Introduction

1.1 Background and Purpose

In recent years, decentralized finance (DeFi) as an emerging force in the financial sector is changing the traditional financial landscape at an unprecedented speed. Built on blockchain technology, DeFi has established a financial ecosystem that does not require centralized financial institutions as intermediaries, covering multiple areas such as lending, trading, insurance, and asset management. Since 2019, known as the ‘Year of DeFi’, the DeFi market has rapidly expanded, with the total value locked (TVL) growing from a few hundred million dollars initially to hundreds of billions of dollars today, attracting widespread attention from investors, developers, and financial institutions worldwide.

The rise of Decentralized Finance (DeFi) stems from a profound reflection on the pain points of the traditional financial system. Traditional finance has problems such as cumbersome intermediary links, high transaction costs, low service efficiency, and poor financial inclusiveness, making it difficult for many people to access fair financial services. DeFi, leveraging the decentralization, transparency, and tamper resistance of blockchain, aims to democratize financial services, allowing individuals from any corner of the world to easily participate in financial activities, manage assets freely, reduce financial barriers, and improve financial efficiency.

With the booming development of Decentralized Finance (DeFi) market, various DeFi platforms are emerging like mushrooms after rain. These platforms have significant differences in functionality, performance, security, user experience, etc., causing confusion for investors and practitioners in choosing and evaluating DeFi platforms. Therefore, in-depth analysis of the characteristics, advantages, and challenges faced by the best DeFi platforms is of great practical significance.

Overview of DeFi Platforms

2.1 Definition and Development History of DeFi

DeFi, short for Decentralized Finance, refers to a financial ecosystem built on blockchain technology, aiming to achieve various functions in traditional financial systems such as lending, trading, payments, insurance, etc., in a decentralized manner, reducing reliance on traditional financial intermediaries (such as banks, stock exchanges, etc.). The core features of DeFi include decentralization, transparency, openness, and trustlessness. Decentralization means there is no single control center, and all operations are automatically executed by smart contracts; transparency ensures that all transaction records and data are publicly accessible; openness allows global participation without restrictions based on geography, identity, etc.; trustlessness is based on blockchain’s cryptographic technology, where users do not need to trust their counterparties but only the logic of smart contract code.

The development of Decentralized Finance (DeFi) can be traced back to 2018 when some early DeFi projects began to emerge, such as MakerDAO, which launched the decentralized stablecoin DAI, laying the foundation for subsequent DeFi applications. However, in the early stages, the DeFi market was relatively small, with limited use cases, mainly catering to technical geeks and cryptocurrency enthusiasts.

In 2020-2021, with the maturity of the Ethereum ecosystem and the emergence of a series of innovative projects, Decentralized Finance (DeFi) saw explosive growth, known as the “DeFi Summer.” During this period, various DeFi protocols emerged like mushrooms, covering multiple areas such as lending, decentralized exchanges (DEX), liquidity mining, yield aggregators, and more. The liquidity mining mechanism launched by Compound provided users with the opportunity to earn high returns through borrowing and providing liquidity, attracting widespread market attention and participation. The rise of decentralized exchanges like Uniswap changed the traditional cryptocurrency trading model, enabling automatic trading and liquidity provision without centralized institutions. These innovations attracted a large influx of funds into the DeFi market, with the total value locked (TVL) rapidly increasing from less than $1 billion in early 2020 to over $250 billion by the end of 2021.

However, the rapid development of Decentralized Finance (DeFi) has also brought a series of problems and challenges. In 2022, with the overall decline of the cryptocurrency market, the DeFi market suffered a heavy blow, with many projects experiencing capital outflows, smart contract vulnerabilities being exploited, and projects running away and other risk events. For example, the collapse of the TerraUSD (UST) stablecoin led to a loss of confidence in the entire DeFi market, causing TVL to shrink significantly. Subsequently, the DeFi market entered a period of adjustment, with regulatory agencies strengthening their supervision of DeFi, and market participants paying more attention to the security and sustainability of projects. Despite facing challenges, DeFi technology and applications continue to develop and innovate, with new projects and concepts emerging continuously, such as cross-chain DeFi, Layer2 scaling solutions, the integration of non-fungible tokens (NFTs) with DeFi, bringing new vitality and development opportunities to the DeFi market.

2.2 Core Functions and Application Scenarios of DeFi Platforms

2.2.1 Lending

Lending is one of the core functions of the DeFi platform, providing users with a way to borrow and lend without the need for traditional financial intermediaries. On DeFi lending platforms, users can borrow other cryptocurrencies or stablecoins by collateralizing encrypted assets. This model breaks the geographical and credit restrictions of traditional lending, allowing users from around the world to participate in lending activities conveniently.

