There are so many developments in DeFi, and such a complex landscape to start with, that it’s hard to get in the loop, and the sheer pace of events can make it quite hard to stay there. Since I started writing this piece, entire liquidity ecosystems named after food have risen and fallen. The good news is that everything keeps getting easier and more useful. With a good understanding of the background principles, it becomes easier to make informed decisions about how to safely invest. This is not to be considered investment advice, more of a documentation of how I understand the varied blockchain based financial ecosystems, and how I approach them.
What is DeFi, Really?
DeFi is everywhere in late 2020, and the momentum of the scene explodes exponentially as I write – $8 Billion in assets held by August. We’ve gone a stretch of days without a fresh exit scam or unicorn-powered script-kiddy franken-token lash-up disaster-scam, but there will be more – many more. The warnings are everywhere. And yet, you wouldn’t want to miss out. There’s clearly a lot of good things going on in the space. It’s good to get involved now, because the mechanisms of the future are evolving fast.
Vitalik himself has warned plenty of times of the risks associated with automated fintech;
- Vitalik Says DeFi Users Are ‘Underestimating Smart Contract Risk’
- Ethereum Founder renews DeFi warnings – Cryptocurrencies
- Vitalik Buterin Warns Against the Popular Trend of the Last Days
- Vitalik Buterin compares DeFi tokenomics to the Fed’s money printer
In amongst this ongoing explosion of DeFi experiments & feral fintech projects, there are many excellent investment opportunities to suit a variety of portfolio characteristics that are relatively safe. If you already have crypto there are places to deposit it in lockup to get a percentage weekly return, and if you don’t have crypto there are attractive reasons to look to invest, save and compound. Back in the 1980s, savers could generate meaningful passive income via a healthy percentage return on their deposits – those days have returned and you can now very easily earn 5-10% weekly, compounding.
From lockups with large, reputable third party players who invest your liquidity and return a percentage to the in-wallet staking [again mainly ETH network] to delegated stake pools where one can [finally!] stake ADA and generate a 5% return whilst also assisting the Cardano network. Then there are the automated liquidity pools – Compound / Maker etc on Ethereum, to much larger staking opportunities – like the 32 ETH that will be required to ‘proof-of-stake’ in order to operate an ETH 2.0 node for example.
Definition of DeFi
‘Decentralised‘ and ‘Finance‘ are impressive words. But what do they mean? Defining DeFi is a little complex, there is just so much momentum and innovation, and it ranges over some quite different markets. The current scene is very ETH 1.0 centred but projects like Cardano and others are going to scale this beyond anything seen so far. I agree with Andreas M. Antonopoulos in that I think there will be ‘one network, many chains.’ Meaning that these systems will be interoperable and mutually beneficial – Cardano will not displace ETH 2.00 for example. Value in one place will be used to underpin reliability in another – the mechanisms of incentivisation are the real new ground that is being broken here – new ways of both encouraging and sustaining ‘good actor‘ behaviour and therefore stability/reliability/sustainability without centralised authority in systems.
‘Decentralised‘ can mean different things in different contexts. Decentralised exchanges – DEXes are one thing – and staking your coins somewhere for a weekly dividend is another. For example, the fact that I don’t need to go through any KYC with an exchange like Changelly makes it technically ‘permissionless’ – I just create the account with an email and start exchanging. I don’t need to prove who I am beyond that. Is it decentralised in the technical ‘automated’ canonical sense? It’s not like Uniswap, for example but so far has been more useful to me than Uniswap. I’ve used IDEX before [again, this is ERC-20 only] and Binance as well. Total opposites, but I get the coins I want regardless. Next time I buy any CEL, though, I’ll check out Uniswap.
There are quite a few broad categories. DeFi is quite a lot of different things to different people. Much of what you will see at the moment is very ETH centric and often quite idealistic, or just a bit too focused on one area. Layer Two developments [such as the Lightning Network] for Bitcoin have not really matured yet, and once Bitcoin Network is leveraged in this space, even more powerful financial forces will be unleashed.
The goal for me early on was to find somewhere to put my crypto to work – not day trading, I’m not interested in the markets in that way, but I wanted my funds active rather than worrying about storing crypto offline – you may as well stick to bullion if you feel like that.
