If you’ve dabbled in the crypto space within the past year or so, chances are you’ve already heard about Decentralized Finance (DeFi). If not, you may be wondering, “what the hell is this DeFi thing”, and why do people keep referring to it as the future of finance.
Decentralized finance is making waves at the moment, well, because it’s the future.
If we were to define finance as the industry and infrastructure required to transfer, store, trade, and make money — then we can define DeFi as the same functionality, minus the middlemen.
Essentially any financial service that currently requires a bank or a certain accreditation to perform (such as being an accredited investor or having a series 7) can be performed through a decentralized application without the high barriers to entry currently found in traditional finance. Making the processes more efficient, and oftentimes more inclusive — even offering profits to those who contribute to the decentralized ecosystems.
An example of this is Uniswap (Decentralized Exchange), and how you can be rewarded in cryptocurrency for providing liquidity to the decentralized exchange (more on this below).
I’m going to go into more detail on DeFi in my next article (get ready for “A Complete Beginners Guide to DeFi”), but for now I want to go into some projects in the space that I think are going to make a name for themselves in 2021.
A quick disclaimer: I am not professionally associated with any of the tokens listed in this article and have not received payment from any of these companies, but I currently own SNX and UNI tokens.
What is DeFi?
According to Binance Academy, the term Decentralized Finance may refer to a movement that aims to create an open-source, permissionless, and transparent financial service ecosystem that is available to everyone and operates without any central authority. The users would maintain full control over their assets and interact with this ecosystem through peer-to-peer (P2P), decentralized applications (dapps).
Simply put, when we place our money into the bank, we are putting trust into the bank; an establishment we’ve all known for a very long time. DeFi ecosystems such as WiseToken are also referred to as “trustless systems” because there is no single entity that has authority over the system, and consensus over the direction of the ecosystem is achieved by voting amongst the token holders of that ecosystem — removing the need to trust a single party to always have your best interest at heart.
The world of finance itself requires middlemen in order to function, and those middlemen are required to spend a fortune in education and certifications before being able to perform their functions. With DeFi, (very simply put) it removes the need for middlemen by automating the process of issuing and collecting value based on different “if this then that”, statements that are written into smart contracts.
With DeFi, you can issue yourself a loan, create your own savings account with better interest rates than most banks, or even generate an options contract and sell it to other crypto traders. As blockchain grows and finds more adoption, it’s becoming clearer and clearer that decentralized finance will be a serious disruptive force in both technology and the banking industries.
What do I look for in DeFi projects?
For the past 12 months, I’ve been on a search for “Blue Chip” DeFi projects. Or in other terms, DeFi tokens that will survive the test of time, and hopefully attract institutional investment in the future.
To do so, I ask myself, “what components are needed for a fully functional decentralized economy?”
If you can answer that question, you can start to identify what projects in the space will become indispensable as the global crypto-economy grows.
I’m going to write another article on what I see as the pivotal pieces of that ecosystem within the coming weeks, so stay tuned if you’re interested in learning more about the space.
For now, I just want to get into a few “Blue Chip” projects that have already brought me some decent returns, that I think will continue doing so.
Wise token is causing a stir in the DeFi space by deviating from the standard Yield Farming/DeFi protocol. It shares some common traits of successful DeFi tokens such as the lack of team tokens, there being no private sale (no discounted tokens have been sold), and it’s ability to allow users to deposit their tokens and earn interest over time (proportional to however long it is locked).
How Wise differs, however, is that 90% of the tokens sold during the wise public sale will be used to provide liquidity for the Wise token, and they will regularly burn Liquidity Pool tokens in order to prove that there will always be liquidity for the Wise token — putting Wise in the race with some of the best DeFi projects in the game. The idea of burning liquidity tokens, to permanently lock in liquidity for trading the Wise token, means that users will never have to worry about not being able to sell their tokens due to thin order books or a plain lack of volume.
Wise seems to be taking an innovative approach to DeFi, while still retaining the core components that make DeFi what it is: purely permissionless, trustless and decentralized.
Because Wise is an ERC20 token (a token built on the Ethereum network), it’s easily tradable on Uniswap and other decentralized exchanges.
Created by Hayden Adams in 2018, the Uniswap protocol is a decentralized exchange that allows you to trade easily between any ERC-20 token. (ERC-20 are tokens built on Ethereum). Uniswap also has decentralized liquidity pools that automate the market-making process.
Liquidity is a fancy way of saying there are buyers and sellers for that token. When there is no liquidity, a small buy or sell order can move the price of a token or stock drastically because there aren’t enough people selling or buying the token to keep the price stable.
The dollar for example stays relatively stable because it has one of the highest volumes in the world, there is more liquidity for the US dollar than almost any currency.
So liquidity pools are just ways that basically Uniswap says “If you give me $50 of ETH and $50 of Tether then I can put it into this pool for people to trade out of, and in exchange, you’ll get a percentage of all the trading fees generated by the liquidity pool”.
Synthetix is a decentralized synthetic asset issuance protocol built on Ethereum. The above mentioned Uniswap also uses the liquidity of the derivatives enabled by Synthetix.
This DeFi product currently supports synthetic fiat currencies (sUSD, sAUD, sKRW, etc), cryptocurrencies (long and short), and synthetic commodities such as gold (sXAU). The platform uses a token called SNX (the Synthetix Network Token), and using this token allows you to create Synths by locking SNX into a smart contract and minting Synths against this value, effectively creating options contracts.
Synthetix is the backbone for derivatives trading in DeFi, allowing anyone, anywhere to gain on-chain exposure to a vast range of assets. This currency is tackling a new part of decentralized finance (DeFi) by using smart contracts. It essentially takes a financial service (as well as a financial instrument) that has previously been reserved for people the government deems worthy and allows anyone with an internet connection and a bit of crypto to start trading or issuing options contracts.
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In my next few articles, I will be going deep into the DeFi world. I plan to produce analysis on AAVE, REN, SUSHI, DOT, LINK, SOL, and more. If there are any other projects you want me to cover, let me know in the comments.
The opinions expressed in this Blog are solely my own and do not represent the opinions of any companies I am associated with.
The opinions expressed in this blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. You should not construe any such information or other material as legal, tax, investment, financial, or other advice.