MakerDAO is one of the earliest and most well-known decentralized lending platforms, known for its decentralized stablecoin DAI. Users can collateralize cryptocurrencies such as Ethereum (ETH) to create a smart contract called a ‘Vault’ on the MakerDAO platform, which then generates a corresponding amount of DAI based on the value of the collateralized assets.

Aave is another important Decentralized Finance lending platform, known for offering various borrowing modes and innovative features. In addition to traditional collateralized borrowing, Aave has introduced Flash Loans, allowing users to borrow funds without collateral, but must complete borrowing, use, and repayment operations in the same transaction. This loan model provides developers with more innovative space, such as for arbitrage trading, liquidation, and other scenarios. Aave’s interest rate model is also flexible, dynamically adjusting borrowing rates based on market supply and demand to balance the supply and demand of funds.

Compound is also an important participant in the DeFi lending field, adopting a unique tokenization mechanism. When users deposit assets into the Compound platform, they receive corresponding cTokens, such as cETH for depositing ETH. cTokens not only represent users’ deposit rights on the platform but can also be used in other DeFi applications, achieving asset liquidity and interoperability. Compound’s lending rates are also determined by market supply and demand, allowing users to choose different lending terms and rate plans based on their needs.

DeFi lending platforms have the following characteristics: First, the lending process is fully automated, executed through smart contracts without human intervention, greatly improving lending efficiency and reducing transaction costs; Second, the lending threshold is low, as long as users have sufficient collateral assets, regardless of their credit status, they can obtain loans, increasing the inclusiveness of financial services; Third, it provides a higher capital utilization rate, allowing users to use borrowed funds for other investment or trading activities while collateralizing assets. However, DeFi lending also faces some risks, such as liquidation risks caused by fluctuations in collateral asset prices, security risks due to smart contract vulnerabilities, etc.

2.2.2 Decentralized Exchange

Decentralized exchanges (DEX) are an important part of the DeFi ecosystem. Unlike traditional centralized exchanges, DEX does not require a central authority to match trades. Instead, trades are automatically executed and assets are transferred through smart contracts, ensuring decentralization, transparency, and security in trading.

Uniswap is a decentralized exchange based on Ethereum, which adopts the Automated Market Maker (AMM) model, providing users with a new trading experience. On Uniswap, the liquidity of trading pairs is collectively provided by liquidity providers (LPs), who deposit two tokens in a certain proportion into the liquidity pool. When users make trades, the smart contract automatically adjusts the token’s price and quantity based on the constant product formula (x * y = k, where x and y represent the quantities of two tokens, and k is a constant), facilitating the execution of trades. For example, if the quantities of ETH and USDT in the liquidity pool are 100 and 10,000 respectively, when a user exchanges 10 ETH for USDT, based on the formula calculation, the user will receive approximately 1,010 USDT (considering transaction fees), and the quantities of ETH and USDT in the liquidity pool will also adjust accordingly. Uniswap’s advantage lies in its permissionless and trustless nature, allowing users to freely trade without worrying about security issues that centralized exchanges may face, such as hacking attacks and fund misappropriation.

Compared with traditional exchanges, decentralized exchanges have the following significant advantages: First, decentralization, where transactions are automatically executed by smart contracts, eliminating control and intervention from centralized institutions, thus reducing single point of failure and trust risks; Second, trading data and funds are stored on the blockchain, publicly transparent, traceable, and users have complete control over their assets; Third, there is no need for cumbersome identity verification (KYC), protecting user privacy. However, decentralized exchanges also have some limitations, such as relatively slow transaction speeds (especially during network congestion like Ethereum), high transaction fees, and relatively insufficient liquidity, which limit their large-scale application and popularity.

2.2.3 Stablecoin

Stablecoin is a special type of cryptocurrency whose value is pegged to fiat currencies (such as the US dollar, euro, etc.) or other assets, aiming to provide a price-stable digital currency, addressing the issue of excessive price volatility in traditional cryptocurrencies, and playing a crucial role in the Decentralized Finance (DeFi) ecosystem.

DAI is a decentralized stablecoin issued by MakerDAO, which maintains a 1:1 peg to the US dollar through overcollateralization of crypto assets. As mentioned earlier, users can collateralize assets such as ETH to generate DAI. When the value of the collateralized assets fluctuates, the stability of DAI is ensured through a liquidation mechanism. If the price of ETH falls, causing the collateralization ratio to be too low, the system will automatically auction off the collateralized ETH, use the proceeds to buy back and burn DAI, thereby maintaining the value stability of DAI. The decentralized nature of DAI makes it not controlled by a single institution, with high transparency and censorship resistance, widely used in DeFi lending, trading, and other scenarios.

