DeFi Happy Hour 🍺 ⧫
Recently I had the chance to give a few friends an intro to DeFi. We got a couple of beers and jumped on Google Meets — we called it DeFi Happy hour.
They found it useful, so I thought I would share it with others, in the hope that it helps you too:
For those that dont know, I am big on Ethereum, and it’s been a major part of my life including why I got into the startup world. I’ve written a few Ethereum and blockchain things here:
What the f*** is blockchain anyways?
Look, I get it. So many crazy terms are thrown in your face every single day.
The era of fungibility
There are a number of major players today — including startups, incumbents, companies and even nations — looking to…
What ethereum means to me
I was born and raised into finance. What I mean by this, is not that my family was in finance, but rather that from a…
Below is an overview of DeFi and the various applications and actual apps used today:
So what is Decentralized Finance or “Defi” ?
DeFi is a form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments. Instead it relies on a decentralized platform using distributed ledger technology called the blockchain.
What does that actually mean ?
This is best highlighted with a simple example.
We trade securities on exchanges today, which act as an intermediary. When you buy a stock or ETF today, its held with a custodian, and trades on a exchange which acts as the clearinghouse.
Today we can do that P2P with apps like Radar Relay and others on the Ethereum network, where we natively own our asset that we are trading, and exchange it with another person or entity with no intermediary (except for a smart contract).This use case is a Decentralized Exchange (more on the different use cases later)
I am a bit of an Ethereum maxi I guess, so sometimes I have a couple issues with the latest and greatest of blockchains, which pop up every other day.
It’s easy enough to fork ethereum, bitcoin and any other chain and get something started, but the key to a blockchains success is its community, network and usage. This is why BTC and ETH are so strong in the market today.
For DeFi, the main metric we care about is Total Value Locked — known as TVL.TVL is essentially how much value exists within DeFi applications. When you think about stablecoins, decentralized lending application, exchanges etc the assets are within smart contracts (escrow, tokens and other mechanisms) — and so this is the true metric of DeFi’s usage.
No one cares about a exchange app with no liquidity, or a lending application with no loans, or a stable coin with low liquidity.The TVL across most relevant blockchains in DeFi is about $160B. Ethereum makes up about $135B of this, everything else is really irrelevant for real use IMO — but of course they are still growing!
Check out more stats on places like https://dappradar.com/defi
DeFi use cases and actual applications
First of all, do yourself a favour and download Metamask — its a chrome extension that is your own Ethereum wallet and pretty much the gateway into this space. Get that at metamask.io. So many people talk, and talk about this industry, write articles about the future of XYZ, but seriously — this technology exists today, right now — go play with it!!
Here are the primary use cases and applications of DeFi from my perspective — Ill detail each one in detail. I’ve included some of the main Dapps used in each one, which you can access with metamask should you choose to.
- Loans — Celsius, DAI
- Flash Loans i.e Repo = Aave https://app.defisaver.com/aave/manage
- https://matcha.xyz/ — DEX aggregator
- https://uniswap.org/ — different model for pricing — automated market maker
- Token Sets — www.tokensets.com
- Thether (USDT)
Its getting said more and more frequently, the different yields available on DeFi applications — especially with the low interest rate (and some negative) environment that we have in the world today.Why is this ?
Celcius is one of my favourite apps, and they offer interest on funds — and then lends them out,. They are not technically decentralized (CeFi) but use DeFi under the hood.Their rates are below.
10% or so on USDC and other stablcoins, thats pretty damn good! But think about it, these are secured, over collateralized lending pools (depositors deposit funds, Celcius lends these out to corps, individuals and repo like market operations). If you tried to get an unsecured loan at a bank today, you are definitely paying 5–15%, its not actually that good. These applications can make quite a good spread lending out as is. The lenders are typically using other cryptocurrencies, not stable coins to borrow against.
You are the bank here. Your deposits are capturing the full spread. Not depositing at a financial institution which pays you 0.5% on your savings account but then lends out at 10–20% to other borrowers.
Another reason interest rates are high is the demand for these assets for trading, leverage and other operations from firms in the space.
Aave is another Dapp thats getting pretty hot these days — screenshot below. Their model is a bit different — there is about $27B in their protocol at the moment (its on Ethereum).
