INVESTMENT THESIS: DeFi
What is DeFi?
Decentralized finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. The system removes the control banks and institutions have on money, financial products, and financial services.
To understand Decentralized Finance it is necessary to understand Centralized Finance aka Traditional Financial system to get a hold of DeFi.
Centralized Finance
In centralized finance, money is held by banks, corporation whose main goal is to make money. The traditional financial system is full of third parties who facilitate money movement between parties where each parties charges some amount of money.
When you have to take a loan, one has to wait for longer time and has to pay interest+ Processing Fees in order to acquire loan. And on tops of that Banks are closed on many Public Holidays and and Weekends and one faces difficulties while one is travelling.
DeFi’s main two goals are reduce transaction time and increase access to financial services.
Decentralized Finance
DeFi consists of applications and peer-to-peer protocols developed on decentralized blockchain networks that require no access rights for easy lending, borrowing, or trading of financial tools.
DeFi applications today are built using the Ethereum network, but many alternative public networks are emerging that deliver superior speed, scalability, security, and lower costs.
Peer-to-peer lending under DeFi doesn’t mean there won’t be any interest and fees. However, it does mean that you’ll have many more options since the lender can be anywhere in the world.
Interested in investing in DeFi?
Let’s see how portfolio can be divided and what all coins are hot!
Before talking about investment strategies there are few metrics to know about DeFi Coins.
1. Circulating Supply/Total Supply
Checking number of coins in the market currently available and total number of coins there will be, is very important. It can tell the position of getting dumped vs getting supply shock of the coin.
2. Total Value Locked (TVL): The Decentralized Finance works on the principle of borrowing and deposits. When users lend their money into Liquidity Pools , they get interest+ % of transaction fees. The money in Liquidity Pools is then used to lend at particular interest.
The more the money locked in the smart contract, the more trust people have in the protocol.
3. Ratio of Market Cap/TVL:
Market Cap is defined as Value of the Coin*Circulating Supply.
This ratio is very important to check time to time as it helps to know whether the coin is Undervalued or Overvalued.
4. Revenue of DeFi: It’s very important to clear the noise, is the protocol actually making money?
By keeping track on revenues, one can see Balancer is gaining traction!
5. Token Economics: The tokens which were acquired by early investors, teams, developers, advisors are locked for certain time period. Checking out supply Schedule is important to know when the vesting period is ending and token are getting unlocked. Those unlocking coins usually creates over supply in the market and token losses it’s value.
Which all DeFi to invest in?
When it comes to investment, I usually follow models which comprises of 3 options. These option range from Safest, Modest and aggressive.
Option 1: Safest, when there’s a bear market.
Option 2: Moderate, When market is short term bullish.
Option 3: Aggressive, When Bull Market trend is clear and everything is gaining traction.
Again it depends on individual risk appetite.
Top 3 Coins to invest in DeFi:
1. AAVE
Aave is an open-source and non-custodial protocol to earn interest on deposits and borrow assets with a variable or stable interest rate. It also enables ultra-short duration, uncollateralized flash loans designed to be integrated into other products and services.
Current Market Price: $179.22
Circulating Supply(CT): 13,680,182
Total Supply(TS):16,000,000
Ratio: CS/TS= 0.85 (85% of coins are already in market!)
Market Cap: $2,450,152,295
Total Value Locked: $22.6b
Market CAP/TVL Ratio: 0.11 (Heavily Undervalued)
Innovation:
Aave very recently launched its v3 iteration on March 16. The new platform has been deployed to the Fantom, Avalanche, and Harmony networks, and Ethereum’s leading L2s Arbitrum, Optimism, and Polygon. (This showcase that developer community is very active and bringing innovations)
Top Investors:
Technical Analysis:
Technically looks like AAVE is at the end of corrective motive waves and carries huge potential upside in mid-term.
2. Bal (Balancer)
Balancer is a non-custodial automated portfolio manager, liquidity provider, and price sensor. The big idea of Balancer is, it is a new financial primitive that combines asset management and decentralized exchange.
Circulating Supply(CT): 10,799,858
Total Supply(TS): 48,994,913
Ratio: CS/TS=0.22
Market Cap: $190,710,530
Total Value Locked (TVL): $3,531,880,808
Market Cap / TVL Ratio= 0.05 (HIGHLY UNDERVALUED)
Revenue: Balancer achieved the highest revenue among major DeFi this month
Top Investors:
Technical Analysis:
Bal looks like it took a major support from levels of Early 2021 and on higher time frame, it looks extremely bullish.
3. CRV (Curve)
Curve Finance is a decentralized exchange optimized for low slippage swaps between stablecoins or similar assets that peg to the same value (e.g. wBTC/renBTC). The protocol employs a Automated Market Maker that was built specifically to give DeFi users low slippage and liquidity providers steady fee revenue.
Circulating Supply: 391,958,099
Total Supply: 1,724,476,387
Market Cap: $960,141,476
Total Value Locked (TVL): $20,622,478,642
Market Cap/TVL Ratio: 0.05 (Highly Undervalued)
Innovation: Curve is integrated to many Blockchain
Top Investors:
How much to invest in DeFi?
To invest in DeFi, let’s take a look into how overall market is doing:
When market was in uptrend: 24th March-31st March’22
When markets was in corrective mode: 1st April to 7th April
We can say that, worst performing sector was Gaming.
For DeFi, let’s say if your invested $100, it would have turned to $113.9 and then dipped to $103.65. Gaining 3.5% in span of 2 weeks. Wooh!!
Much Awaited!
PORTFOLIO DISTRIBUTION
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