Generating a reliable regular return was a very new idea in late 2018 when I started looking and I’m really happy to see how the whole space has really matured. We now have access to a wide variety of reliable and secure crypto savings setups that generate between 5-10% return, with longer commitments as well as minimal lockup available.
There are quite a few things that could be described as both decentralised and finance. But for the sake of this article, let’s say we have
- Exchanges – for swapping crypto
- Savings Schemes – for investing crypto 7 borrowing against your crypto
- Other upcoming Financial Infrastructure Innovations – eg for handling crypto
- Decentralised Exchanges [Uniswap / IDEX / SushiSwap etc]
- Decentralised ETH 1.0-Space – Standard Experimental DeFi [Maker / Compound Etc]
- Decentralised Bank / 3rd Party [Lockup & Loans] – [Celsius / BlockFi Etc]
- Decentralised Blockchain Ecosystems & Staking [Cardano / ETH 2.0 ]
- Decentralised Token Ecosystems & In-Wallet Staking [Trust Wallet / Uphold / Monarch Wallet]
- Decentralised Payment Systems [Unstoppable Domains etc]
- Decentralised Layer Two innovations for Bitcoin Network [eg Lightning Network]
- Decentralised New Blockchains – Stage 3 [legitimate & unique new chains with their own languages & smart contracts] [Cardano, Zilliqa]
Why use Uniswap? It’s easy, you don’t need an ‘account’ or to give any details. But it’s only for Ethereum based tokens – the main DEXes are for ERC-20 tokens only. Uniswap, IDEX, etc are all Ethereum based. Metamask have just launched for mobile, so everything built on top of ETH 1.0 is going to see a huge uptick from this.
The last exhange I used was Changelly [a non-custodial crypto exchange that allows you to instantly buy, sell, and exchange over 160 cryptocurrencies – about], because the trade I wanted to perform was BTG into BTC and then on into STX. I had to use Binance for the BTC/STX pair, because STX is still quite hard to find, but Binance’s BTG wallet had been down for maintenance, and I just wanted to execute into Bitcoin, get my STX and move on. Changelly handled it perfectly, great price, and I got my STX from Binance shortly after. Did I care whether is was decentralised or not? Not particularly. I’m not ideological about it, I just want to get stuff done. With Changelly, you have to set up an account with an email, so this is significantly less bother than, say, Binance, but more than, say, Uniswap [as long as you have your Metamask all set up and know how to use it]. Not being limited to ERC-20 tokens is the issue for me in general.
Technically True Pure DeFi
- Why Decentralized Trading Has 10Xed in a Few Months
- SushiSwap Takes On Uniswap: Which Should Win and Why?
Decentralised Banking – CeFi/CeDeFi
CeDeFi is what I call Decentralised Banking, in the sense that you deposit your tokens with a third party/company, which is obviously not ‘decentralised’ – I use Celsius Network, there are other similar approaches that have copied Celsius – BlockFi, Nexo etc.
Because I wanted to have my crypto active and earning for me, I was looking into this around 2018 – long before the current De-Fi craze. I’m still a happy customer.
Sometimes your geographical location will have a bearing on what you can consider – attitudes to crypto vary widely between jurisdictions. For example, many people who could not access Celsius accounts direct for geographical and therefore legal reasons were able to access Celsius Network savings via an in-wallet lockup deal they have with Monarch Wallet. So this is a sort of in-wallet-cedefi-staking.
NEXO as well as BLOCK-FI have lockup/savings/loans – it all depends on your strategy and circumstances! Coinbase now offer staking of DAI – so even the most cautious savers can get 2% interest for staking.
You can see why I’m so pleased with the performance of the CEL token.
A Matter Of Choice
- Rate Of Return
- Availability of staking for the coins you already have, which are part of . .
- Projects You Want To Support
Would I use any of the other Ethereum based De-Fi services like compound? I might use Uniswap to exchange – but Celsius is the only place I’m happy to keep my savings. It all comes down to a mixture of things. If I was ETH-only, I’d have it locked up in Compound or Maker and some others. As it is, I’m 70% BTC and a variety of other tokens.
Staking – Direct or In Wallet
With staking, you are investing in the token of a specific blockchain, let’s say Ethereum with it’s ETH token, or Cardano with it’s ADA token. If you like the technology, you can invest in the token, and park your stake, lock it up, for a regular percentage return. in this way, you can get compound interest on your savings. You can stake from within a wallet – for the casual crypto owner. This is often ETH / ERC-20 based at the present time.
