Ethereum development offices in Berlin, Germany. Ethereum is an open source blockchain that has … [+] helped launch decentralized finance companies. (Photo by Jens Kalaene/picture alliance via Getty Images)
picture alliance via Getty Images
Every day I get Telegrams and emails about DeFi, which a year ago I kept equating with Senator Diane Feinstein. Then this year I bought the Stellar Lumens token after reading day after day about decentralized finance being the one real thing you can do with cryptocurrencies. Only to find out that it’s not really a decentralized finance company, because the coins are supposedly managed by one group.
Here I was thinking I hopped on the DeFi bandwagon on the cheap, and come to find out I am not.
If you’re hearing about DeFi on YouTube ads by old school investors talking about disruption, and hot shot retail traders talking about their 3,000% baggers, the basic fact is that if you want DeFi, and believe in DeFi, then you need a cryptocurrency account.
Until four weeks ago, anyway. The other option for those who want in on the DeFi theme is the new Bitwise Asset Management DeFi Crypto Index fund (BITW) I had never heard of this fund until this week.
Matt Hougan, CIO for Bitwise Asset Management told ETF Trends that “The growth and activity in the … [+] (DeFi) market is incredible.” The new Bitwise fund holds a portfolio of DeFi services cryptocurrencies and seeks to track the Bitwise Decentralized Finance Crypto Index.
“DeFi is the story of 2021,” Matt Hougan, Chief Investment Officer for Bitwise Asset Management, told ETF Trends on February 17.
Decentralized finance (aka DeFi) refers to digital, peer-to-peer financial services technologies that permit crypto trading, loans, interest accounts, and other services. It is reliant on public blockchains like Ethereum and cryptocurrencies.
In the sci-fi world of digital currencies, DeFi creators want to cut out traditional banks and brokers, allowing for the potential to facilitate faster, cheaper, financial transactions, all day every day, with no minimum transaction amounts, no paperwork, full transparency, and auditability.
The growth of the DeFi industry accelerated in 2020, growing from $700 million by December 2019 to $13billion on December 31, 2020. It reportedly hit $40 billion this year, based on industry data across a host of sources and cryptocurrency exchanges.
“We can say DeFi got started around 2013, with the first Initial Coin Offering, called Mastercoin (now Omni),” says Nikita Soshnikov, director of Alphacash Store, a 9-year old cryptocurrency exchange based in Estonia. “They applied a new mechanism of fundraising, very similar to the IPOs. Then a year later, the first stablecoin was created with BitShares (up 400% since December 20). ICOs and stablecoins would eventually play a key role in the growth of decentralized finance,” he says.
I liked this blog post by them: how not to make thousands of dollars with DeFi.
A number of cryptocurrencies have been issued by DeFi companies.
DeFi Names to Know
In 2020, there was an explosion of new centralized and decentralized financial protocols created on Ethereum. This is why my inbox is so full.
Some of the most talked about names are those involved in decentralized exchanges (Uniswap, Ox); interest rate protocols (Aave); lending protocols (MakerDAO); are creating synthetic assets like tokenized Tesla shares (Synthetix, UMA); automated investing (Yearn Finance), and numerous investment Decentralized Autonomous Organizations (that’s what DAO stands for), just to name a few.
Right now, I don’t know what most of this means. But as a retail investor, I am on board with the thousands of others who are all learning day-by-day and are investing in these companies and protocols side-by-side with our traditional E-Trade accounts.
The AAVE coin was priced at $85 on December 20. As of March 20, it is $380.61.
Synthetix (SNX) was $6.11. It’s now $20.41.
Yearn Finance (YFI) was $26,571 on December 20. It’s now $35,845 and hit an all-time-high of $49,328, on February 12.
According to DeFi Pulse, the current market leader in terms of investment money locked in is Danish MakerDAO (the developers of the stablecoin DAI) with over $6 billion invested.
In decentralized exchanges (known as DEXes), the Swiss-based and Russian created Curve Finance has $4 billion locked. The Australia-based Synthethix leads in derivatives DeFi with around $2.4 billion invested. Badger DAO from Canada has $1.36 billion. Here in the U.S., DeFi payments platform Flexa has around $424 million.
“There is a lot of opportunity for retail investors in the DeFi space, especially for creating passive income,” says Audrey Nesbitt, Global Head of Marketing at Metaverse. “Token holders can deposit their funds into a liquidity pool to earn a passive income. There are some more established DeFi lending and borrowing protocols like Aave. Token holders of Aave get reduced fees, improved loan-to-value ratios, and staking rewards. The more utilities there are, the greater the token is worth in my opinion,” she says.
Cohasset, Massachusetts based Sarson Funds, a specialist in blockchain-related investing, said they expect DeFi will continue its “meteoric growth,” CIO Daniyal Inamullah wrote in a 19-page report published last month.
“Protocols are continuing to show that there is real demand and a product market fit for DeFi,” Inamullah wrote, adding that they are seeing traditional financial analysis being applied to crypto protocols today. Analysts are beginning to apply methods like traditional discount cash flow valuations or multiples-based analyses on crypto assets, bringing an old school Wall Street eye to this futuristic (and often confusing) securities trade.
Sarson Funds thinks that many crypto protocols are “incredibly undervalued” based on the analysis they are reading in the market.
“We are in the early stages, with a lot of hype and bubbles around it, just like the internet in the 90s,” says Adrian Peng, CEO of Cook Finance, a decentralized asset management platform. Peng was an early investor in Ethereum, Polkadot, and Filecoin. “DeFi has the potential to eventually reshape our current financial industry,” he says.
The Block Dream Fund, the investment subsidiary owned by the OKEx cryptocurrency exchange, invested in Cook Protocol last week.
The market cap of decentralized finance companies is minuscule compared to the world’s much more … [+] stable stock markets.
The total market capitalization of the world’s stock markets is around $90 trillion. The total market capitalization for cryptocurrencies, of which almost all of it is Bitcoin and Ethereum, sits at more than $1.4 trillion. DeFi’s market capitalization is around $74.8 billion.
“That doesn’t sound impressive, but Bitcoin didn’t sound impressive either in 2009. Not even in 2013,” says Soshnikov. “But to create a multi billion dollar market in such a short period is a feat. Even more considering that the stock market has existed since the 17th century.”
The opportunities that have sprung up with DeFi-related coins over the past 6-12 months have been considerable. Coinbase
In early February, Mark Cuban was asked in a Reddit Ask Me Anything with the r/wallstreetbets crowd, “What industry that is relatively small now has the potential to explode in the next 10 years?”
“DeFi,” Cuban said.
Cuban talking DeFi (albeit in a hyper-niche forum) is a bit like Jim Cramer telling investors on his show Mad Money and readers of The Street to buy Bitcoin.
“Once it becomes mainstream, and different aspects of DeFi trickle into everyday life and everyday finance, it will impact everyone – from the tech savvy to those like grandma who don’t otherwise understand what’s going on behind closed doors,” says Alex Alexandrov, founder of Velas and Coinpayments.net.
“The layers of DeFi will deepen — especially with the implementation of Layer-2 or gas-improving features on Ethereum — and then innovations will move at speed,” Alexandrov thinks. “That’s when the real investment opportunities will emerge.”