The role of stablecoins in Decentralized Finance (DeFi) is mainly manifested in the following aspects: first, as a medium of value storage and exchange, due to its relatively stable price, users can easily transfer and trade value in DeFi applications, avoiding the risks brought about by the fluctuations in cryptocurrency prices; second, in the lending market, stablecoins are often used as the currency for borrowing and repayment, providing a stable unit of account for both parties involved in lending; third, in decentralized exchanges, stablecoins are important base currencies for trading pairs, facilitating the trading and liquidity provision between different cryptocurrencies. However, stablecoins also face some risks, such as credit risks of issuing institutions, reserve management risks, regulatory risks, etc., which may affect the stability and market confidence of stablecoins.

2.2.4 Other Application Scenarios

In addition to lending, decentralized exchanges, and stablecoins, DeFi also covers a variety of other use cases, providing users with more diversified financial services.

Synthetic assets are an innovative application in the Decentralized Finance (DeFi) field, which allows users to create and trade digital assets pegged to real-world assets (such as stocks, gold, commodities, etc.) or other cryptocurrencies. For example, Synthetix is a well-known synthetic asset platform where users can generate synthetic assets (sAssets) by staking the platform’s token SNX, such as synthetic gold (sXAU), synthetic stocks (sBTC, sETH, etc.). The prices of these synthetic assets fluctuate with the prices of their underlying assets, allowing users to participate in global financial markets by holding and trading synthetic assets without directly owning the actual assets, thus reducing investment thresholds and costs.

Derivatives trading is also gradually rising in the field of Decentralized Finance (DeFi), providing users with tools for risk management and speculation. dYdX is a decentralized derivatives trading platform based on Ethereum, supporting various types of derivatives trading such as perpetual contracts, futures contracts, and margin trading. Users can engage in leveraged trading on dYdX, profiting from predicting the rise and fall of cryptocurrency prices. Compared to traditional derivatives trading, DeFi derivatives trading offers higher transparency, lower trading costs, and greater trading flexibility. However, the high leverage nature of derivatives trading also brings higher risks, requiring users to possess strong risk awareness and trading skills.

An oracle is a bridge connecting DeFi applications with real-world data, providing external information to smart contracts, such as asset prices, market data, etc. Since smart contracts on the blockchain operate in a closed environment and cannot directly access off-chain data, the existence of oracles is crucial. Chainlink is currently one of the most well-known oracle projects, which collects and verifies data from multiple sources through a decentralized node network and provides it to smart contracts. For example, in DeFi lending platforms, oracles can provide real-time price data of collateral assets, allowing the platform to adjust borrowing limits and liquidation thresholds based on asset prices to ensure the safe operation of the system.

Insurance is an indispensable part of the DeFi ecosystem, providing users with protection against risks such as smart contract vulnerabilities, project exits, and market fluctuations. Nexus Mutual is a decentralized insurance platform where users can hedge the risks they face in DeFi investments by purchasing insurance products. In the event of an insurance incident, such as funds loss due to a smart contract attack, users can file a claim with Nexus Mutual, which will be paid out from the platform’s pool of funds. Nexus Mutual employs unique risk assessment and payout mechanisms, ensuring the fairness, transparency, and sustainability of its insurance business through community governance and smart contracts.

Evaluation criteria for the best Decentralized Finance platform

3.1 Security

Security is the primary criterion for evaluating Decentralized Finance platforms, as DeFi platforms involve the storage and trading of user assets. Once a security issue arises, users may suffer significant asset losses. The security of DeFi platforms is mainly reflected in aspects such as smart contract auditing, multi-signature and cold wallet storage, and security incident history.

3.1.1 Smart Contract Audit

Smart contracts are the core of the DeFi platform, and the security of their code directly affects the stable operation of the platform and the safety of user assets. Smart contract auditing involves a comprehensive inspection of the smart contract code by a professional security team to identify potential vulnerabilities and risks, such as reentry attacks, overflow vulnerabilities, and permission control issues. DeFi projects audited by well-known institutions have a certain degree of security assurance for their smart contracts, which can reduce the risk of user asset attacks.

3.1.2 Multi-signature and Cold Wallet Storage

Multisig is a security mechanism that requires multiple private key signatures to complete an operation when conducting important transactions or fund transfers. This means that even if one of the private keys is leaked, the attacker cannot complete the transaction alone, thus greatly enhancing the security of the assets. Cold wallet storage involves storing user assets in offline devices, isolated from the internet, to avoid the risk of asset theft due to network attacks.

3.1.3 Security Incident History

The security incident history of a DeFi platform is an important reference for evaluating its security. If a platform has experienced a serious security incident, such as a large-scale user asset theft due to a smart contract attack, it indicates that the platform has serious vulnerabilities and shortcomings in security, and users need to be extra cautious when choosing the platform.

