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Defi Is The Next Generation For Cryptocurrency Investors

Defi Is The Next Generation For Cryptocurrency Investors
The Top Three Defi Applications For Investors

Defi or decentralized finance is the next generation for the cryptocurrency market and investors. Also known as smart contracts, defi is a means of locking value into a blockchain and then leveraging it for profits. Defi applications run the gamut of financial transactions from simple purchases through equity ownership of companies, derivatives, lending, and insurance offering investors multiple avenues for gain. The defi market is already worth upwards of $22.4 billion and the value is growing exponentially. The sum total of money locked into defi is up about 35% YTD and represents the 4th largest crypto market in terms of market cap with most of that locked in the Ethereum network.

MakerDAO Is The Largest Defi Network By Marketcap

Within the ever-broadening defi market there are many to choose from but MakerDAO is by far the largest. It boasts a locked-value of $4.25 billion and has been yielding a variable rate that has reached as high as 8% and 9% for its investors. The network provides a means of financing debt that investors can capitalize on by holding Dai coins and earning the Dai Daily Savings Rate.

Dai coins are minted via loans. Holders of Ethereum or other Ethereum-based (ETH) tokens can lock those coins into a MakerDAO vault and then withdraw up to 66% of the value. The loan is managed by a smart contract that will liquidate the loan if the collateralization falls below a certain percentage. It is the fees generated by the loans that fuel earnings for the DAI holders and helps drive demand for DAI loans. Dai is the 28th ranked cryptocurrency by market cap and is right behind Maker. Maker is the other coin powering the MakerDAO network. Holders of Maker are allowed to vote on governance and other items pertaining to the operation of the network

Aave, A Ghost In The Machine

Aave, a Finnish word for ghost, is another defi application focused on lending. It is the second largest defi application by market cap and also built on the Ethereum network. The total value locked into the Aave network is just over $3.2 billion and growing.

The Aave protocol allows lenders to deposit Ethereum-compliant tokens and then issues ERC-20 (Ethereuem based) tokens to borrowers. The interest on the loans begins to accrue instantly and compounds continuously provided earnings are held in the same wallet. Borrowers are able to take loans based on the collateralized amount with collateralization levels and repayment terms variable based on the underlying deposit.

For example, a lender can deposit DAI and earn an APY of 17.5%. Borrowers of DAI pay a whopping 36% but there are other, more reasonable, options as well. Aave, notably, is also yielding in the mid-teens on Tether deposits as well.

Uniswap For Atomic Swaps

Atomic Swaps, instant exchange of cryptocurrency assets, are still not common due to the time-lag generated by exchanges and block-chain verification. Uniswap, however, has solved that problem at least for ERC-20 tokens. Based on the Ethereum network it uses liquidity pools to guarantee transactions and that is the opportunity for investors.

Depositing capital into a Uniswap liquidity pool pays investors a fee to facilitate transactions. All it takes to start or join a pool is any amount of Ethereum and an equal amount of an ERC-20 token.  Because there is only one pool per ERC-20 token new investors will have to join an existing pool.  Fees are worth 0.03% of each transaction and are shared within the pool based on each stakeholder’s percentage of the total. There is no native token for Uniswap.

Defi Is The Next Generation For Cryptocurrency Investors
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Thomas Hughes
About The Author

Thomas Hughes

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Technical and Fundamental Analysis

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