Decentralized Finance (DeFi or open finance) has emerged as one of the most interesting and active spaces within the blockchain space. The term DeFi mainly refers to open financial infrastructures built on public smart contract platforms like the ethereum blockchain.
DeFi doesn’t rely on intermediaries and centralized institutions. Rather, it is based on decentralized applications (DApps) and open protocols. Within open finance, agreements are enforced via smart contracts, transactions are executed in a deterministic and secure way, and the changes are added to information blocks on the public blockchain. Through the open finance architecture, financial organizations can create immutable and highly interoperable financial systems that are characterized by unprecedented transparency and equal access rights.
Thanks to blockchain’s novelty, it is possible for DeFi use-cases like DeFi Data and Analytics, Eth2Staking, Know Your Transaction (KYT) and Compliance, and token utilization.
What are DeFi protocols
DeFi protocols are digital money lending platforms that are built on a blockchain. These protocols have a set of standards that are usually implemented via smart contracts and that can be accessed by any stakeholder or DeFi application.
DeFi protocols provide specific standards for use-cases like debt markets, decentralized exchanges,on-chain asset management, and derivatives.
How do different Defi protocols compare
Different DeFi protocols have unique features that influence their operations. Exploring three major protocols — Compound Finance, Aave &TradeFinex — spotlights how they compare.
#1. Compound Finance
Compound finance is a leading lending protocol that allows users to lend or borrow popular cryptocurrencies like Tether, Dai, and Ether.
Built On & Use Case
Compound’s protocol is built on the Ethereum blockchain. The protocol establishes money markets (pools of assets whose interest rates are derived via an algorithm), based on demand and supply for each asset class.
Each money market on the compound protocol is unique to a specific ethereum asset. Ethereum assets may include an ERC-20 utility token like Augur, ether, or an ERC-20 stablecoin like Dai. At the same time, each money market on the protocol contains a publicly-inspectable and transparent ledger that records all transactions and a history of interest rates.
Borrowers and suppliers of different assets interact with Compound’s protocol, paying and earning floating interest rates, without the need to negotiate loan terms like interest rates, maturity, or collateral with counterparties or peers.
Smart Contract Origination & Regulation
Compound’s smart contracts are on-chain. This implies that data in the Compound’s smart contract is stored within the system’s blockchain. Being stored on the blockchain ensures that the information is available to all parties within the system.
However,on-chain smart contracts face the challenge of the limited information that can be stored within a block. With the increased popularity of compound finance, users will be forced to pay higher transaction fees to incentivize miners to include their transactions in a block.
Compound is regulated by a decentralized community of COMP token-holders and/or their delegates. These token-holders propose and vote for upgrades to the protocol.
Within Compound’s protocol, interest rates or compound finance fees are determined by an algorithm. To figure out the current interest rates, a user should visit the Compound Finance markets page.
Capital Locked in Compound Finance
Estimates by Defi pulse show that compound’s daily transactions are around $754.39 million, as of writing.
Compound finance transactions are purely crypto-funded. The transactions are mainly in DAI, Ether, USD coin, Ox, Tether, Wrapped BTC, Augur, Basic Attention Token, and SAI.
Compound’s Approximate Market Size
Today, the compound’s approximate market size is close to $2.7 billion in volume ( lending and borrowing) as of writing. With more innovations in the crypto-lending space coming onboard, Compound Finance’s market size is set to surpass the current level.
Being an open-source and non-custodial protocol, Aave enables the creation of money markets where users can borrow assets and earn interest on deposits.
Built On & Use Case
Aave protocol is built upon the Ethereum blockchain, where it is implemented as a set of smart contracts. The smart contracts guarantee safety and eliminate the need for middlemen. Users and Dapps interact directly with the blockchain data and smart contracts through their favorite web3providers.
Use cases for the protocol include self-hedging for less-savvy traders, self-liquidation, arbitrage, collateral swapping, and debt refinancing.
Smart Contract Origination & Regulation
Aave’s smart contracts are on-chain. Similar to the Compound finances protocol, Aave’s on-chain smart contracts ensure that all stakeholders can access the information.
That said, the on-chain smart contracts introduce drawbacks like limited information that can be stored within a block and the possibility of exceptionally high transaction fees.
On regulation, Aave’s protocol depends on its “genesis governance” system, which allows its users to vote using cold wallets. Through a signed message that can be forwarded through a different wallet, users can vote for different aspects.
The downside of the genesis governance system is that users can abuse the system by voting multiple times with the same tokens but different wallets.
Fees & Capital Locked
Fees associated with Lend, Aave’s native governance token, are 0.09% of flash loans, and 0.25% of the originated loans. These fees go towards rewarding lenders, burning LEND, and compensating affiliates.
As of writing, the total value of assets locked on Aave was approximately $484.1M or 1.3M ETH.
Aave funding channels are mainly crypto-based. To enhance effectiveness, the Aave protocol supports close to 20 Ethereum-based assets.