3.2 Liquidity

Liquidity is one of the key indicators of the DeFi platform, which directly affects the platform’s trading efficiency and user experience. DeFi platforms with sufficient liquidity can provide better trading depth, reduce trading slippage, attract more users and funds to participate. The main indicators for measuring the liquidity of DeFi platforms include Total Value Locked (TVL), number of liquidity providers, as well as trading depth and slippage.

3.2.1 Total Locked Value (TVL)

Total Locked Value (TVL) refers to the total value of encrypted assets locked by users in the smart contracts of DeFi platforms, reflecting the scale of available liquidity funds on the platform. A higher TVL generally indicates stronger platform liquidity and higher market recognition. Due to differences in business models, market positioning, and user bases, different DeFi platforms have significantly different TVLs.

3.2.2 Number of Liquidity Providers

Liquidity providers (LPs) are users who provide liquidity to DeFi platforms by depositing their assets into liquidity pools to earn trading fees or other rewards. The more liquidity providers there are, the more diverse the platform’s liquidity sources, and the more abundant the liquidity. Different DeFi platforms attract liquidity providers through various incentive mechanisms.

3.2.3 Trading Depth and Slippage

The depth of the market refers to the maximum amount of trading that the market can accommodate at the current market price. The larger the depth of the market, the more the market can withstand large transactions without significantly affecting the price. Slippage refers to the difference between the actual transaction price and the expected price when trading. DeFi platforms with good liquidity typically have deep market depth, which can effectively reduce slippage and provide users with a better trading experience.

3.3 Usability

Usability is one of the important factors influencing users’ choice of Decentralized Finance (DeFi) platforms. An easy-to-use DeFi platform can lower the user’s learning curve, improve user experience, and attract more users to participate. The usability of DeFi platforms mainly lies in aspects such as user interface and operation process, as well as customer support and community services.

3.3.1 User Interface and Operation Process

A user-friendly and easy-to-use DeFi platform allows users to perform various operations more easily. Gate Wallet, as a well-known digital currency wallet and DeFi gateway, performs well in terms of user interface and operation process. The interface design of Gate Wallet is simple and intuitive, with clear icons and easy-to-understand menu layout. Users can quickly find the functions they need, such as wallet balance checking, trading operations, and access to DeFi applications, after opening the application.

When trading, Gate Wallet provides detailed operation guidance, from selecting trading pairs, entering trading amounts to confirming transactions, each step has clear prompts and explanations, even first-time users can easily get started. In contrast, some early DeFi platforms, due to focusing too much on technical implementation and neglecting user experience, have complex interface designs and cumbersome operation processes, such as the trading interface of some decentralized exchanges, which are full of a large number of professional terms and complex parameter settings. For ordinary users, the understanding and operation are difficult, which to some extent limits the user growth and popularity of these platforms.

3.3.2 Customer Support and Community Service

High-quality customer support can solve problems for users in a timely manner and improve user satisfaction. Active communities can provide users with a platform for communication and learning, helping users to better understand and use the Decentralized Finance platform. Aave community excels in this aspect, with a large and active community including developers, investors, and users.

In the community, users can share their usage experiences, raise questions and suggestions, and other members and the platform’s official team will actively participate in discussions and provide assistance. Aave community also regularly hosts online and offline events, such as technical workshops, AMA (Ask Me Anything) sessions, etc., allowing users the opportunity to directly communicate with the project team, gain in-depth understanding of Aave’s technical principles, development plans, and future direction. At the same time, Aave officially provides various customer support channels, including online customer service, email support, etc., so that users can receive timely responses and solutions when encountering problems, providing users with a good user experience, enhancing their trust and loyalty to the Aave platform.

3.4 Profitability

Yield is one of the key factors that investors focus on when choosing a DeFi platform, and it directly relates to the investment return of investors. The profitability of DeFi platforms mainly lies in aspects such as staking and liquidity mining income, as well as loan interest rates and returns.

3.4.1 Staking and Liquidity Mining Rewards

Staking refers to users locking their encrypted assets on the DeFi platform to receive corresponding rewards, such as platform tokens or other cryptocurrencies. Liquidity mining is when users provide liquidity to the liquidity pool, participate in transaction fee sharing, or receive additional rewards distributed by the platform. The staking and liquidity mining rewards offered by different DeFi platforms vary, and the calculation method of rewards is also quite complex.

