Understanding DeFi Aggregators
Decentralized finance (DeFi) aggregators are tools that assemble decentralized applications (dApps) to help investors navigate them easily through one interface.
“They usually provide tools to compare and rate services, allow users to perform otherwise complex tasks by connecting to several protocols simultaneously, and combining relevant information in a clear and concise manner.”Schär, F. (2021)
Schär, F. (2021)
These tools pool data from all across the DeFi landscape. These include Decentralized Exchanges (e.g., Uniswap, Curve, and Pancakeswap), lending services (e.g., Aave, MakerDAO, and dYdX), and liquidity pools.
The process is similar to how a website like Skyscanner would gather airline price data into one interface, allowing buyers to choose the best price.
How Can Using a DeFi Aggregator Simplify Crypto Trading?
Traders using a DeFi aggregation tool like 1inch can access over 205 dApps on 13 available blockchains ( e.g., Ethereum, Base, Avalanche, and more) that offer various DeFi services and products..
Users can:
- Trade on 1inch to borrow liquidity against your available collateral (like Ethereum).
- Use the liquidity to purchase cryptocurrencies at the lowest prices offered by various decentralized exchanges.
- Lend out the purchased cryptocurrencies on another DeFi platform like Compound to generate income.
- Use the income generated to pay for the interest on the funds initially borrowed from Aave.
- Repeat the process as needed to continue the cycle.
Without 1inch, completing all these operations would take much more time and resources, significantly lowering the total profit.
This is just one scenario where the possibilities of a DeFi Aggregator can be used. Actually, aggregators like 1inch are used by millions of traders to perform hundreds of different operations and use cases.
What are the Benefits of Using DeFi Aggregators?
DeFi aggregators offer five main benefits for traders:
- Reduced Friction: Traders can complete transactions on multiple platforms at once without switching between them. This reduces the complexity associated with DeFi trading and eliminates technical barriers.
- Cost Efficiency: DeFi aggregators can cut trading costs by leveraging multiple liquidity sources, providing a wide range of information on lending and borrowing, and optimizing trade execution.
- Enhanced Liquidity: When it comes to trading, DeFi aggregators tap into the combined liquidity of various DEXs, minimizing slippage and reducing the risk of insufficient liquidity.
- Large Information Database: Having all the information on historical prices, liquidity, and interest rates can make or break a trading tactic. DeFi aggregators offer a wide range of information from hundreds of dApps.
- Optimal Pricing: The biggest benefit for traders is that DeFi aggregators scan multiple exchanges to find the best prices and pairs. This ensures that traders and investors get the most assets for their liquidity.
What is the Difference Between DeFi Aggregators and DEX Aggregators?
The difference between DeFi aggregators and DEX aggregators is that DeFi aggregators pool various types of dApps (from lending to exchanges) into one interface, while a decentralized crypto exchange aggregator focuses only on bringing DEXs together.
What is DeFi Yield Farming?
DeFi yield farming, also known as liquidity mining, is the process of lending or staking crypto in DeFi protocols (like Aave, MakerDAO, or Curve) to earn additional tokens as a reward.
This process works very similarly to bank deposits. Customers deposit a given amount of money, which the bank lends as credit and earns interest.
To earn DeFi yield, users should go to dApps like Unsiwap and put their ETH to work, becoming liquidity providers (LP). In exchange for providing liquidity, users receive Uniswap’s native tokens, $UNI, which can be used for governance or sold on the market.
With the help of DeFi aggregators, or yield aggregators, investors who intend to use their money for yield farming can find the best rewards/lowest risks.
Schär, F. (2021). Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets. Federal Reserve Bank of St. Louis. https://files.stlouisfed.org/files/htdocs/publications/review/2021/04/15/decentralized-finance-on-blockchain-and-smart-contract-based-financial-markets.pdf
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