Challenge question
How can we encourage DeFi teams to build/deploy open finance solutions on Cardano in the next 6 months?
Why is it important?
It's important b/c Defi dApps provide trustless on-demand access to financial services for global users w/ Total Value Locked ~$25billion
What does success look like?
A competitive environment for DeFi on Cardano with an emphasis on cross-collaboration & driving composability across protocols.
Key Metrics to measure
How many DeFi protocols were launched on Cardano mainnet within 6 months from this DeFi focused community challenge?
How many daily active users are the DeFi protocols funded in this cohort attracting?
How much Total Value Locked (TVL) are the funded DeFi protocols able to capture 1 month post launch on Cardano mainnet? (measure again at 3 months, 6 months and 1 year post-implementation to glean complete insights on proposal challenge effectiveness)
How many DeFi developers did this community focused challenge bring into the Cardano ecosystem?
How many FinTech/DeFi development firms did this community focused challenge bring into the Cardano ecosystem?
Challenge brief
Currently the vast majority of DeFi dapps and currency flows occur on the Ethereum blockchain, however due to congestion and increased transaction fees, the use of DeFi is increasingly elitized, leaving out the people who could most benefit from it. benefit from this, the unbanked.
To make simple swap transactions between 2 tokens a person can spend more than 10 dollars. More complex transactions that require more space in blocks easily pass $ 100. While Ethereum 2.0 is not implemented, different solutions to the problem of congestion and high transactions fees are being developed, some involve the use of a second layer in Ethereum 1.0 (Zk rollups, Optimistic rollups, Plasma, etc.), others involve the creation of DeFi in other blockchains, like Cosmos and Polkadot, but this is not restricted to just these two, many blockchains are focusing on the development of DeFi.
This image represents the ecosystem of DeFi-related projects at Polkadot.
https://pbs.twimg.com/media/Erz71y2XAAUO1Ek?format=jpg&name=large
The current situation shows that there is a huge public that is unable to use DeFi due to high transaction fees and several projects are developing solutions for this. I believe that Cardano is an excellent option for this.
But why Cardano?
There is a concept that the DeFi community is well aware of, which is the composability of protocols / dapps. This allows several smart contracts of different dapps/protocols to interact with each other, this concept of composability is often referred to "DeFi legos", in analogy to the LEGO building toy. In this analogy, each dapp / protocol would be a lego and the combination of these can leverage DeFi, creating more options, services, liquidity, among other positive aspects, but it can also leverage risks from poorly programmed, unaudited contracts, excess leverage and risks in general.
Imagine that the primordial dapps were at the base of a pyramid and more complex dapps were built above these. These articles are a good source of information on the subject:
https://medium.com/pov-crypto/ethereum-the-digital-finance-stack-4ba988c6c14b
https://medium.com/@roypritam1234/decentralized-finance-defi-stack-built-on-ethereum-feea8f93a47d
The problem is that the money LEGOS composability brings systematic problems and this is exacerbated by the problems caused by the absence of code with formal verification and this makes Cardano an excellent option for critical applications, such as DeFi dApps.
In addition to the advantage of having a functional language and portability with KEVM and other languages in the future, we still have MARLOWE, which should facilitate onboarding for people without technical programming knowledge and ATALA PRISM, which should help onboard people without identity documents / without credit score.
If we want a rich and competitive environment for DeFi on Cardano we need to accelerate the development of these dapps and prioritize their development. With this challenge, we can encourage the creation of native DeFi projects on Cardano and promote Cardano as a scalability and security option for DeFi projects that are on Ethereum and are interested in migrating their project to Cardano. We can use the Catalyst referral program to attract more projects / proposals.
I will mention some project niches that I believe are important for creating a promising DeFi environment on Cardano, all the niches mentioned below have projects implemented (mainly on Ethereum blockchain) and can serve as inspiration for proposers who want to submit proposals on Fund5, if this challenge be chosen by the community.