Taking Lido Finance as an example, it is an Ethereum staking solution where users can stake Ethereum (ETH) on the Lido platform to receive stETH (representing the staked ETH). Holding stETH allows users to not only participate in Ethereum staking rewards distribution but also use it in other Decentralized Finance (DeFi) applications, combining asset liquidity and profitability. Lido’s staking rewards are dynamically adjusted based on factors such as Ethereum network’s block rewards and validators’ performance, currently yielding an annual return of around 5% - 7%. In terms of liquidity mining, Lido collaborates with some decentralized exchanges, enabling users to provide liquidity by forming pools with stETH and other tokens, earning trading fees and platform rewards. However, staking and liquidity mining involve certain risks, such as market volatility risk and smart contract risk. If the Ethereum price experiences a significant drop, the value of the staked assets by users will decrease accordingly; and if there is a vulnerability in the smart contract leading to an attack, it could result in user asset loss.

3.4.2 Lending Rates and Returns

The borrowing rate is an important indicator of the DeFi lending platform, which directly affects the income and cost of both borrowers and lenders. Due to different factors such as fund supply and demand relationships and risk assessment models, borrowing rates vary significantly among different DeFi lending platforms. Compound is a well-known DeFi lending platform, and its borrowing rates are dynamically adjusted based on market supply and demand conditions. When there is sufficient money supply in the market, the borrowing rate is relatively low; conversely, when there is strong demand for funds, the borrowing rate will increase accordingly. Taking USDC lending as an example, during periods of relatively abundant funds, the borrowing rate may be around 3% - 5%, while the deposit rate is around 1% - 3%. Users can earn interest income by depositing funds on the Compound platform, while borrowers need to pay corresponding interest costs. Borrowing rates are also influenced by factors such as collateral asset types and loan-to-value ratios. Generally, the more stable the collateral asset value and the higher the loan-to-value ratio, the lower the borrowing rate; conversely, the borrowing rate will increase.

Four, Analysis of Mainstream DeFi Platforms

4.1 Aave

4.1.1 Platform Introduction and Features

Aave is a decentralized lending platform, founded by Finnish entrepreneur Stani Kulechov, originally named “ETHLend,” and renamed Aave in 2020. It is built on the Ethereum blockchain and has expanded to several other blockchain networks such as Avalanche, Fantom, Harmony, and Polygon, aiming to provide users with decentralized lending services without the need for intermediaries.

Aave has many distinctive features, among which the most notable is Flash Loan. Flash Loans allow users to borrow funds without the need for collateral, but they must complete borrowing, using, and repaying operations within the same blockchain transaction. This unique loan model provides developers with innovative opportunities, such as for arbitrage trading, liquidation, and other scenarios. For example, if there is a price difference for ETH/USDT between different decentralized exchanges, arbitrageurs can borrow a certain amount of ETH through Aave’s Flash Loan, buy ETH at the lower-priced exchange, sell it at the higher-priced exchange, profit from the price difference, and repay the Flash Loan principal and interest in the same transaction.

Aave also provides liquidity mining, allowing users to deposit crypto assets into Aave’s liquidity pools to provide liquidity to the lending market and earn corresponding interest income. Aave’s interest rate model is quite flexible, dynamically adjusting lending rates based on market supply and demand. When there is sufficient funding in the market, borrowing rates will decrease to attract more users to borrow; meanwhile, deposit rates will also be adjusted accordingly to balance the supply and demand of funds. This dynamic interest rate mechanism enables Aave to better adapt to market changes and provide users with more reasonable borrowing and yield solutions.

In addition, Aave has introduced the Rate Switch feature, allowing users to freely switch between variable and fixed interest rates. For users who are more sensitive to market interest rate fluctuations, variable interest rates can allow them to enjoy lower borrowing costs when interest rates are low; whereas fixed interest rates provide users with a stable interest rate environment, avoiding an increase in borrowing costs due to rising market interest rates. This flexibility meets the needs of different users, enhancing the platform’s applicability and attractiveness.

4.1.2 Development Status and Achievements

Aave has achieved significant success in the field of DeFi and is now one of the largest DeFi lending platforms globally. According to DeFiLlama’s data, as of November 2024, Aave’s Total Value Locked (TVL) has exceeded 5 billion USD, occupying an important position in the DeFi lending market. The growth trend of its TVL reflects the market’s recognition and trust in the Aave platform, attracting more and more users to deposit assets into the platform, providing ample liquidity for the lending market.

The number of users on Aave is constantly growing, with a large and active user base. Its users are located all over the world, covering different types of participants such as investors, developers, financial institutions, etc. These users utilize the Aave platform for various financial activities such as borrowing, arbitrage, liquidity mining, forming a thriving ecosystem. Aave actively collaborates with other Decentralized Finance (DeFi) projects and traditional financial institutions to expand its business scope and enhance the platform’s influence. For example, Aave partners with Chainlink, using its decentralized oracle to provide accurate price data for assets, ensuring the security and stable operation of lending operations; and explores cooperation with some traditional financial institutions to introduce DeFi lending services into traditional financial markets, providing innovative financial solutions to more users.

