DeFi Brief Overview: The Crypto Sector Up 2600% This Year
While fears of inflation is one catalyst of why cryptocurrency has been moving up lately, another reason for Ethereum and alts rocket ship upwards has been the latest trend to take cryptocurrency by storm: DeFi.
DeFi is short for decentralized finance, and like the name suggests, is the application of blockchain and smart contracts to challenge traditional finance models.
Things like lending, options, derivatives, providing liquidity, and many other traditional finance functions have been flipped on their head, decentralized, and offer users a healthy APY to boot.
Defi Mania
To date, over $6 billion dollars are in TVL or Total Value Locked. This is by far the biggest metric used to measure the size of the DeFi market, as it shows how much capital is actually being deployed in these kind of operations.
What's crazier is that in the last 90 days alone, TVL jumped from $1 billion to $6 billion.
Img source: https://defipulse.com/
It's unknown what in particular caused such huge capital inflow in such a short time frame, especially considering that DeFi's first projects were already working last year as well and as early as 2017.
Perhaps we have J Powell and his infinite QE to thank, as younger investors are seeking hedges against inflation but want something besides precious metals.
What can you do?
For example, right now you could:
Lend ABC on AAVE or similair lending platform like Compound.
Receive aABC as collateral, which allows you to redeem your deposit at any time through smart contracts. (You are now receiving x% APY, paid in real time)
Could then provide aABC as liquidity for a pool like Balancer, Yearn Finance, etc. and receive a portion of the transaction fee as well as "earn" tokens.
Everything is so new and the amount of strategies possible are dizzying - people have quickly coined the term "yield farmer" for those constantly optimizing how to receive the best return on an asset class that's already outperformed every other asset class for the last decade or so.
More aggressive yet automated investment strategies are also a possibility, thanks to protocols like Stacked, Set Protocol, or Yearn's Vaults.
Stacked Defi Index, which simply takes the largest DeFi tokens on exchanges and buys them in equal weighting has returned 2600% this year - hence the name of the title.
Yearn's Vaults, depending on asset class, return anywhere from 25% APY on stablecoins like USDC and even up to 100% for some other tokens.
And unlike traditional finance, changing investment strategies, inflation, fees, literally anything is done by voting - people use their tokens as voting power for or against new proposals that update said protocol.
Growing Pains
While this sounds absolutely amazing, just like with anything, there come risks.
YAM, a DeFi protocol where users deposited various tokens to receive YAMs in exchange, quickly rose to $160/coin, and has come tumbling back down to its ashes as bugs in the code caused massive issues.
The team is working on a v2 and potentially v3, but anytime you're depositing funds into unaudited contracts, systematic risk exists.
Another growing pain are the gas fees associated with the transactions. Since DeFi exists on Ethereum, all transactions occur within and are recorded on the blockchain.
Think of it as a highway - as more cars (transactions) pile on, fees for tolls, maintenance, etc. increase. The same is occurring within Ethereum - with more complicated smart contract exactions easily costing upwards of $30.
If ETH 2.0 does ever come out - which should overhaul internal coding to exponentially improve transaction capacity and fees, this shouldn't be a problem.
In the meantime however - DeFi remains relatively cost prohibitive for those with small working capital.
Regardless of all the ups and downs, DeFi is something I'm personally involved in, and something worth checking out for those brave hearted enough to face the risks the pursuit for those sweet yields.
