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01.02.2021

First Look at DeFi on Tezos

These days, decentralized finance apps are the primary use case of smart contracts on public blockchains. Let’s see what landscape of decentralized finance has already taken shape on the Tezos blockchain.

Let’s start with why Tezos is a great platform for decentralized finance.

Tezos VS Ethereum

Ethereum was the first smart contracts platform to underpin an ecosystem of decentralized finance. Still, being the first doesn’t necessarily entail being the best. Even though Ethereum had the advantage of making the first move, Tezos proved to have other advantages.

Tezos transactions are faster than those on Ethereum (40 tx/sec vs 15 tx/sec), and the gas is cheaper: the Delphi update lowered the gas price by 75%, and currently, Tezos fees are a thousand times as cheap as those on Ethereum.

Financial apps require not only fast and cheap transactions but also reliability. Unlike Ethereum smart contracts, Tezos smart contract code is formally verifiable. This lowers the risks of finding a potential loss-inflicting bug in a DeFi app after its launch. On top of that, the on-chain governance of Tezos updates protects the network from fragmentation after a hardfork.

Tokenization

A financial system has to have assets moving, so the first thing required by the DeFi ecosystem on Tezos is being filled with various crypto assets.

First of all, it is tokens issued directly on the Tezos blockchain: from tokenized traditional assets like real estate or securities to the tokens of various DAOs.

Second of all, it is tokens from different blockchains, like Bitcoins transferred to the Tezos blockchain. Protocols like WRAP are developed for that purpose. Aside from that, there are tokenized XTZ stakes like wXTZ that enable one to use staked XTZ in a DeFi ecosystem.

NFT

Non-fungible tokens (NFT) are a relative novelty that nonetheless has become an independent segment of the cryptocurrency ecosystem that finds common points with DeFi.

Thus, CricTez is a fantastic sports game where one doesn’t just make teams of tokenized characters and participate in competitions but also trades those characters on an internal marketplace. Kalamint is the first community-governed NFT marketplace on Tezos where one can create NFT, sell and collect them, and get rewarded with native KALA tokens.

Stablecoins

One would need money to buy and sell tokens unless it’s a barter deal. In DeFi ecosystems, the functionality of money is represented by stablecoins, both backed by national currencies or crypto assets.

The Tezos blockchain has stablecoins of both kinds. The first is USDS, tokenized US Dollars by Stably (their CEO recently told us why the project moved to Tezos from Ethereum). The second kind is currently represented only by Kolibri and their stablecoin kUSD backed by XTZ. Currently, Kolibri is still on the testnet and has yet to undergo audits. Still, the results of the first audit are expected to arrive on February 17th.

Oracles

The operation of stablecoins like Kolibri, decentralized credit apps, and certain other DeFi applications requires data on the current price of collaterals. This data is fed to smart contracts by oracles.

Tezos has their native project Harbinger that ambitiously aims to build self-sustainable price oracles paid to with XTZ received as rewards for baking. Aside from that, the SmartPy and Cryptonomics continue their work on integrating Chainlink oracles (successfully used in Etherem-based DeFi) in the Tezos ecosystem.

DEX

When a financial system is packed with all kinds of assets, it is decentralized exchanges that take the stage.

Dexter is the first decentralized exchange on Tezos; it works on AMM pools. It has four trading pairs with XTZ: XTZ/wXTZ, XTZ/tzBTC, XTZ/ETHtz, and XTZ/USDtz. Another exchange on AMM pools, Quipuswap by Madfish.Solutions, is on the testnet now.

Atomex develops another area of exchanging crypto assets: they have launched a hybrid exchange supporting cross-chain atomic swaps between Tezos, Bitcoin, Ethereum, and Litecoin blockchains.

The Smart Contract Labs team has announced the development of exchange for synthetic assets using DeFi primitives by Tezos such as Harbinger and Kolibri. It means that the bricks of financial Lego on Tezos have started shaping a solid structure.

Only a Beginning

We have mentioned only the most basic kinds of DeFi and the examples of Tezos-based projects that represent them. Aside from those, there are tokenized funds, credits with tokenized assets as collateral, prediction markets, insurance products, and many other things.

The Tezos ecosystem has products that have a hard time fitting into any category. For instance, there is Stakepool where you can try to predict the XTZ price by the end of the next staking period, and get the entire pool reward for the period if your assessment proves more accurate than others.

TzButton is more of a social experiment with gambling than DeFi. Their website has a button whose pushing is worth 0.2 XTZ. All XTZ paid to the button are staked. At the end of each cycle that may last up to 24 hours, all those XTZ go to the last button pusher, and the profit from staking those XTZ goes to the support of open-source software.

This is but a beginning. The year 2021 has a promise to become the year of DeFi on Tezos, so we will keep on researching this topic, and will dedicate separate posts to different DeFi application categories. Stay in touch with Tezos Ukraine:

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