
“Rather than being required to allocate capital across the entire price spectrum from 0 to infinity, each LP is given full control over what price ranges they wish to provide liquidity to”
Prior to this update, the default limit was 0.3% per trade but it is now possible to choose fees ranging from 0.05% to 1%, allowing greater freedom in case of a ‘Take Profit’ strategy or market decline.
The DeFi x NFT is still a very experimental field
Although the merge between NFTs and DeFi has immense potential, these two worlds are still very recent and their use is still a very experimental field, therefore it’s important to keep in mind that projects with a focus on DeFi are relatively risky.
We could have talked about more projects, created last year, that present interesting concepts. But it is difficult to know at this time whether the use of NFTs in these projects is relevant and above all, planned for the long term.
More and more projects that link DeFi and NFTs are make their concepts fun to use and therefore easier to use. This simplified access to Decentralized Finance should not make us forget the due diligence as well as the necessary research we must carry out before using them!
That said, these different experiences will have an overall positive impact on the NFT ecosystem to better determine what will and won’t work in the long run..