In terms of technological innovation, Aave continuously releases new versions and features to enhance the platform’s performance and user experience. Aave V3 introduces a series of important improvements, such as supporting more blockchain networks, optimizing flash loan functionality, and enhancing risk management. By supporting multiple chains, Aave enables users to interact with and borrow assets across different blockchain networks, further expanding market coverage, increasing asset liquidity, and interoperability. Aave is also continuously exploring new technologies and applications, such as introducing Real World Assets (RWA) into the DeFi lending field, providing users with more diversified borrowing options and investment opportunities.

4.2 Uniswap

4.2.1 Platform Introduction and Features

Uniswap is a decentralized exchange (DEX) based on Ethereum, created by Hayden Adams and launched in November 2018. It adopts an automated market maker (AMM) model, abandoning the traditional exchange order book model and implementing trades through liquidity pools. This innovative trading model makes Uniswap unique in the field of Decentralized Finance (DeFi), providing users with a way to trade without the need for centralized institutions to match orders.

In the AMM model of Uniswap, the liquidity of the trading pair is provided jointly by liquidity providers (LP). LPs deposit two tokens into the liquidity pool in a certain ratio. The smart contract will automatically adjust the price and quantity of tokens according to the constant product formula (x * y = k, where x and y represent the quantities of two tokens, and k is a constant), enabling the execution of the trade. When a user trades ETH/USDT on Uniswap, assuming there are 100 ETH and 10,000 USDT in the liquidity pool, if the user exchanges 10 ETH for USDT, based on the formula, the user will receive approximately 1,010 USDT (taking into account transaction fees), and the quantities of ETH and USDT in the liquidity pool will also be adjusted accordingly. This automatic pricing and trading mechanism makes the trading process more convenient and efficient, eliminating the need to wait for counterparties’ order matching, significantly improving the speed and flexibility of trading.

Uniswap also has a high degree of openness and permissionless characteristics. Any user can create a trading pair on Uniswap, as long as there is corresponding token in the liquidity pool, trading can take place. This openness promotes innovation and development in the cryptocurrency market, allowing many emerging tokens to quickly gain liquidity on Uniswap, providing support for project development. Uniswap’s trading data and funds are stored on the blockchain, publicly transparent, users have complete control over their assets, avoiding security issues that centralized exchanges may face, such as hacking attacks, fund misappropriation, etc.

4.2.2 Development Status and Achievements

Uniswap occupies an important position in the field of decentralized exchanges, being one of the most popular and highest trading volume DEXs currently. According to DeFiLlama’s data, as of November 2024, Uniswap’s 24-hour trading volume exceeded 500 million USD, holding a high market share in the DEX market. The continuous growth of its trading volume reflects users’ recognition and reliance on Uniswap’s trading services, attracting more and more users to choose to trade cryptocurrencies on Uniswap.

Uniswap has a rich variety of trading pairs, covering a wide range of mainstream cryptocurrencies and a large number of emerging tokens. This enables users to easily trade multiple cryptocurrencies on one platform, meeting the trading needs of different users. Uniswap has also attracted numerous liquidity providers, with a large pool of liquidity providing ample liquidity for trading, effectively reducing slippage and improving trading efficiency. Uniswap’s ecosystem is constantly growing, attracting a large number of developers to build various financial applications on its basis, such as lending, derivative trading, synthetic assets, forming a thriving DeFi ecosystem.

Uniswap has also made significant progress in technological innovation. Uniswap V3 introduces the Concentrated Liquidity mechanism, allowing liquidity providers to concentrate liquidity within specific price ranges, improving capital efficiency and reducing transaction fees. Through concentrated liquidity, LPs can concentrate liquidity in price ranges where they expect significant price fluctuations, thereby earning higher transaction fee income in those ranges. This innovative mechanism helps Uniswap maintain its leading position in the competitive DEX market, further enhancing user experience and market competitiveness.

4.3 MakerDAO

4.3.1 Platform Introduction and Features

MakerDAO is a decentralized financial platform based on Ethereum, founded in 2017, aimed at issuing and managing the stablecoin DAI in a decentralized manner, building a trustless financial infrastructure.

The core of MakerDAO is the issuance mechanism of the stablecoin DAI. DAI is a decentralized stablecoin pegged to the dollar, whose value is maintained through overcollateralization of crypto assets. Users can collateralize crypto assets such as Ethereum (ETH) into MakerDAO’s smart contracts, create a smart contract called Collateralized Debt Position (CDP), and generate a corresponding amount of DAI based on the value of the collateral assets.

