I probably don’t need to introduce you to Decentralized Finance (DeFi) or Open Finance. DeFi is here to change traditional finance, creating an open ecosystem of financial products. It’s here to stay.
Blockchain is the underlying foundation for DeFi. By nature, blockchain has always been dominated by its monetary aspects. Therefore, it’s no surprise many DeFi projects have sprouted throughout recent years. It’s believed 2019 was an amazing year for decentralized finance. However, I dare to argue that 2020 will become an even better year, bringing more advanced DeFi products to the market such as crypto insurance.
This article explores the power of decentralized finance through a curated list of amazing projects that are at the forefront of the DeFi space. The projects range from crypto index funds, to crypto insurance for hacks like the DAO, or even automated asset management strategies. Everything you need for building a new, open financial system. Let’s explore!
YouHodler
What is YouHodler? YouHodler is focused on crypto-based lending. However, a more interesting feature that explores the limits of DeFi is Multi HODL. This feature uses the power of the Barbell Strategy where 20% of your funds are invested in high-risk assets and 80% of your funds in low-risk assets. However, this is not a fixed percentage. Users are free to change this balance to any risk appetite they wish such as a 90/10 or 60/40 balance.
YouHodler applied this strategy by allowing you to deposit stablecoins into a savings account which generates a guaranteed annual profit of 12% without any risks. However, Multi HODL defines that you should invest 20% of your funds into small, speculative bets. Here, your money is exposed to a maximum risk of 50%. This means you can lose only 10% of your funds which is compensated by a guaranteed 12% annual return from your savings account on 80% of your money.
In other words, worst case scenario, this strategy brings you to a break-even position after a year. Best case, you end up with a 150% profit on your 20% high-risk investment combined with the 12% annual return on the savings account. For this reason, you should start to like the DeFi space.
PieDAO - Index Mutual Funds
What is PieDAO? PieDAO was born with the idea to port the passive index approach to the world of crypto. In traditional finance, index mutual funds have proven to be extremely successful for the simple reason that they spread risk. These risks are spread as the index provides access to a basket of cryptocurrencies to diversify your portfolio.
PieDAO wants to provide users with the ability to participate in the creation of tokenized portfolios. Like this, investors are exposed to many underlying crypto or traditional assets. Such an index of several crypto coins is called a PIE.
Furthermore, risk can be further reduced by bundling multiple PIEs to end up with a similar product as mutual index funds. Such a diversified PIE fund can consist of many PIEs that represent different types of assets such as traditional assets, crypto assets, or cash.
Opyn - Securing Decentralized Finance
What is Opyn? Opyn is one of the few products that provide insurance for DeFi users. In other words, Opyn provides the protection DeFi users are looking for. DeFi is an amazing emerging financial system, however, there are no guarantees. Many new DeFi apps may present risks to the users investing money into those platforms. It’s only a matter of time before we see another DAO hack.
Opyn allows users to protect themselves to both technical and financial risks. For example, hacks, bank runs, or even administrative key compromises. If this happens, you can create a claim for payout to receive your DeFi deposit. This is one of the building bricks to make DeFi a more stable environment with increased trust for regular investors.
Uniswap - Automated Liquidity Provisioning
What is Uniswap? Uniswap allows anyone with some spare cash (liquidity providers) to participate in Open Finance. Uniswap allows liquidity providers to provide liquidity to exchanges or decentralized finance applications in return for a small fee. This is a very wanted feature as many exchanges and margin lending products have trouble finding liquidity for their application.
Uniswap solves this problem by providing one big liquidity pool to many applications through their SDK and smart contracts.
Set Protocol - Automated Asset Management Strategies
What is Set Protocol? Set Protocol is a non-custodial protocol that allows users to create a basket, also called Set, of underlying assets, similar to PieDAOs offering. In addition, the Set Protocol lets you set management rules for your basket of underlying assets such as how the basket should be rebalanced and when this should happen. Therefore, we can say the Set Protocol allows users to define strategies in the smart contract.
Currently, two types of sets can be created:
- Social trading which allows humans to execute strategies.
- Hard-coded rules that define how the contract should trade.
To give an example, there is a LINK RSI Set that automatically rebalances into USDC when the RSI crosses below 45. If the RSI crosses again above 45, the contract will convert the USDC again back to the LINK token. Pretty amazing!
Melon Protocol - Asset Management Protocol
What is Melon Protocol? The Melon Protocol is developed to allow participants to set up, manage, and invest in digital assets. This can be any type of digital assets such as PDFs, images, videos, stock photos, or audio files. Also, the Melon Protocol allows developers to define rules in order to create management strategies for your digital assets.
The goal of Melon Protocol is to tokenize digital assets and minimize the need for trust. Also, it makes the creation of funds on the blockchain much simpler and inexpensive. By nature, Melon allows anyone to invest in other funds without having to trust the fund manager managing this fund as the rules have been defined on-chain and can’t be changed.
Synthetix - Track Value of Assets in the Real World
What is Synthetix? With Synthetix, you can create on-chain Synths which represent the value of assets in the real world. For example, Synthetix offers sUSD which tracks the price of USD in the real world. Also, you can trade sXAU which similarly tracks the price of gold.
The idea here is that you can simply trade an asset without actually holding it. This is a very appealing concept for traders who are interested in trading metals to give an example. Often, heavy costs are involved with buying and storing metals such as gold and silver. Therefore, this is an appealing low-cost way to trade those popular assets.
Augur - Crowd Wisdom
What is Augur? Augur is a prediction market platform that rewards a user for correctly predicting the future. They allow participants to buy and sell shares in the outcome of an event. The price of an event share is set by the probability of an event actually occurring. For example, the odds for Bitcoin to hit $10.000 within a month are odd. This means that a share on either side costs $0.50 as the total cost of a share is $1. If you guess it correctly, you’ll receive $1 in return.
In other words, Augur is based on the scientific principle known as crowd wisdom.
BzeroX (bZx) Protocol - Decentralized Lending and Margin Trading
What is BzeroX? bZx is a protocol that offers decentralized lending and margin trading. The fact that bZx is a protocol means that it can be integrated into any project or exchange so they can also reap the benefits of decentralized lending or margin trading.
The protocol itself uses peer-to-peer margin lending and shorting. To provide liquidity, token holders are encouraged to hold tokens by providing them with rewards. The protocol itself does not collect fees, however, a 10% fee is collected of the earned interest to fund maintenance of an insurance fund for lenders. Aside from this, the protocol itself is very similar to the offering of the MAKER protocol.
dYdX - Crypto Derivatives
What is dYdX? dYdX relies on a liquidity pool with interest rates defined by algorithms. It doesn’t engage in p2p loans as they do not always guarantee liquidity, which is a key element for margin traders that want to quickly open a position.
To expand on this, dYdX is focused on the specific use-case of margin trading. dYdX allows users to open margin positions with a leverage of up to 4x. A trader can send money to a dYdX smart contract that sells the deposit and holds the money in the contract. Once the trader decides to close the margin position, it will buy back the lent amount. Therefore, the user receives its initial deposit back with potential profits if the trade was successful.
To finish off the article, here’s a quote about DeFi by Philipp Sandner.
“An ecosystem comprised of applications built on top of public distributed ledgers, for the facilitation of permissionless financial services.”