The gains in DeFi this season have been nothing short of phenomenal. Decentralised finance (DeFi)— is built on the idea that blockchain technology can be used to recreate traditional financial instruments such as loans and insurance. From Maker to Compound to Aave, DeFi users who are regarded as liquidity providers capitalise on the high-interest rates available to them within these protocols.
Compound, a decentralised money market protocol, started the distribution of its governance token, the COMP, to liquidity providers in June and saw its token appreciate from $92 to $372, an all-time high within a week before it started correcting, sliding to $126 in August.
COMP’s initial appreciation represents just one of the jaw-dropping gains those investing in DeFi tokens post almost on a weekly basis. At the time of writing, the Total Value Locked (TVL) across major DeFi platforms has reached $7 billion. And it doesn’t look like it’s slowing down.
Let’s take a brief look at the major DeFi platforms with the native tokens they employ for protocol governance.
Without a doubt, Maker is one of the most popular DeFi protocols in the market. . The decentralised credit platform supports Dai, another ERC20 token but a stablecoin whose value is pegged to USD based on a basket of other cryptocurrencies. Maker, allows anyone to open a vault to lock-in crypto collateral, and generate Dai against that collateral. As a decentralised protocol, it also allows liquidity providers to vote on governance using the MKR token.
What gives MKR token value is that it’s needed to pay stability fees when using CDPs, like using ETH to pay gas fees when using Ethereum. This burns the MKR, reducing the total supply and making the asset more scarce. Owning MKR gives you access to vote on governance proposals, as well as stability for the Dai stablecoin. See a historical graph of the MKR token year to date from Maker Platform:
Another governance token issued by the algorithmic interest fixing and money market protocol is Compound. The COMP token was released in June for the community to mine. In other words, as a liquidity provider using the various pools on Compound Finance, you earn COMP tokens for providing liquidity to the protocol. You also get to vote on governance proposals using the COMP token. As pointed out earlier, the idea of earning COMP token and not buying it just by providing liquidity sparked a frenzy within the industry. Thus, COMP rose to $372 per token before correction took its course. Below is the chart showing COMP’s movement since its launch:
Aave is also an open-source and non-custodial protocol enabling the creation of money markets by DeFi users. Bringing innovations such as Flash Loans, Credit Delegation, Cold Wallet Voting and more into the DeFi space, Aave continues to demonstrate itself as a formidable money market protocol of the future. A quick look at DeFi Pulse shows Aave’s TVL is rising quickly. TVL on the protocol has crossed the $1 billion milestone signalling huge user interest in the platform.
Also, Aave is about to transition fully to AAVE, its protocol’s governance token. However, LEND, its native token’s price picked up a few months ago after a protracted bear condition and the rally hasn’t stopped since then.
Examining all the graphs above, it is evident that we are experiencing a major DeFi bull run. However, even though there are many other governance tokens like CRV, YFI etc., other ERC20 tokens are also actively being deposited into DeFi protocols. BAT, ZRX, REN, ENJ and MANA, act as collateral for lenders within many of these protocols. Hence, DeFi has unlocked a new use case for these tokens in addition to their original and intended functions. Bear in mind, Swisborg’s CHSB is also an ERC20 token that may soon be applied as collateral when these protocols open it for such use cases.
Sound investment decisions aren't like gambling. Risk in itself is an investment decision based on available data. While many of these projects may appear to be lucrative investment opportunities, you must look beyond the surface as an investor. There are important technical and fundamental metrics to consider.
For fundamental analysis, you should check the team, tokenomics, and business model behind a project. Referencing Aave again, a good look at the team shows a highly experienced team that has continued to birth revolutionary ideas. From flash loans to credit delegation and a whole new suite of offerings, keeping an eye on the project and the LEND token which will soon transition to AAVE governance token is very important. In a nutshell, the team matters greatly before considering investing in any DeFi token.
Another important factor to consider is the price-to-earnings ratio of some of these DeFi tokens. PE ratio means the $x the market is willing to pay for every $1 generated by the company. It helps to know if a DeFi token is already overbought or sold. This is a form of technical analysis and may demand some math skills. In the simplest sense, it calculates how much of a network’s valuation is captured in daily transactions or network use.
Since the cryptocurrency industry is not as mature as regular financial markets, P/E ratio cannot be applied in its literal sense because cryptocurrencies do not have earnings. At best, smart contract platforms like DeFi protocols can be programmed to act in this manner. A substitute to P/E ratio is Willy Woo’s Net Value to Transactions (NVT) ratio originally applied to Bitcoin. It compares a crypto’s network value to how much the network is being used.
NVT Ratio = Market Cap/Volume of On-Chain Transactions over 24hrs
But a simpler resource to track this metric is Token Terminal which is still in beta. You can easily see the NVT ratio for DeFi Tokens listed. The higher the value, the more promising it looks.
As I pointed out earlier, most DeFi tokens serve important utility within the DeFi-verse. They can be staked in liquidity pools by lenders to start unlocking interests which compound over time. These tokens can be unlocked anytime without permission or penalty. This is one of the signature benefits of DeFi.
Additionally, DeFi protocol users tend to engage in a new practice called yield farming. This is the practice of constantly moving tokens around in search of high interest yielding positions. And perhaps the most important function of these tokens is the governance voting powers it affords holders. Holders of MKR, COMP, YFI, etc., are able to vote on protocol improvements because they hold protocol native tokens.
The risks associated with investment in DeFi tokens revolve principally around smart contract failures. Because most DeFi protocols are built on top of similar smart contract technology stacks, failure in one may eventually spell risk for others.
And, just like in the ICO days, scam DeFi tokens are being created on a daily basis and added to permissionless DEXes like Uniswap. The DEX allows anyone to list tokens without any ID verification. Unsuspecting investors may fall victim to these which are nothing but the classic pump and dump schemes.
Also, yield farming has been criticised for being an unsustainable model that will come crashing down. This is due to its fast pace and the high interest rates liquidity miners seek. . DeFi users in search of gains pool their funds, most of the time, just to attract more gains in the form of tokens distributed by protocols when users provide liquidity. These tokens are distributed in the form of governance tokens which earns DeFi users a chance to vote on improvement proposals. Hardcore yield farmers hardly stake their governance tokens for improvement proposals. Rather they flip it for gains at any sign of price appreciation. This is one of the reasons yield farming has attracted huge criticisms even from DeFi OGs. More so, it's a practice in which only highly experienced arbitrageurs should engage..
More than 95% of existing DeFi tokens are ERC20 tokens. Ethereum tokens with high liquidity are constantly being implemented into DeFi protocols as collaterals.This brings me to SwissBorg’s native token: the CHSB.
CHSB is a multi-utility token with a range of utilities, including staking, which allows users to access fees as los as 0% in the Wealth App; a protect and burn program to protect the price of the token in bearish markets through limiting supply; voting rights in Swissborg referendums; and the opportunity to earn rewards through the SwissBorg DAO.
So the opportunity here is in the possible integration of CHSB among new DeFi protocols. If it gets integrated among DeFi protocols, then we are certain there will be an added utility to CHSB. And with added utility comes reduced volatility just as we see in similar utility token’s such as the BNB.
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