Tezos DeFi: An Overview of a Vibrant, Growing Ecosystem.
9 Sep 2022
Decentralized Finance, DeFi is a revolutionary application of cryptocurrency’s underlying blockchain technology that has expanded the horizons of global finance. Created as an alternative to the traditional financial ecosystem, DeFi applications were made possible by Ethereum – the first ever programmable blockchain protocol with smart contract capabilities.
The DeFi space has grown since then, with plenty of projects replicating almost every traditional financial product and service in a decentralized setting. With its rising adoption, Ethereum’s inherent scalability issues came to the forefront, resulting in high transaction fees, delayed confirmations, and more. With the future of DeFi
at risk, the search for Ethereum alternatives began, leading to the creation of multiple blockchain protocols.
What is a DeFi Ecosystem?
DeFi ecosystems are a combination of Blockchain and Finance. They are a deviation from a centralized traditional financial ecosystem with banks and other institutions to more decentralized alternatives where users maintain control over their funds and investment decisions.
DeFi ecosystem comprises a variety of financial products and services that are commonly found in mainstream finance as well, viz., borrowing and lending, investments, trading, prediction markets, insurance, and a lot more.
Unlike traditional finance, DeFi ecosystems do not come with geographic restrictions, lots of intermediaries, excess regulatory burdens, and costs that hamper accessibility. They are open to everyone.
The effective combination of blockchain and finance, fueled by crypto assets enables DeFi to offer equitable access to financial services and address the “unbankedness” problem quite prevalent around the world.
Advantages of Tezos DeFi
Tezos is one of the worthy Ethereum contenders to emerge from this race, complete with characteristics making it stand apart for its peers. As the first-ever open source, self-amending, Liquid Proof-of-Stake (PoS) consensus-based protocol, Tezos has positioned itself as a secure, completely decentralized, highly scalable, and versatile protocol for uninterrupted development and operation of dApps and web3 applications in a cost and energy-efficient manner.
Today, Tezos protocol is the preferred choice for many individuals and enterprises to create new-gen DeFi and NFT applications. Thanks to its potential, Tezos as an investment has also gained favor among crypto investors.
Foundation for a Vibrant DeFi Ecosystem
After a shaky start, Tezos picked up the pace by clearly establishing its advantages over other alternatives. Today, Tezos finds itself the most viable option to build DeFi and NFT solutions. Its capabilities have helped Tezos protocol garner a sizable community following who are actively contributing towards its growth and adoption.
As of July 21, 2022, the Tezos protocol has a market capitalization of over $1.5 billion, with over $71.59 million in adjusted Total Value Locked (aTVL) on native DeFi projects. Tezos commands a comprehensive list of DeFi projects offering Stablecoins, DEXs, DeFi Lending, Staking, and Yield Aggregation protocols, catering to almost every possible use case in the industry.
Stablecoins on Tezos
The volatile nature of crypto assets, driven by market forces have turned stablecoins into one of the important tools in any DeFi ecosystem. Designed to represent a constant value, the stablecoins are generally pegged against the value of assets with low or minimal volatility like fiat currency.
The value is constantly maintained with the help of reserves and algorithms. These stablecoins help investors conserve the value of their assets and make sound investment decisions by relying on the fixed value.
The Tezos ecosystem plays host to some of the prominent stablecoins including the most popular USD-pegged Tether USD (USDT).
Apart from USDT, other stablecoins on Tezos include:
Kolibri – an algorithmic kUSD stablecoin backed by Collateralized Debt Positions
EURL – Euro-pegged stablecoin backed by EUR reserves maintained on Société Générale bank
USDS – USD-backed stablecoin backed by physical reserves of fiat in USD denomination
USDtz – USD-backed FA token standard crypto asset maintaining 1:1 parity with USD
uUSD – USD pegged stable token on Youves exchange for synthetic assets
DeFi Lending on Tezos
Even though lending is a major business activity in traditional finance, access to credit doesn’t come easy for most customers. They are required to furnish a lot of documentation, credit history reports and hefty collaterals before a loan can be approved.
In this scenario, many without prior credit exposure or access to financial services don’t stand a chance of satisfying the requirements. Even when approved, disbursal of the loan isn’t always immediate.
DeFi lending removes these hassles, providing easy access to credit for anyone who satisfies the minimum requirements stated by the platform. Even though DeFi lending platforms provide easy access to credit, borrowers must still provide collateral in the form of crypto assets against the loan, usually issued in stablecoins.
DeFi lending platforms maintain a lending pool into which the community members contribute liquidity by depositing their assets. The platform issues loans to eligible participants from this pool, and in return for their contributions, the liquidity providers receive a portion of interest charged on these loans as rewards.
