Investing for future II - DeFi
DeFi is the revolution of traditional finance mechanisms like funding, borrowing, lending, and derivatives. These centralized instruments are becoming user-friendly, automatized, profitable, and decentralized.
Opportunity Breakdown
In 2021, the total value of US equities worldwide was $53.3T where the total value locked in crypto markets was $2.2 T (+ The size of US Equities is around ~40% of global equities 🧐) The question is how much more percentage can crypto take it from equities? And/or how they grow together?
I firmly believe that the “FIRE” (Financial Independence; Retire Early) movement will be a game-changer for socio-economic movements in the future. And as a liberated trend, DeFi offers a strong passive income motivation to investors with easy “in” and “out” processes. Correspondingly, FIRE movers and crypto investors are the same generations of people. According to research, 72% of stock market investors are aged 55+, while crypto investors are the exact opposite; 74% are aged between 25–44.
- Investing in the traditional stock market keeps its vogue but becomes more personal. For example, as a PFM (personal finance management) & Investing tool Robinhood increased its customer base by ~72% CAGR since 2015 and reached +22m customers in 2021.
- On the other side, long-term investing started to lose popularity because of shorter company life spans, advanced machine tradings and bots, lower transaction fees, and short-term result expectations.
DeFi encourages people to invest in sophisticated financial instruments with ease. It is fast, automated, rich (in terms of investment vehicles), and hopefully cheap (🥲 gas fees). Because DeFi is easy as downloading an app, people who open an account and try it just lost their 5 minutes if they cannot catch the point 🤷♂️.
In the US, 56% of the population owns at least one stock. (It decreased from 61% to 2008) What I believe is Defi lives its traditional stock market of the 70s in terms of getting used to using by mass communities. Of course, we can not know if there will be any “2008” in DeFi ecosystem, but it is sure that day by day, people are getting more interested in it, and it wants to get 30 years of experience in 5 years.
Estimations say that there are +300m of crypto users worldwide. And also we know there are ~4.4m people in Defi. So just 1.4% of the crypto investors are interested in DeFi, is not it is a bit low?
I believe DeFi is the leading pillar in the blockchain ecosystem. Even though we heard NFTs much more, compared to 4.4m unique wallets in DeFi, we see 3.6m active wallet has ever been bought or NFT or not.
I started to learn DeFi ecosystem from stablecoins. At a very basic level, stablecoins are digital currencies pegged to other assets. (Ex. USD, TL, Gold…) Furthermore, I aimed to understand how much passive income I could earn with the compounded interest of these stablecoins. While there is a <1% interest rate for USD; Compound Treasury offers 4% APR.
So, in this article, I want to demonstrate the macro view of DeFi ecosystem and go through some of the popular protocols briefly to create a sharp image and practical perspective in your mind.
Market Overview
- Compound: Compound.finance is a crypto lending and borrowing platform built on the Ethereum net. You earn interest by providing liquidity into the system. With a collateral mechanism, you can also lend coins. The platform gives compound governance tokens (COMP)which makes contributors also right owners.
- Aaave: Aave is one of the leading lending platforms in the market. It works on Ethereum Avalanche and Polygon. Major differences from Compound are; Blockchain infrastructure, a Rich asset portfolio, higher interest rates, and flash loan (without collateral) options.
- Curve: Curve is a decentralized stable coin exchange and liquidity platform on Ethereum. CRV is the governance token of CurveDAO and can be earned by providing liquidity to the platform. Also, please see the young Convexfinance project, which you can provide and stake your CRVs.
- Uniswap: Uniswap is an automated liquidity protocol that enables liquidity providers to trade their ERC-20 tokens without order books. Uniswap continues to improve its technology; Starting from pooling assets, now, LPs can allocate their assets on specified price ranges in the liquidity pools. LPs earn fees (mostly around 0.05%) per transaction made in their pools.
- Yearn: Yearn.finance, founded in 2020, is one of the youngest and most disruptive trading and lending protocol complexes running on Ethereum. Yearn has a unique “Vault” system which enables people to invest in multiple investment strategies through a “yVault”. They also encourage individuals to become a “strategist” and add their vaults to Yearn system. Strongly recommend taking a look at their blog post.
- Ribbon: Ribbon is an automated option investing platform that generates fixed income for its investors. RBN owners (the governance token of Ribbon) can vote for the vault’s option investment strategies.
Keep in mind that even though the gas prices are high, Ethereum is the most popular chain. Total Value Locked (TVL) in Defi is currently +$200b and allocated as: 54% ETH, 12% Terra, 5% BSC, 5% Avalanche, and the remaining percentage backed by other chains.
If you are a number cruncher like me, I strongly suggest you follow and try Dune Analytics. Dune is a crypto market data & analytics platform for individuals who want to create and find subject-specific dashboards like “# of users in Defi,” “lending metrics across the protocols,” “NFT trends,” and many more! They just closed their Series B, raised $69m, and became 🦄🇳🇴
Please be careful while investing. Do your feasibility and be ready for unstable transaction fees and poor UX.
Lastly, just in case, I always look for if a protocol is audited or not and go for the Discord channels. These steps are not mandatory sure, but I believe the crypto ecosystem is not full enough with reliable protocols yet.
