So you’ve bought some Bitcoin and Ethereum, and you’re happy seeing your coins double in value this year. But both of these projects are pretty established, and you want to get a little closer to the cutting edge where you can see some 1000x gains. Well then maybe you want to get into something called DeFi (decentralized finance), one of the hottest areas in cryptocurrency at the moment! Here’s a chart showing just how popular it’s gotten, courtesy of https://defipulse.com/.
We keep seeing new projects in this space, and it seems like the bull market for cryptocurrencies combined with a growing appetite for yield-bearing accounts will drive this value even higher in the future. Seems like a good time to put some money in!
But be careful when you invest!
The space currently resembles the infamous 2017 bull market for tokens, in that there’s a bunch of dumb projects, copycat projects, and scam projects mixed in with the good ones, and there’s a lot of people rushing to uncritically buy them so they can get 10000x gains. There’s also a large number of hacks and exploits from poorly implemented smart contracts (see https://rekt.ghost.io / for some funny examples), so it might behoove you to buy some insurance before you go all-in to these protocols https://nexusmutual.io.
Savings Accounts for Crypto
As a side note, even if you don’t want to invest in DeFi, you can also get some yield from it by just sticking your tokens in these protocols. (https://defirate.com/lend/ is a decent place to get an overview of where you can get return on your tokens.) I personally use some centralized institutions to get yield now (BlockFi and crypto.com) because the rates are a bit better, but of course if you want to avoid KYC or want something more trust-less, then use DeFi.
Without Further Ado, let’s look at some of the top DeFi projects.
I just sorted the projects on DeFi Pulse by their total value locked and read through the whitepapers and websites of the ones I didn’t know much about. I’ll admit I don’t have any extraordinary insights here, but there’s definitely a lack of sober and disinterested voices in the space, so I figured I’d write something up as I was doing my research anyway.
- Maker (https://makerdao.com): Here, you have the option of giving a coin like Ether as collateral and getting a synthetic USD (called DAI) as a loan. This is good if you want to borrow to pay expenses or if you want extra leverage on your trading. Or, you can earn money on the DAI you borrowed using the DAI savings rate, allowing you to earn interest on your crypto indirectly, so long as the lending rate is lower than the savings rate. To me the key problem with MakerDAO is that they force you to borrow in their ersatz USD (stablecoin), which is not backed by real dollars. At some point we probably will get official digital US Dollars, in which case the demand for DAI probably goes down. In addition, we already have companies like Circle who are actually actually working with the US government to distribute money outside of normal channels, which I think is less than bullish for Maker. Still, a good project with a lot of traction now. They’ve printed a billion USD worth of tokens, which is pretty impressive! Recommendation: Probably okay in the short term, I would want to see some evidence that they want to branch out if they plan to survive longer than 5 years.
- Wrapped Bitcoin (https://wbtc.network/): Another great project. The gold standard of crypto value is available for you to transact with on Ethereum, the de-facto platform for WEB3 apps. Unfortunately there’s not much you can do here except put your BTC in DeFi and earn around 2% on it. Recommendation: Wrap some bitcoin if you want to make some DeFi yield with it, but you can earn more at BlockFi or other centralized exchanges at the moment. We’ll talk more about RenVM (the premier provider of this service) later.
- Compound (https://compound.finance/): Now we are getting to real DeFi. Overcollateralized loans! Mmmm sounds tasty! These could be useful if you want to short something, take a short-term loan, or earn interest on your tokens without going to a normal exchange. The primary reason people use it though is because they are incentivizing usage of the platform by giving their governance token COMP to users. A lot of the DeFi craze involves incentives for taking loans, and users like deposit the tokens they get from these loans into other lending platforms (rehypothecation), to earn even more incentives.This sort of “farming” is probably only sustainable as long as we keep seeing new projects popping up though, so Compound will probably suffer when the hype goes down. Recommendation: Compound has a solid two-way marketplace where you can either earn interest or borrow, and the decentralized nature of it is also attractive. A lot of the borrowing is still driven by incentives though, and it remains to be seen how attractive DeFi remains once more reputable institutional players enter the space. Can give this a weak buy recommendation.
- Aave- this is basically the same as Compound, except the mascot is cuter, and it has some more advanced features like flash loans (loans that are paid back in the same block, mainly used for advanced financial engineering). I It seems like it’s very easy to make your own Compound-clone, and the money isn’t very sticky once it’s there, so be cautious with your investments. Recommendation: same as Compound, but be aware that there’s not much of a moat for these kinds of short-term lending projects.
- Uniswap: We finally get to talk about the famous automated market-makers (AMM)! What I’ve heard is that you can only use AMMs for DeFi because there’s not enough blockspace to do order book based market-making. This will certainly be fixed in the future, either through roll-ups of transactions (https://loopring.org/) or increased bandwidth on the blockchain (https://ethereum.org/en/eth2/), so I view this as a temporary solution to providing liquidity between tokens. They say that the major risk in running AMMs is something called “impermanent-loss”, which is a fancy way of saying that you lost money due to smarter people arbitraging your pool. Recommendation: Get in now if you think that the team can keep innovating enough to stay relevant in the future, but be nervous because the barrier to entry in this space is low. Cautious buy recommendation.