For more information on DeFi's niche markets, I recommend accessing.
https://defiprime.com/
I WANT TO CLARIFY THAT ALL THE EXAMPLES SHOWN BELOW ARE IDEAS OF WHAT CAN BE CREATED BY PROPOSALS ONLY IN FUND5, IF THIS CHALLENGE IS CHOSEN BY THE CARDANO COMMUNITY.
ORACLES AND PREDICTION MARKETS They allow the inclusion of "real world" data in the blockchain, for example, prices of digital assets and unique events, such as the result of a game, weather, elections, among others.
https://chain.link/
https://augur.net/
https://tellor.io/
https://omen.eth.link/#/liquidity
https://explorer.ergoplatform.com/en/oracle-pools-list
DECENTRALIZED EXCHANGES (DEXs) Within DEXs, different DEX models can be created, the most common of which are Order books DEXs and AMM DEXs.
AMM (Automated Market Maker) They enable a more efficient model of decentralized exchange, where sellers and buyers are available to execute a trade without the need for a match order. This model uses liquidity pools to create constant liquidity, essential for tokens with little trade volume.
https://uniswap.org/
https://balancer.finance/
https://app.bancor.network/
ORDER BOOKS - They present the same concept as traditional exchanges, where buyer and seller need their offers to have a price match for the trade to be executed, however with the use of blockchains this can be done in a decentralized way.
DEX AGGREGATORS Allow users to get price arbitration between different DEXs in an automated and intuitive way.
https://1inch.exchange/
https://paraswap.io/
MONEY MARKETS & LENDING PROTOCOLS They allow users to make loans without gatekeepers as intermediaries, only through smart contracts and the economic model of a dapp.
https://www.liqwid.finance/
https://compound.finance/
https://aave.com/
FLASH LOANS Allow users to use liquidity poools to borrow from a pool without providing collateral, contact to pay for the transaction in the same block + fee (the profit is left to the arbitrator). This allows atomic arbitration between different dapps by anyone who has technical know-how, but does not have the capital to perform the arbitration.
LIQUIDATION POOLS They allow users to pool their funds in a pool to liquidate users who don't have enough collateral.
DERIVATIVES & OPTIONS In traditional finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the underlying." Derivatives on DeFi allow this to be done transparently and with accountability, solving problems that exist in the current financial market, problems that have caused rehypotecation of papers (IOUs) in cases like Dole Foods. Algorithmic stable coins can also be understood as a product resulting from a dapp of that niche, since they can be seen as dollar derivatives, like Maker DAO stablecoi, DAI an the new model created by EMURGO, AgeUSD.
https://makerdao.com/en/
https://www.synthetix.io/
https://opyn.co/#/
INSURANCE It allows users to be able to cover possible failures and losses associated with a DeFi protocol.
MARKETPLACES FOR DIGITAL ASSETS Allow users to trade their digital assets in a decentralized way, the focus here are NFTs, as these are not possible to be traded with conventional DEX models.
https://opensea.io/
https://wax.atomichub.io/
ASSET MANAGEMENT TOOLS They allow a dapp to manage his digital assets, through a single interface, automation in the execution of smart contracts and to execute contracts of other dapps within a single platform.
https://yearn.finance/
https://zapper.fi
https://www.tokensets.com/
https://mycrypto.com/
https://defisaver.com/
https://gelato.network/
ANALYTICIS & CONTENT AGGREGATORS Analytics is the discovery, interpretation, and communication of meaningful patterns in DeFi protocols data and the process of applying those patterns towards effective decision making. Portals/websites that monitor the DeFi ecosystem, offer data, metrics and information material for projects related to the DeFi ecosystem. This type of project is fundamental for the introduction of new users to the DeFi ecosystem and the information of all people involved in DeFi.
https://www.duneanalytics.com/
https://defipulse.com/
https://pools.fyi/#/pt/
https://dappradar.com/
https://www.dapp.com/