Aave has a unique demand and supply curve — that is totally transparent and determines the market prices for the loans/deposits (which is similar to uniswap which we will talk about soon).You can check out their interest rate model here: https://docs.google.com/spreadsheets/d/1TY_ai7vapncY66HUdkFp8G8W7owIQOS2lqTsdvqm6PY/edit?usp=sharing
They also have a rating mechanism for the different assets available on their website.
Celcius rates + Aave dashboard:
I love the decentralized exchange use case. I’m a markets guy, so P2P exchange of any type of represented asset — its just so cool.
Theres lots of different types, primarily algo driven or direct P2P. These days you get some great apps like https://matcha.xyz/ which acts as an aggregator of decentralized exchanges, keeping track of the best prices across all of them.
One of the coolest, and most used projects in the DEX space today is Uniswap. https://uniswap.org/ The innovative thing about uniswap is that it is a automated market maker — meaning there is no bid ask spread like a regular exchange. Instead, it works of a demand/supply utility curve, where each asset has a curve, and as liquidity is added into and out of these pairs, the price gets driven up and down.If you look at most volume of tokens traded, you will see this is one of the most popular DEXsHeres a screenshot of matcha, uniswap and an example of a uniswap demand curve.
As a finance guy — I love the securitization of stuff.Baskets are essentially the ability to create your own vehicles, like an ETF. All done with smart contracts. Choose your assets, symbol and then actually deploy and publish your basket to the world.
This is essentially an ETF that can trade, and be invested in by others — as people deposit funds it creates new units and buys the underlying and vice versa.Can you imagine what it costs to launch an ETF today on a traditional exchange and go through the creation and redemption process ?
Rather than talk, heres a video of me creating a basket on Token sets https://www.tokensets.com/explore
Last but not least…
Many people are getting excited about stablecoins, and for good reason. At the moment, one of the key use cases is the onramp into the crypto world, and getting fiat dollars into crypto natives that can be traded i.e USDC is a ERC-20 Ethereum token.
At its most basic level, stablecoins are a basket of real currency that are translated 1:1. USDC as an example, holds billions of USD $ in custodial accounts, and then issues tokens on various blockchains based on that.
2$ in the account = 2 USDC tokens on the Ethereum blockchain (check it out here https://etherscan.io/token/0xa0b86991c6218b36c1d19d4a2e9eb0ce3606eb48 ).
But theres actually 3 main flavours of stable coins:
This is basically the use case above (USDC). Where many differ is on the trust and liquidity. USDC and the Gemini dollar are the most well known, because of their transparent reserves to back the actual creation of tokens.
USDT — Tether — is one of the biggest, but has ongoing regulatory issues and there is a big question mark on whether they actually have sufficient dollars backing it — which actually presents a large systemic risk for the entire crypto ecosystem.
These are the key risks with stable-coins, along with the fact that they are not considered regulated currency and all of what that entails — so it can be a buyer beware situation. Many things are being done to address this.There is also stable versions of precious metals out e.g gold, silver etc
DAI is probably the most famous one here. 1 DAI is roughly $1 — but theres a difference here. It value is determined by the community (who votes on this with their MakerDao governance token) and they set the collateral needed to hold the peg at $1. This has been remarkably consistent, and represents a new way of thinking about stablecoins!
The key here is that users over-collateralize their crypto deposits to then make DAI, the collateralization amount is dynamically determined to hold the stability
MakerDAO | An Unbiased Global Financial System
MakerDAO enables the generation of Dai, the world's first unbiased currency and leading decentralized stablecoin.
Wont dive deep here — but check out stuff like https://www.basis.io/(actually they have folded it looks like — its a hard thing!). Terra is another one doings some innovative things in the space.
2 last comments.
First of all Liquidity:
$3B USDC on Solana, $12M on Stellar — $35 Billion on Ethereum. That tells you all you need to know about what is even close to feasible at the moment. A million blockchains, a million hyped projects — just look at liquidity and community to determine whats real and whats noise.
Second — Gas fees:
As Ethereum moves top ETH2 — which is proof of stake (not requiring hardware miners) — there will be a big drop in gas fees (cost to use the network) and rise in transaction capabilities. At the moment, gas fees are super high, which can be quite the barrier to adoption and real world use cases.Current Ethereum gas fees and what that translates to: