What are the top DeFi Projects To Watch In 2023? Koinly rounds up 2022's top 5 performing Decentralized Exchanges (Dex) and Decentralized Autonomous Organizations (DAO) to make money with in 2023.
DeFi? DEX? DAO?
Decentralized finance, or DeFi, focused on providing decentralized financial services that anyone, anywhere, can access. DeFi platforms are available for lending, staking, trading, liquidity mining, minting, insuring - you name it.
Some of these DeFi platforms function as decentralized exchanges for cryptocurrency. A decentralized exchange (or DEX) is a peer-to-peer marketplace where transactions occur directly between crypto traders.
Other DeFi platforms for cryptocurrency investing and trading, follow the DAO principle, meaning that it's blockchain-powered decentralized autonomous organization.
For our analysis of top DEX and DAO platforms to watch, we looked Total value locked (TVL) as a guiding metric.
- What? Curve is a decentralized exchange (DEX) based on Ethereum and specializing in stablecoins.
- Built: 2020
- TVL: $20.86b
- Blockchain: Ethereum
- Token: CRV, governance and utility token.
- Products: Liquidity pools, incentivized pools, CRV token
- Fees: Swap fees (0.04%)
Governed by smart contracts, Curve lets users and other decentralised protocols exchange stablecoins (DAI to USDC for example) with low fees and low slippage. Curve makes use of liquidity pools like Uniswap. To achieve this, Curve needs liquidity (tokens) which is rewarded by those who provide it.
Every time someone makes a trade on Curve.fi, liquidity providers receive a small swap fee split evenly between all providers. Trade volume is the key to returns. Curve's liquidity pools are also supplied to the likes of Compound's interest-earning protocol in the background, so you get extra interests on top of the trading fees.
Curve rewards loyalty. Curve's governance token, CRV, is used for voting on proposed changes to the protocol.Curve has a "time-weighted" voting system, meaning the longer a user holds CRV, the more voting power their tokens have. CRV tokens can be locked for a period of between one week and four years. In exchange for their locked tokens, the Curve users VECRVS tokens, which afford extra voting power. In addition to that, users could use VECRVS to boost their pool rewards up to x2.5. ECRVS could also be used to get a refund for some of the protocol’s fees.
- What? An Ethereum-based DAO protocol, mints the Dai stablecoin and facilitates collateral-backed loans.
- Built: 2014
- TVL: $19.63b
- Blockchain: Ethereum
- Token: Dai, ERC-20 token and MKR, governance token.
- Products: Maker Vaults, Dai Savings Rate
MakerDAO is a decentralized autonomous organization (DAO) that develops and operates Maker, a smart contract platform for borrowing, saving, and issuing stablecoins. The Multi-Collateral Dai (MCD) system enables users to generate a stablecoin called DAI by collateralizing assets accepted by the Maker governance community. Dai is soft-pegged to the U.S. dollar and its stable value makes it an good cryptocurrency with which to issue loans, send remittances, and hedge against volatility.
Dai can be purchased from centralized and decentralized exchanges. Investors can also generate Dai when opening a Maker Collateral Vault. Previously known as collateralized debt positions (CDPs), vaults are smart contracts that run on the Ethereum blockchain and hold collateral in escrow until the borrowed Dai has been returned.
To transact a Dai stablecoin loan through MakerDAO, you can deposit any Ethereum-based asset as collateral as long as it has been approved by the MKR holders who govern MakerDAO. Once borrowed, Dai is one of the most integrated digital assets in all of blockchain. In particular, it is utilized around the decentralized finance (DeFi) ecosystem, and in the growing sector of blockchain-based gaming and collectibles.
The Dai Savings Rate (DSR) enables Dai holders to earn interest automatically by simply locking their Dai into a DSR contract. This provides investors the option to make a steady predictable income while waiting for better market conditions. Hodlers are probably the most suitable individuals to use DSR.