- SushiSwap: this started off as a UniSwap fork, and then there was some drama because the original developer sold off a bunch of his tokens once it gained traction (https://www.coindesk.com/sushiswap-rug-pull-thriller-crypto-geeks-bitcoin). Somehow it got saved by the token holders, and it bounced back to nearly eclipse its parent project. It looks like a fancier UniSwap with more features, so I guess I can say I’m more bullish on this one since it has proved it survive hardships and innovate. Most of what they offer looks a little bit like an online casino though, but honestly that’s what a lot of DeFi is at this point. Recommendation: Buy this instead of UniSwap because it looks more dynamic, plus you might benefit from the upcoming merger with yEarn finance.
- Curve Finance: This is again sort of a UniSwap clone, but maybe it’s a little more sophisticated with its AMMs than UniSwap. Recommendation: Same as UniSwap, or a bit lower because the website is ugly (unless you like the retro look, in which case a bit higher than UniSwap).
- Synthetix (https://www.synthetix.io/): This is a platform that’s like an expanded version of Maker, in that it creates synthetic versions of USD and other assets of interest (Gold, S&P 500, etc). Decentralized derivatives are a cool idea, but I’m not sure I like the idea of having the entire exchange as a “pooled counterparty” since this really complicates your trading. However, it is great for people that want to be able to take sophisticated financial positions and get paid for providing collateral to the marketplace. Recommendation: The SNX token is intended more for staking than for trading (https://synthetix.community/docs/buying-snx), but to make money off of staking, you need to carefully manage your portfolio. Not really a good token for beginners, but if you want to trade a lot, I think this is a great option.
- Balancer (https://balancer.finance/): This is another AMM project. Again, I don’t really see a long-term future for these products, but Balancer claims that it has more and better AMMs than its competitors. Maybe the Smart Pool functionality provides enough of an edge to make these viable for long,er but probably not since it’s kind of expensive running complicated logic on a smart contract. Recommendation: Same as for Uniswap.
- Harvest (https://harvest.finance): This is an interesting protocol, sort of like a hedge fund for the DeFi space. It implements various yield-farming strategies (basically rotating tokens into other products in order to maximize interest) and gives governance token holders (in this case the original developers or people who buy this on the secondary market) 30% of interest earned. I don’t really believe that yield-farming will continue to exist in its current format once this DeFi hype cycle ends since it relies on a steady stream of new projects offering incentivized borrowing to remain profitable, but I do think the idea of rotating your deposited tokens to whichever platform provides the highest interest is a good idea. Also I take it as a positive sign that the developers behind Harvest can implement such complicated investment schemes, which means they might be able to keep pace with DeFi as it evolves. However, these yield-farming projects keep cropping up every few weeks now, so it’s hard to say whether this is something that will last. Recommendation: Put some money here if you’re willing to tolerate a lot of risk. Could be good for networking and learning about new projects, but long-term this project seems a bit sketchy.
- yearn (https://yearn.finance/): The project that inspired Harvest. Basically the pet project of https://twitter.com/AndreCronjeTech, who is a savant and influencer in the DeFi space. Constantly rolling out new products as the old ones lose alpha, it’s super fun to watch what he comes up with. As Andre says “I test in prod”. This is more of a playground for learning and experimenting with DeFi than a project that’s designed to make money. Recommendation: Buy if you believe in Andre and want to learn more about DeFi. There’s no better place! Not really designed as an investment vehicle though, so don’t necessarily expect you’ll get rich off of it.
- RenVM (https://renproject.io/): These are the guys that wrap up bitcoins and other tokens and let them move across protocols. Wrapped Bitcoin is a great product, but there’s also other members of the wBTC consortium so you can’t bet on RenVM for that alone. Recommendation: Buy in the short to medium-term because DeFi will be growing and consuming more from other blockchains, but take a look at some of the competitors like Polkadot (https://polkadot.network/technology/) to see if RenVM will really dominate this niche in the future.
- C.R.E.A.M. Finance (https://cream.finance/): Super young project, $130M locked. This is where I get scared. Could be buggy, a scam, flash in the pan, or the next Maker. Recommendation: For anything C.R.E.A.M. tier or lower, only buy if you’re super well-informed and very comfortable taking risk.
Looking back through this list, I’m not convinced that any of these projects are going to survive the next five years. There’s lots of good ideas, but I think the financial offerings are still rather primitive, and the life-cycle in DeFi is very short. Moreover, I think at some point we’re going to see traditional finance businesses moving into this space, and they will have huge cash piles, a lot of experience, and institutional trust. For now, just enjoy the wildness of the early days of DeFi, where fortunes are made orlost in a matter of hours! And remember: investing in Ethereum is another way of getting exposure to DeFi, so if you don’t feel you understand any of these projects well enough to put money in, just keep stacking ETH.