20 January 2021 | ZebPay Trade-Desk
DeFi stands for “decentralized finance,” and is an umbrella term for a variety of financial applications in digital assets or blockchain. DeFi is interesting as it extends the use of blockchain from simple value transfer to more complex financial use cases.
The core of DeFi lies in the technology behind the digital currency, bitcoin, which allows several entities to hold a copy of a history of transactions. Hence, it is not controlled by a single, central source. In the early days, conceptually, the idea of DeFi was often called “open finance.” Most applications that call themselves “DeFi” are built on the Ethereum platform, the world’s second-largest digital asset by market cap. The primary reason for this is that Ethereum’s platform relies on smart contracts, which automatically execute transactions if certain conditions are met and hence offer much more flexibility.
From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols and financial instruments. Currently, ~$15 billion worth of value is locked in Ethereum smart contracts, as it provides a wide range of uses for individuals, corporations, and developers. By deploying immutable smart contracts on Ethereum, DeFi developers can launch financial protocols and platforms that run exactly as programmed and that are available to anyone with an Internet connection.
The Rise of DeFi:
In the traditional ecosystem, there is a legal requirement that lenders and borrowers know one another’s identities, for which we have intermediaries. In DeFi, there are no such requirements. Instead, everything is about mutual trust and ensuring privacy. In July last year, the US Securities and Exchange Commission (SEC) made a major shift towards embracing DeFi by approving an ethereum-based fund, Arca, for the first time; a move that was much appreciated by the crypto community.
A second reason for the DeFi surge is that banks and FI’s are getting involved. Many global financial institutions have started to accept DeFi, such as JP Morgan, ANZ and Royal Bank of Canada. Today, many global asset management funds also take DeFi seriously. Most prominent is Grayscale, the world’s largest crypto investment fund.
Moreover, the pandemic has driven global interest rates even lower. In the Eurozone, interest rates are now in negative territory and the US and UK could potentially follow. In this economic climate, DeFi can offer much higher returns to savers. Compound, for example, has been offering an annualised interest rate of 6.75%. In addition to a higher interest rate, holders also get additional Compound tokens, which is an added benefit. With two-thirds of people without bank accounts in possession of a smartphone, DeFi also has the potential to open up finance to them.
Key Advantages of DeFi Ecosystem:
Decentralized finance leverages key principles of the Ethereum blockchain. This allows for increased financial security, better transparency, more liquidity and growth opportunities. Ultimately, this helps to support the development of an integrated and standardized economic system.
- Programmability. Ability to program smart contracts that automate execution and allow the creation of new financial instruments and digital assets.
- Immutability. Improvement in the security and auditability thanks to the blockchains decentralized architecture, also ensure tamper-proof data being exchanged.
- Interoperability. Ethereum’s software stack ensures that DeFi protocols and applications are built to integrate and complement one another. This gives developers the flexibility to build on top of existing protocols, customize interfaces, and integrate third-party applications.
- Transparency. On the public Ethereum blockchain, every transaction is broadcast to and verified by other users on the network. This allows for rich data analysis and ensures that network activity can easily be monitored by any user.
- Permissionless. Unlike traditional finance, DeFi is defined by its open, permissionless access: anyone with a crypto wallet and an Internet connection, regardless of their geography and often without any minimum amount of funds required, can access DeFi applications.
- Self-Custody. DeFi market participants always keep custody of their assets and control of their personal data.
Investment Analysis:
We look at some DeFi tokens namely MKR, COMP, UNI and YFI to understand how these assets have performed, both from their respective launches, but also on a YTD basis (in his case January 2020-21).
We chose these assets in particular, as not only are they trading on our ZebPay Exchange, but they are also the most popular DeFi tokens in the market. The table below gives a short synopsis of how these assets have performed, but and their respective market capitalization.
At the time of writing:
| Asset | ||||
| Maker (MKR) | Compound (COMP) | UniSwap (UNI) | Yearn Finance (YFI) | |
| Market Cap. | $1,421,295,374 | $1,020,120,762 | $2,626,863,144 | $1,129,132,161 |
| Locked (USD, bn) | $4.51 | $3.05 | $2.95 | $0.4 |
| ROI (from ICO) | 6367.35% | 126.18% | 164.18% | 3489.66% |
| YTD ROI | 255.66% | 248.99% | 164.18% | 4095.11% |
| All TIme High | $1,976.24 | $381.89 | $9.84 | $43,873.82 |
| All TIme Low | $21.06 | $61.25 | $0.4190 | $739.44 |
| Circulating Supply | 995,789 MKR | 4,448,242 COMP | 285,217,163 UNI | 29,969 YFI |
| Total Supply | 1,005,577 MKR | 10,000,000 COMP | 1,000,000,000 UNI | 30,000 YFI |
An interesting statistic is that of the locked USD (in billions). This basically shows how much of the traders/investors capital is tied up in the asset. This is nothing short of a testament to the belief that the crypto community has in DeFi backed assets. While MKR leads the pack, COMP and UNI are not too far behind. YFI remains an attractive token, but is still very much in its early stages of development.
At ZebPay, we are firm believers in the DeFi ecosystem. Hence, we have thrived to ensure that our platforms support the development and growth of these tokens. We have presented used cases, and investment analysis on all the tokens mentioned above. To have a read, and further deepen your understanding of the same, please click here – MKR, COMP, UNI, and YFI.
Conclusion:
It would be safe to say that we are heading towards a new financial system that is more liberalised and decentralised than before. The central question is how best to guide its development with checks and balances that minimise the risks and spread the potential benefits as widely as possible. That is the challenge for the next few years. Although hype might have played a big role in its rapid growth, the Decentralized Finance sector brought more of the traditional banks’ capabilities into the crypto and managed to connect protocols more easily, allowing the implementation of new concepts with less effort. The growth and the hype around DeFi, comes mainly from yield farming. With the opportunity to turn their assets into passive incomes, holders are much more inclined to provide liquidity to lending protocols. However, aside from the hype going away, we can expect DeFi to evolve further and implement more functionalities and further explore the developing opportunities offered by other protocols.
In ZebPay’s weekly reports and insights compiled by the Trade team, we aim to provide market updates, technical analysis, breakdowns of new coin launches, and more. All to help you unlock the full potential of trading and investing on ZebPay. Happy Trading!
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Disclaimer : This report is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. The Company has prepared this report based on information available to it, including information derived from public sources that have not been independently verified. No representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein. This report is preliminary and subject to change; the Company undertakes no obligation to update or revise the reports to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. Trading & Investments in cryptocurrencies viz. Bitcoin, Bitcoin Cash, Ethereum etc.are very speculative and are subject to market risks. The analysis by Author is for informational purposes only and should not be treated as investment advice.