MakerDAO adopts a unique governance mechanism, where users holding governance tokens MKR collectively participate in the governance decisions of the platform. MKR token holders can vote on important matters such as adjusting platform parameters, launching new features, and risk control. For example, decisions such as adjusting the stability fee of DAI and expanding the types of collateral assets need to be decided by the votes of MKR token holders. This decentralized governance model enables MakerDAO to flexibly adjust the platform’s operational strategies according to market changes and user needs, maintaining platform stability and sustainable development.

4.3.2 Development Status and Achievements

MakerDAO has an important position in the stablecoin field, and its issuance DAI is one of the earliest and most well-known decentralized stablecoins. As of November 2024, the supply of DAI exceeds 5 billion US dollars, widely used in various DeFi scenarios such as lending, trading, and payments, becoming an indispensable underlying asset in the DeFi ecosystem.

DAI is widely used as a currency for borrowing and repayment in the DeFi lending market, providing a stable unit of account for both borrowers and lenders. In decentralized exchanges, DAI also serves as an important base currency for trading pairs, facilitating transactions and liquidity provision between different cryptocurrencies. Many DeFi projects choose to collaborate with MakerDAO, integrating DAI as a payment and settlement tool, further expanding the use cases and market influence of DAI.

MakerDAO’s governance system is also constantly evolving and improving, attracting many MKR token holders to actively participate in platform governance. Through the joint efforts of the community, MakerDAO is able to respond to market changes and technical challenges in a timely manner, continuously optimizing the platform’s functionality and performance. For example, when facing market fluctuations and risk events, the MakerDAO community can quickly make decisions, adjust key parameters such as collateralization ratio and stability fee, ensuring the stability of DAI and the safe operation of the platform.

Five, the advantages and challenges of DeFi platforms

5.1 Advantages

5.1.1 Decentralization and Trustlessness

One of the core advantages of the DeFi platform is its decentralized nature, which eliminates intermediary institutions in the traditional financial system, such as banks and stock exchanges. In traditional financial models, users often need to go through these intermediary institutions for financial transactions, which not only increases transaction costs but also introduces trust risks. For example, in bank lending business, the bank as an intermediary institution needs to conduct credit assessment on the borrower, a process involving cumbersome procedures and high operational costs. At the same time, users need to trust that the bank will not misuse their funds or disclose personal information.

5.1.2 Transparency and Auditability

The DeFi platform is based on blockchain technology, where all data and transaction records are publicly transparent and stored on the blockchain, allowing anyone to view and verify. This makes the DeFi platform highly auditable and enhances user trust in the platform.

5.1.3 Global Accessibility and Low Threshold

DeFi platforms break the geographical limitations of traditional financial services, allowing users to participate in DeFi activities anytime and anywhere as long as they have internet access and a digital wallet. This enables users worldwide, especially those who cannot access traditional financial services such as low-income groups in developing countries and the unbanked, to enjoy financial services.

5.1.4 Innovative Financial Products and Services

DeFi platforms provide a broad space for financial innovation, giving rise to many innovative products and services that are difficult to achieve in traditional financial fields. For example, synthetic assets are an innovative application in the DeFi sector, allowing users to create digital assets pegged to real-world assets (such as stocks, gold, commodities, etc.) or other crypto assets’ prices. Synthetix platform is a typical synthetic asset platform where users can generate synthetic assets (sAssets) by collateralizing the platform’s token SNX, such as synthetic gold (sXAU), synthetic stocks (sBTC, sETH, etc.). The prices of these synthetic assets will fluctuate with the prices of the corresponding underlying assets. Users can participate in the global financial markets by holding and trading synthetic assets without directly owning the actual assets, reducing investment thresholds and costs.

5.2 Challenge

5.2.1 Regulatory Uncertainty

Regulatory policies on Decentralized Finance (DeFi) vary significantly across countries worldwide and are still incomplete, bringing great uncertainty to the development of DeFi platforms. In the United States, DeFi faces a complex regulatory environment where different regulatory agencies have varying attitudes and approaches towards DeFi regulation. The Securities and Exchange Commission (SEC) tends to classify some DeFi projects as securities offerings, requiring them to comply with strict securities regulations such as registration and disclosure; while the Commodity Futures Trading Commission (CFTC) focuses mainly on derivatives trading within DeFi for regulation. The lack of uniformity and clarity in regulation makes it difficult for DeFi projects to determine their compliance boundaries, increasing operational risks and costs.

5.2.2 Smart Contract Vulnerabilities and Security Risks

Smart contracts are a core component of the Decentralized Finance platform, however, smart contract code may contain vulnerabilities, which poses serious security risks to the Decentralized Finance platform.