Tezos DeFi ecosystem has attracted many projects to set up lending protocols where users can lend out their Tezos-based assets to those needing them and earn rewards in the process. Few prominent Tezos DeFi projects in lending space include Control Finance, MAVRYK, TezFin, Yupana Finance and others.
Staking and Yield Aggregation
A broad term, staking is a process where a user locks their tokens on a smart contract for a certain duration to enable certain network functions and receives rewards in return. It can happen on the protocol or a project level involving different tokens and varying reward payouts. As a Liquid PoS-based protocol, staking forms an important part of Tezos network functions.
Users can stake Tezos’ native XTZ token on the protocol to become a baker – Tezos version of a validator to verify and commit transactions to the blockchain or alternatively, tokenholders can delegate their tokens to bakers and continue receiving rewards.
With average staking returns hovering around 3%, it is an attractive option for token holders to increase their portfolio. Similarly, liquidity provisioning on Decentralized Exchanges (DEXs) and Lending Protocols is also a form of staking.
An extensive network of public, private and enterprise bakers power Tezos protocol, offering plenty of staking opportunities to the community. Token holders can use tools like Baking Bad, TzStats and Tezos Nodes to discover available bakers, check their vital statistics and pick those meeting the requirements to start staking. .
Meanwhile, with AMM DEXs like QuipuSwap, InstaDEX, SpicySwap and PlentyDeFi, there is no dearth of liquidity provisioning opportunities on Tezos. All these staking opportunities, in turn, present plenty of yield farming options for participants.
In yield farming, liquidity providers are incentivized through additional cryptocurrency rewards to encourage contributions to the project. It is effective in attracting the much-needed liquidity to DeFi projects.
The standard yield farming mechanism allows liquidity providers on DEXs or lending pools to stake the resulting Liquidity Provider tokens (LP Tokens) on farming contracts for specified durations to earn rewards. These rewards are earned on top of the regular reward payouts from liquidity provisioning.
Yield Aggregators provide multiple yield farming choices to participants, allowing them to pick the most suitable ones with maximum yield-generating potential. Most AMM DEXs like QuipuSwap, Vortex, and Plenty DeFi include yield farming contracts within their platform while other dApps like Matter DeFi act as standalone yield aggregator solutions.
Powerhouses of Tezos DeFi
Tezos is home to hundreds of dApps and DeFi projects. Few among them stand out by offering a whole suite of solutions to help the community make the best out of what the Tezos DeFi ecosystem has to offer.
The flagship AMM DEX on Tezos Protocol, QuipuSwap supports an extensive list of Tezos-based crypto assets along with an entire suite of DeFi products and tools including yield farming, stableswap, and analytics. With a well-rounded DeFi offering, QuipuSwap is the most widely used DEX on Tezos.
Another end-to-end solutions platform, Instaraise started as the first of its kind protocol on Tezos to provide decentralized fundraising and incubation solutions for projects building on the protocol.
Having successfully helped multiple Tezos-based projects raise necessary funds and make community connections, Instaraise has since expanded to create an all-in-one DeFi ecosystem on Tezos
Complete with its own InstaDex featuring single asset liquidity provision and impermanent loss insurance for liquidity providers which was so far available only on the Ethereum-based Bancor platform.
An all-in-one DeFi solution on the Tezos ecosystem, Vortex offers decentralized exchange, launchpools, yield farming, NFT marketplace, lottery, and DeFi market analytics to the community. Created by Smartlink, the Vortex dashboard acts as a single window interface for almost all the DeFi offerings available on the Tezos ecosystem.
Its “track” feature allows users to keep track of their entire Tezos-based portfolio’s performance while providing ways for users to maximize revenues and reduce risks.
Future of Tezos Defi
The self-amending and governance features of Tezos blockchain combined with lower energy requirements and the LPoS consensus mechanism make it futureproof, an advantage not many protocols have.
Tezos protocol can be constantly upgraded without ever forking, eliminating any possible disruptions to existing dApps on the ecosystem. Further, the combination of highly scalable architecture, low transaction fees, and the use of optimized OCaml and Michelson programming languages makes it ideal for projects of all sizes.
As a budding ecosystem, the Tezos protocol is slowly gaining widespread adoption as a lot of projects in various stages of development prepare to launch soon. It has already gained recognition from some of the big names across various industries.
Apart from DeFi, Tezos has secured a strong foothold in the NFT space, with brands like McLaren, RedBull Racing, Ubisoft Quartz, GAP, and personalities like Mike Shinoda among others opting to launch their NFT collections on the protocol.
Overall, the Tezos ecosystem is poised to become one of the most preferred protocols as the demand for blockchain and web3 applications is only set to grow from here.