Part 1 covered Liquid Staking, Lending, and Decentralized Exchanges. Part 2 covered Bridges, Collateralized Debt Positions, and Services. Part 3 covered Yield Protocols, Tokenization of Real World Assets, and Derivatives. Part 4 covered Yield Aggregators, Cross Chain Protocols, and Synthetics. Part 5 covered Launchpads, Indexes, and Liquidity managers. Part 6 covers Insurance, Privacy, and Algorithmic Stablecoins.
1. Insurance
DeFi insurance protocols are decentralized platforms that offer coverage against potential losses arising from technical issues, smart contract failures, or even malicious attacks within the DeFi ecosystem.
Much like traditional insurance, users pay premiums to obtain coverage, and in the event of a valid claim, they are compensated.
The main challenges are Pricing Mechanisms, Claim Resolution, and Scalability.
Determining premiums in a rapidly changing DeFi environment is complex. Premiums need to accurately reflect risks, but the nascent nature of DeFi means data is limited.
Decentralized governance can sometimes lead to prolonged claim resolution processes, especially if the community is divided on the validity of a claim.
As DeFi grows, insurance protocols will need to scale to cover a broader range of assets and potential risks.
No. of protocols: 25
Combined TVL: $273 million
The Top 3 protocols by TVL are:
Nexus Mutual ($220 million)
Unslashed ($28 million)
Guard-Helmet ($6 million)
2. Privacy
Privacy protocols are a set of rules or procedures designed to protect user data from unauthorized access, manipulation, or theft.
Let's take the example of Tornado Cash.
Native Ethereum transactions are transparent and can be easily traced using blockchain explorers.
Tornado Cash is a protocol designed to ensure transactional privacy on the Ethereum blockchain.
Tornado Cash is a non-custodial Ethereum and ERC-20 privacy solution. It improves transactional privacy by breaking the on-chain link between the source and destination addresses.
Users deposit tokens and can later withdraw them to a different address by providing a proof that they control a deposit. An observer cannot determine which deposit corresponds to a particular withdrawal, ensuring privacy.
No. of protocols: 13
Combined TVL: $249 million
The Top 3 protocols by TVL are:
Tornado Cash ($230 million)
Railgun ($11 million)
Aztec ($6 million)
3. Algorithmic Stablecoins
Algorithmic stablecoins are cryptocurrencies that use software algorithms to automatically adjust their circulating supply, aiming to achieve a stable value, usually pegged to a certain asset like the US dollar.
Unlike collateralized stablecoins, which maintain their peg through backing by real-world assets, algorithmic stablecoins use on-chain mechanisms and protocols to increase or decrease supply in response to market conditions.
Algorithmic Stablecoins work using Expanding and Contracting Supply.
If the stablecoin's price goes above the peg (e.g., $1), the protocol will mint and distribute additional coins. This increase in supply is expected to drive the price back down due to market dynamics.
If the stablecoin's price drops below the peg, the protocol will incentivize users to buy the stablecoin and 'burn' or remove it from circulation, often in exchange for another asset (like a share token which may appreciate in value when the stablecoin returns to its peg). This reduction in supply aims to drive the price back up.
No. of protocols: 110
Combined TVL: $150 million
The Top 3 protocols by TVL are:
Mento ($71 million)
Frax ($45 million)
Frax FPI ($27 million)