- What? A decentralized exchange protocol for automated liquidity provision on Ethereum.
- Built: 2018
- TVL: $10.32b
- Blockchain: Ethereum
- Token: UNI, governance token
- Products: Liquidity pools, concentrated liquidity pools, swaps, flash swaps, staking, UNI token
Developed by Uniswap Labs, the UniSwap protocol is a peer-to-peer system designed for exchanging ERC-20 Tokens on the Ethereum blockchain via smart contracts. Uniswap's major draw lies in the variety of cryptocurrencies on the platform. This is due in part to UniSwap almost near-zero coin listing fee. Absolutely any ERC20 token can be listed on Uniswap. Each token has its own smart contract and liquidity pool and if one doesn’t exist, it can be created easily.
When adding liquidity, users need to contribute equivalent amounts of both cryptocurrencies to the pool. For example, if you choose the Ethereum/Dai pool, you'd need to lend Ethereum and Dai. In return for your contribution, Uniswap will pay you a share of the gas fees for that liquidity pool. Keep in mind, gas fees depend on the congestion at the time of a transaction, not the amount of the transaction. This makes Uniswap a poor choice if you're only trading a small amount. It doesn't make sense to pay $30 in fees for a $50 trade.
Whenever new ETH/ERC20 tokens are contributed to a Uniswap liquidity pool, the contributor receives a pool token, which is also an ERC20 token.
Pool tokens are created whenever funds are deposited into the pool and as an ERC20 token, pool tokens can be freely exchanged, moved, and used in other dapps. When funds are reclaimed, the pool tokens are burned or destroyed. Each pool token represents a user’s share of the pool’s total assets and share of the pool’s 0.3% trading fee
- What? A DEX protocol and yield farm on Binance Smart Chain
- Built: 2020
- TVL: $6.87b
- Blockchain: Binance Smart Chain
- Token: CAKE, governance token
- Products: Liquidity pools, yield farming, flash loans, swaps
PancakeSwap is the first and largest decentralized exchange on the Binance Smart Chain.
Liquidity providers collect rewards in the protocol’s token, CAKE, which can also be staked in the Syrup pools. CAKE’s total value locked (TVL) was at $6.6 bln in late August 2021 and the market cap was $5.4 bln, according to CoinMarketCap.
- What? An Open Source, Non-Custodial protocol to earn interest on deposits and borrow assets.
- Built: 2017
- TVL: $16.49b
- Blockchain: Ethereum
- Token: Aave, governance token
- Products: Liquidity pools, yield farming, flash loans, swaps.
Aave is a KYC-free, DAO, DeFi protocol built on the Ethereum network. Aave allows investors to lend and borrow cryptocurrency without having to go through a centralized intermediary. Aave hosts a range of cryptocurrencies, from stablecoins to altcoins. These cryptos can be borrowed for stable and variable interest rates or users can lend cryptocurrencies into liquidity pools and earn interest on deposits.
Borrowers can swap a variable rate for a fixed rate and vice versa. This provides the user with the freedom to get the best interest rate possible at any given time.
The Aave lending protocol utilizes a native token called AAVE, formerly $LEND. The AAVE token is used for governance and can be staked on the Aave DeFi platform in return for fees and other rewards.
How are DeFi cryptocurrency trades taxed?
With tax authorities around the world cracking down on crypto investors, it’s important you understand the tax implications of your DeFi investments.
We’ve barely even scratched the surface of the various capabilities and opportunities DeFi offers to investors and DeFi is constantly developing. What this means is tax offices haven’t yet issued exact guidance on DeFi taxes.
However, all tax offices have clear guidance on crypto taxation and it always falls under two different types of tax - Income Tax or Capital Gains Tax. This is dependent on whether your crypto investment is seen as regular income or whether it’s seen as a disposal of an asset.
Read more about how Defy works in our Defi Tax Guide. We cover it all, from how liquidity mining is taxed, to the tax rules on staking, yield farming, wrapping, and more.