Is it Time to Scale back in DeFi?

iDeFi is a blanket term that refers to a whole set of functions in the economy built around decentralized protocols. 

DeFi promises to transform, and even upend traditional finance with decentralized products owned and run by the users themselves. DeFi products, unlike traditional finance, rely directly on the developer teams and their prospective ideas and visions. In this sense, DeFi aims to democratize finance by letting the user directly be in charge of their portfolio with the ability to not only choose between competing products, but to build their own if they so desire.

DeFi, as a term, encompasses a range of products, including wallets, prediction markets, marketplaces, lending, asset tokenization, or borrowing and lending. However, commonly the expression is used to describe products in the field of decentralized exchanges, staking, interoperability, or stablecoin products.

Dexes, or decentralized exchanges, have become the leading edge in the introduction of new tokens into the market. Led by the retail segment, dexes have seen explosive growth. However, the concept is yet to prove its use case in the wider sense, as dexes typically have emerged to serve early speculators rather than sustained growth in trading established assets. With time, dexes are likely to go through cyclic growth and attain productivity.

Staking has emerged as an alternative way to make gains on holding a token, particularly on platforms that promise to improve transaction speed and technology stack to serve the market, as opposed to limitations in proof of work blockchains. This incentive mechanism combined with added risk through decentralized finance may feel attractive to users open to experimenting with new technologies. As the technology matures, staking might provide an infrastructure layer for incentivizing decentralized finance products in general.

Interoperability encompasses oracles, and blockchains built around the technology. Oracles provide mechanisms to transfer value between blockchains by acting as mechanisms to transfer data reliably between separate chains. Interoperability is a way to link islands of value into a network, which in the future might pave the way for an "internet of value".

Top Market Picks

LINK is the market leader in the oracles market. The product provides an easy and seamless way to transfer value between separate blockchains based on their on-chain data. The token has gone through an initial price discovery and a year-long bull market, followed with a price reversal and a short bear market. If the price consolidates well during late 2020 and early 2021, it might approach a new bull market between late 2021 and early 2024.

BAND has emerged as a contender to LINK, occupying the underdog position in the oracles market. While there's no definite data on the token performance in the long term, the fundamentals and trading volume suggest a possible price discovery in the first and second quarters of 2021.

Yearn.finance(YFI) is a DeFi yield aggregator that runs on the Ethereum blockchain. Yearn offers a suite of yield aggregation products:

• Earn provides automated yield management for DYDX, Aave and Compound, maximizing yield.
• ZAP provides cost-savings on gas fees through Curve pools of base assets.
• Vaults are algorithmic trading strategies for yield farming.
• $YFI (wai-fu) is the token for Yearn Finance with a total supply of 30,000. 

Yearn described $YFI as follows:

"In further efforts to give up this control (mostly because we are lazy and don’t want to do it), we have released YFI, a completely valueless 0 supply token. We reiterate, it has 0 financial value. There is no pre-mine, there is no sale, no you cannot buy it, no, it won’t be on uniswap, no, there won’t be an auction. We don’t have any of it."

YFI has gone through an explosive rise since its inception and entry to the market. It has topped out at $40 000, and formed a consolidation pattern between $20 000 and $25 000, with a clear reversal W. Longer outlook shows a price curve heading towards consolidation across 2021, with a possible bottom around $10 000 and rise towards a top around $100 000 or higher in 2023.

Compound provides an infrastructure layer for compound finance. The protocol runs a market that lets users borrow, withdraw, and repay assets from other users who provide liquidity. As the first decentralized protocol of its kind built in a decentralized manner, it has gathered a large following.

UNI is the token behind the Uniswap decentralized exchange.  The platform has become the clear market leader in introducing new projects in the market, which would otherwise commit to an ICO or an IEO. This route offers legitimate projects a cheaper alternative to vetted market entry, but on the other hand low quality projects can enter the market through this exchange in the same manner. Nonetheless, the platform has seen success driven by retail market popularity.

After the initial release, the token pumped, but then went to consolidation. While the data is scarce on the token itself, the trading metrics show continuous growth with a peak around the beginning of September followed with consolidation. This suggests price discovery around the first or second quarter of 2021.

Curve DAO is a decentralized exchange for stablecoins, where participants may provide trading liquidity through the smart contract. The governance token is called CRV. Curve makes a mark by providing exchange services through swaps. This in theory provides competitive fees.

The token has been dumped after listing, and is in the process of bottoming out. This is due to early adopters dumping on the retail market. There's not enough data on the token yet, but as the exchange volume is consolidating, this metric indicates a possible price discovery through the first and second quarters of 2021.

BZX Protocol promises to provide a decentralized market for loans and obligations. The platform provides fixed interest rates for indefinite-term loans with margin trading features, and an expanding selection of products. The native airdrop totaled about a fifth in value compared to Uniswap. The currently running products are Torque Loans for borrowing and lending, and Fulcrum Network for staking the governance token.

Since its introduction to market, the token went through an initial pump with a return to the mean, and is currently in the process of bottoming out. While there's almost no data to provide feedback on the token's potential, the fundamentals seem legitimate, and the contracts have been audited. The platform remains an interesting, high-risk, high-opportunity offering.

Money Legos is an open-source framework that combines DeFi products as modules. The idea behind the innovation is that while there are around 200 listed tools in the DeFi market, the individual tools remain quite isolated on their own. However, combining them into structured products offers unprecedented opportunity with millions of possible combinations. Currently the code supports the following products:

MakerDAO is a decentralized stablecoin platform behind the DAI token standard. The DAI has been integrated by hundreds of apps, as a stablecoin foundation for building decentralized services. As an open standard, the DAI is poised to become a foundation for digital services of the future following stocks, currencies and indices.

Zerion is a DeFi portfolio manager. Portfolio management is considered a utility in the world of cryptocurrency investing. In the future most trades may in fact be trades based on baskets of assets rather than trades on individual tickets.

Totle connects the user to various DEX services. As such, the service acts as a bridge making trading between otherwise separated services seamless, and an intuitive experience.

Conclusion

The DeFi space is in an important development phase, with innovation being the driving factor behind its explosive growth. New ideas define the future of the entire segment. This means that the desired way to be successful in the DeFi market is to take part in projects with the strongest fundamentals early on with relatively low amounts of investment or to invest in a developer team with a sound idea. A sound investor indeed would explore the opportunities provided by the technology, and make sound decisions based on fundamentals at this phase of the market.