Some assets supported by the protocol include Tether (USDT), Basic Attention Token (BAT), Dai (DAI), ChainLink (LINK), Aave (LEND), Ethereum (ETH), Decentraland (MANA), Kyber Network (KNC), Augur (REP), Maker (MKR), TrueUSD (TUSD), Synthetix (SNX), USD Coin (USDC),0x (ZRX), Wrapped BTC (WBTC), and Synthetix USD (SUSD).
Approximate Market Size
Aave’s market cap is approximately $404,266,807.
Tradefinex is a peer-to-peer decentralized platform that allows Trade Finance originators to distribute deals to a variety of bank and non-bank lenders/funders.
Built On & Use Case
Built on XinFin — a public/private hybrid blockchain platform — , TradeFinex’s architecture is powered by XDC01 Protocol in which the XDC is the native digital asset. (XinFin’s hybrid architecture is derived from a fork of Quorum and Ethereum).
Maintaining both public and private states ensures that sensitive data is secured (role of the private state) and that the system is transparent and verifiable(role of the public state).
TradeFinex’s architecture makes its protocol highly scalable, secure, and lightning-fast. The system’s hybrid nature also makes it highly interoperable with a diversity of blockchain platforms and legacy systems.
Tradefinex has a variety of use cases. They include SME finance, Trade Finance, and Infrastructure Finance.
Smart Contract Origination
Trdefinex’s smart contracts combine aspects of on-chain and off-chain architecture. The hybrid system introduces key benefits that make the protocol highly exceptional.
Off-Chain smart-contracts are contracts whose code isn’t run by miners, harvesters, endorsers, or requesters. Rather, the client runs the code. Tradefinex draws some benefits from off-chain aspects of its smart contracts. These aspects include writing code that has minimal impact on the Xinfin blockchain, allowing the writing of code that’s not bound by a cryptocurrency reward structure.
Other benefits include allowing the running of data-intensive transactions cost-effectively and allowing the running of computations with high computational times without clogging the network.
The hybrid nature of Tradefinex’s protocol ensures that it’s off-chain characteristics supplement weaknesses associated with its on-chain characteristics, and vice-versa. Off-chain characteristics, for example, enable Tradefinex’s hybrid protocol to support real-time processing. That would not be possible with on-chain smart contracts.
Smart Contract Regulation
With XinFin being listed on Abu Dhabi Global Market(ADGM), Tradefinex’s protocol is regulated by the laws governing the ADGM. Specifically, legislation like the Financial Services and Markets Regulations (FSMR), detail the requirements that TradeFinex must meet to receive full authorization by the Financial Services Regulatory Authority (FSRA).
What’s unique is that FSMR is modeled on legislation like the UK’s Financial Services and Markets Act 2000 (FSMA), among other English Common Laws.
Tradefinex’s protocol is also supported by the Openlaw framework. With the OpenLaw framework, the Tradefinex protocol can incorporate legal agreements into its blockchain-based systems, helping streamline legal operations surrounding the blockchain network.
Currently, TradeFinex is seeking approval under different Digital Courts jurisdictions.
Tradefinex protocol offers exceptionally low transaction fees. Precisely, the transaction costs on the Xinfin network are roughly 0.00042% of the transaction amount.
Put into context: for $50 worth of USDT on the XDC network, the transaction fee is roughly 0.00021 XDC or 0.00000078 USD.
Capital Locked & Funding Channels
As of writing, the amount of capital locked within the Tradefinex’s protocol is roughly 1.1 Billion XDC or approximately USD 6.6 Million.
The protocol also supports both legacy fiat and crypto as funding channels.
Approximate Market Size/Opportunity
Noting that Tradefinex supports the global trade/infrastructure finance market, the trade finance market size was roughly USD 63.540 billion in 2019 and is estimated to surpass the USD 79.410 Billion by the end of 2026, with the 2021–2026 CAGR being 3.2 percent.
At the same time, the global blockchain finance market size was roughly USD 2.3 billion in 2018, and it’s expected to hit the USD34 billion by the year 2025, with the 2019–2025 CAGR being 33.6%.
Currently,the protocol’s market capitalization is roughly $61,568,033 USD or 5,448 BTC.
While Compound Finance, Aave, and TradeFinex are outstanding protocols, Tradefinex’s features and architecture make it more feasible. Thanks to the hybrid nature of the XinFin blockchain, the TradeFinex protocol guarantees safety of sensitive data and that the system is transparent and verifiable.
At the same time, Tradefinex’s smart contracts hybrid architecture — combining on-chain and off-chain characteristics — introduces more benefits as compared to benefits drawn from on-chain smart contracts in Compound Finance and Aave. Besides, the cost of transactions on the Tradefinex network is considerably low as compared to Compound Finance and Aave.
What’s more, TradeFinex effectively uses Openlaw framework with English common law governed smart contracts and digital courts jurisdiction.
That said: Tradefinex is the more feasible protocol as it offers more benefits to its users, and offers more opportunities to funders.