Slightly more complex is delegating your crypto yourself, as can be done now with Cardano blockchain. Now that Shelley era is live, you can delegate your ADA to a stake pool [or operate one yourself] and get a percentage return in ADA.
I’m personally invested in Cardano tech, and am happy to lock up funds in order to not only contribute to the system, but also be rewarded for it. Also, of course, there is the potential for ADA token to increase in value dramatically over the next few years, making my long term investment well worthwhile. Sometime in the future, both Cardano wallets will offer delegation to stake pools from within wallets, making it very easy. This is the essence of ‘incentivised‘ energy in a financial system. Savings accounts where your money grows as you put it to use – and both you and the network gain real-world benefits from the relationship.
Interest Bearing Crypto Schemes
- Ce-Fi [CeDeFi]
These three have different characteristics, and it’s important to know the possibilities.
- ‘True’ Technically Decentralised DeFi – you deposit your ETH to a scheme, you get daily or weekly returns. No lock-in – deposit and withdraw at any time. Interest paid daily or weekly.
- Centralised DeFi – CeDeFi You use a company like Celsius to whom you transfer your assets. They lend these out [to exchange and OTC markets that need temporary liquidity for example]. A good company like Celsius also does not have fees, minimum lock in times etc. Interest is calculated weekly on a per annum rate, and is now compounding also. The CEL token is also part of this setup. There are other companies like Block-Fi and Nexo who, in my opinion, while not bad, do not share the Hodler’s ethos that Celsius do. Rates up to 15% and more per annum on stablecoins and if you earn in CEL.
- Simple Staking – There are two types of staking – in wallet [you just select the option in your wallet. to lock up your funds, with a % return] or more Complex Staking like the delegated stake pools that Cardano uses where you ‘deposit’ your funds and receive rewards [Incentivised Main Net Staking] on a periodic basis. There are now many of these types of scheme, and they are extremely safe. A service like Uphold offers all this in one – wallet, exchange, staking via their CredEarn system at up to 10% with lockup [I’ve not looked into exact details]. I got into Uphold because it’s the only way to get your Brave-Browser-earned BAT tokens out into the wild. It’s actually a very impressive service despite being a bit over complex. I have to refer to instructions every time I withdraw, which isn’t a great UI experience.
Some Staking Examples
Quite a few wallets now offer in-wallet staking, pictured here are UPHOLD as well as Binance’s Trust Wallet.
Decentralised Payment Systems
This is a whole other branch that has yet to become well known – along with dAPPs and the decentralised IPFS web – this is a whole new type of decentralised internet tethered to the blockchain. Blockstack is going to be huge in this space.
Unstoppable Domains offer both .crypto and .zil domains, which allow on-chain DNS to serve decentralised websites using decentralised backend – as well as offering a front end of human readable crypto wallets. Not yet too well known, but there is a lively market on Opensea for them. You can visit my own Simpatico.crypto domain if you have access to the IPFS net – which is set up to receive multiple digital assets. I own a number of these domains – and just like CryptoKitties, everything is administered via Metamask. Great detail on this here. This is an excellent storefront payments mechanism, and very recent Coinbase Wallet integration shows that this is growing fast.
Caveat Emptor – Buyer Beware
There is no magic money tree – if there is no good reason for a token to exist, then there is no good reason to see a liquidity market in that token or to exect it to hold value. Highly liquid and in-demand tokens will generate high rewards – which is why stablecoins offer such great interest rates to savers – and why they will be so important to the future financial stability of new and improved systems around the world.
The dynamics that are being worked out in this space are a genuine innovation in harnessing energy. Systems that run on incentives can provide new sustaining energy to many of enterprises. Rewards [incentives] are an essential part of a good-energy system, where good actors are rewarded. This is how, on a meta level, things are moving and evolving towards a far more open and fair/broad access to a new true free market of opportunity – by opting in to these Game B type systems that are mutually beneficial and thereby more than the sum of their parts .SimpaticoCrypto
Game B [It’s not “Game A”]Game B – Wiki
What Does Anton Think?
This is discussed in a more Ethereum context
I will be looking at the hugely important stablecoin/CBDC situation in forthcoming article, as well as governance in crypto [and beyond].