The Proliferation of DeFi (Part 2) – Fitzner Blockchain Consulting
In our last article earlier this week, we touched some of the prominent decentralized financial (DeFi) applications within the exchange and lending space. In summary, DeFi applications such as Maker and Uniswap leverage decentralized, permissionless networks to provide any individual with an opportunity to lend, borrow or exchange digital assets.
Over the past few months, DeFi has grown increasingly more complex as new applications are pushing the envelope on Ethereum’s programmable SoV (store of value) narrative. In this particular article, we’ll be focusing on a few more abstract, yet extremely thought-provoking applications surrounding derivatives and new forms of tokenized assets.
dYdX provides a mechanism to trade derivatives on Ethereum. Margin trading, derivatives and other financial products are crucial for the maturity of DeFi as access to these powerful financial products is currently limited across the globe. Investors can now leverage dYdX to access new assets to expand their ability to deploy new trading strategies, take on additional risk through margin trading, and manage risk through lending, ultimately leading to more desirable capital allocations.
In May 2019, dYdX released an open source protocol called Solo which allows users to lend, borrow, or margin trade ETH, Dai, and USDC along with future support other popular Ethereum-based assets. Similar to Dharma and Uniswap, dYdX is untokenized and does not have a native token.
Since the release of Solo in May, dYdX has experienced explosive success with TVL increasing from $1.1M to a peak of $8.9M (+709%) in just the span of two months.
Another derivatives platform on Ethereum, Synthetix has created Synths which are on-chain synthetic assets which track the value of real world assets. As of writing, Synthetix supports over 20 Synths which include a wide-range of assets including gold, stocks, crypto, and other fiat currencies such as USD, GBP and KRW to name a few. In addition, there are also Synths such as iBTC, iETH, and iBNB which inversely track the price of these assets through the use of oracles. As Synthetix continues to grow, we will likely see more and more assets including major public equities such as TSLA or AAPL in the near future.
In addition to these assets, there is also a native ERC20 token called SNX. In order to mint new Synths, SNX must be locked as collateral where transaction fees from these Synths go to SNX holders and Synth minters. Synthetix is one of the fewer tokenized DeFi projects and SNX has performed rather well in parallel with TVL.
Set Protocol is an emerging platform to create and manage baskets of tokenized assets. A Set is an ERC20 token that represents fully collateralized portfolios of other ERC20 tokens. This could include WBTC, WETH, and DAI among others. An interesting aspect about Sets is that they are automatically rebalance, making any portfolio strategy accessible simply by holding a single token. Users who create Sets are responsible for custody and collateralization of the assets in the portfolio. As of writing, a few Sets already exist and are in circulation:
- Range Bound Sets are for investors who are neither bearish nor bullish on the underlying asset. These Sets strategically automates buying dips during price drops and selling spikes during price increases in an attempt to seek alpha by capturing local minima and maxima. This is done by buying the targeted crypto asset when prices are down and selling into a stable asset when prices are up.
- Buy and Hold Sets allow users to purchase an automatically rebalanced weighted portfolio of x% ETH and y% BTC to maintain a fixed portfolio and limit over exposure. It’s safe to assume that as the protocol evolves, more assets will be added to these portfolios.
All in all, Set Protocol will likely play an important role in the DeFi space as more and more tokenized assets becoming a reality. Users will ultimately be able to hold a single token while gaining exposure to a multitude of assets along with the added comfort of knowing their portfolio will always maintain the same exposure and risk at any given time.
After its launch a few months ago, WBTC is at the forefront of garnering some massive attention within the crypto community. WBTC is wrapped Bitcoin or in other words, a fully collateralized ERC20 token of BTC. WBTC brings in a whole new paradigm of liquidity and accessibility by allowing Bitcoin to act as a collateralized asset in DeFi protocols and applications.
The WBTC ecosystem is largely managed by a DAO consisting of a few entities including custodians and merchants. Custodians such as Bitgo are responsible for providing institutional-grade custody of the underlying BTC while merchants are responsible for minting and burning WBTC. Notable entities within this DAO include: Dharma, OmiseGo, Kyber, Maker, Compound and others.
To swap, a user must complete basic KYC/AML with a verified merchant, who supplies the user’s BTC to the custodian. The custodian then mints an equal amount of WBTC and sends it to the user. It goes without saying that the reverse is also possible as users can return WBTC for BTC. More importantly, users are able to verify that WBTC is fully-collateralized via on-chain proof of reserves.
Given that it was simply launched back in April, this is still fairly early for WBTC but the growth has been rather profound. Since its inception, WBTC has grown to $6M in TVL with a large spike in growth occurring towards the latter half of June.
The proliferation of Decentralized Finance has been rather exciting, especially throughout the first half of 2019. Multiple protocols and applications have garnered a relatively significant amount of traction within the space as total value locked continues to increase.
More importantly, all of this growth that is happening in DeFi is happening on Ethereum.
With the narrative that ETH is becoming a programmable store of value, Ethereum is well on track to find it’s next niche that will fuel the next bull run.
Rather than an ICO boom being the driver behind another speculative bull run, DeFi could likely take the wheel and provide global users with tangible value through the notion of globally accessible banking alternatives. This is nothing to take lightly and we at Fitzner Blockchain are excited to continue to watch this growth in the coming months and years.
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