To address the security risks posed by smart contract vulnerabilities, DeFi projects typically undergo security audits. Security audits involve a comprehensive review of smart contract code by professional security teams to identify and fix potential vulnerabilities. However, even smart contracts that have undergone security audits cannot completely eliminate the possibility of vulnerabilities. Therefore, DeFi projects also need to continuously enhance security monitoring and emergency response mechanisms to promptly identify and address security issues, ensuring the security of user assets.

5.2.3 Market Volatility and Risk

The DeFi market is closely connected to the cryptocurrency market, and cryptocurrency prices are highly volatile, which poses significant market risks to DeFi platforms. Cryptocurrency prices are influenced by various factors, such as market supply and demand, macroeconomic conditions, policy and regulatory changes, market sentiment, etc. The price of Bitcoin has experienced significant fluctuations in the past few years, reaching a historical high of nearly $69,000 in November 2021, and then dropping to around $16,000 in November 2022, a decrease of over 75%. Prices of other cryptocurrencies like Ethereum also exhibit similar volatile trends.

5.2.4 User Experience and Insufficient Education

Currently, the user experience of many Decentralized Finance platforms needs to be improved. Complex operations are one of the common issues in DeFi platforms. Compared to traditional financial applications, the operational processes of DeFi platforms are often more complex, involving knowledge and skills in various aspects such as blockchain technology, smart contracts, and cryptocurrency wallets. For example, when trading on decentralized exchanges, users need to understand how to create a wallet, import private keys, add liquidity, perform trading operations, etc., which can be challenging for ordinary users.

Six, Development Trends of DeFi Platforms

6.1 Enhanced Cross-chain Interoperability

The development of cross-chain technology is crucial for the continued expansion and innovation of Decentralized Finance (DeFi). Currently, the blockchain ecosystem presents a multi-chain coexistence pattern, with data silos and asset circulation barriers between different blockchains. For example, Ethereum has a rich DeFi application, but faces network congestion and high transaction fees when handling large-scale transactions; while some emerging blockchains, such as Polkadot and Avalanche, have advantages in high performance and low transaction fees, but relatively small ecosystems. Cross-chain technology can break through these barriers, achieve asset transfer, data sharing, and smart contract interaction between different blockchains, integrate the advantages of each chain, and enhance the overall efficiency and user experience of DeFi.

6.2 Integration with Traditional Finance

As the Decentralized Finance (DeFi) market matures, the trend of integration with traditional finance is becoming increasingly apparent. Asset tokenization is a crucial manifestation of their integration, mapping traditional financial assets such as stocks, bonds, gold, etc., onto the blockchain through tokenization, enabling them to be traded and managed on DeFi platforms. This not only expands the asset categories in DeFi but also provides traditional financial assets with a more efficient, convenient trading method and broader market participation. For example, some financial institutions are starting to tokenize real estate assets, dividing ownership of properties into multiple tokens, allowing investors to participate in real estate investment by purchasing these tokens, achieving the fragmentation and liquidity enhancement of real estate investments.

6.3 Regulatory Compliance Development

With the rapid development of Decentralized Finance (DeFi) market, its regulatory issues are receiving increasing attention. Due to the decentralized nature of DeFi, traditional financial regulatory models are difficult to directly apply, leading to regulatory gaps and uncertainties, increasing the difficulty of financial risks and investor protection. To address these issues, DeFi platforms are moving towards compliance and actively taking measures to meet regulatory requirements.

6.4 Technological Innovation and Application Expansion

In terms of technological innovation, the DeFi platform will continue to explore and apply new technologies to improve platform performance and user experience. The application prospects of artificial intelligence (AI) technology in DeFi are broad, and AI can be used for risk assessment, intelligent investment decision-making, market trend prediction, and other aspects. By analyzing a large amount of market data and user behavior data, AI can more accurately assess user credit risk, providing more reasonable loan interest rates and credit limit suggestions for lending platforms. AI can also automatically generate personalized investment strategies based on users’ investment goals and risk preferences, achieving intelligent investment.

Conclusion

When investors choose a DeFi platform, they should prioritize security. It is recommended to select DeFi projects that have been audited by well-known security organizations to ensure the security of smart contracts. Pay attention to whether the platform uses security measures such as multi-signature and cold wallet storage to reduce the risk of asset theft. Also, be aware of the platform’s security incident history and be cautious about platforms that have experienced serious security incidents. Monitor lending rates and returns, and choose the appropriate lending platform and interest rate scheme based on your own risk tolerance and investment goals. Additionally, recognize that high returns often come with high risks, so take risk prevention measures.