Let’s accurately evaluate the main projects and platforms in the DeFi sector, the article originally published in Cointelegraph. The article is really very rich in information, thus giving us the most important and relevant of the main DeFi platforms on the market. 2020 is really being the year for decentralized finance.
The ecosystem of decentralized finance (DeFi for its acronym in English) has had a significant increase in this 2020, its market capitalization increased to US$ 11 billion dollars and the money locked in its smart contracts as well, with 6.1 million in Ether (ETH), as reported by the DeFi Pulse site.
If we review 2019, we see that 1 in 57 ETH was locked in DeFi; As of May of this year, 1 in 42 ETH and at the time of writing, 1 in 25 ETH is blocked.
Considering that the data in the previous Figure are correct, it is possible to see that there is an avid interest in the ecosystem to create decentralized products. This is consistent with the impressive number of projects that arise each week and show us a typical growth.
Despite the growth, within the ecosystem, it seems that the diffusion and familiarization with the DeFi ecosystem, its platforms and products is still complex to understand. Therefore, in this article, I will make a review and basic description of the main decentralized platforms, taking into consideration the position they occupy based on the capitalization volumes reported by CoinMaketCap.
ChainLink is a decentralized network that, said by the company, offers security in smart contracts. In theory, the network offers tools that analyze the possible flaws that could exist in a smart contract and eliminate them.
The company indicates that there is a problem between the transaction data in a blockchain and external applications, hence one of the main values that stand out is that it allows the connectivity of smart contracts with other resources, for example, the interfaces of application programming (API for its acronym in English).
In general, it is a solution that is focused on developers who have problems when they want to implement their smart contracts with other applications. The company has its own token, LINK, which at the time of this writing was in the first position of the list in CoinMakertCap with a capitalization volume of around US$ 3.3 billion dollars.
Although the company has indicated that its system is highly secure and reliable, they have received some criticism, specifically from an alternative investment fund (Zeus Capital) who affirm in an extensive report (published in July 2020), that the founders they maintain an important reserve of their token (LINK) with the aim of trading it in the secondary market (OTC) apparently incurring manipulation practices and, using 3 valuation methods: absolute valuation, relative valuation, and breakeven point.
The first model MV = PQ (Fisher’s model), evaluates the accumulated economic value which is added by the project and the cost of capital of the token holders and finds that, based on the assumptions of the model, the fair value of LINK is 0.155 USD / LINK, which implies a disadvantage of 98% of the price reported in the market.
In the second method, relative valuation, they use the current market rates for Proof-of-Stake (PoS) projects and compare them with what Chainlink needs to justify its current valuation; that is, to produce a LINK, it would be equivalent to around 10.1 USD per transaction and considering that a transaction is equivalent to 0.5 USD, then the fair value of LINK would be stipulated at 0.07 USD / LINK which again indicates that it is inconsistent with the market price at At the time of writing this note, it is around 13.24 USD (the development of the calculations can be found in the cited document, pp. 53).
They also indicate that ChainLink would require an additional 219 customers to satisfy its current valuation (which is 20 times more than what the company has disclosed). Finally, for the third model, breakeven point, the cost to operate a node is taken which is 0.158 USD per day (120 watts/hr and a price of 0.055 KWh), with an estimated daily income of 0.554 USD for the operator of a node and find that if a node gave 150 data retrievals per day and the cost of LINK was $ 0.1667 per request, then the default price would be set at $ 0.044 per LINK.
Based on the valuation models used in the said study and with the “generous” (sic) assumptions they assign, the conclusion they reach is that LINK is overvalued and that, in the short or medium term, it will become a “fiasco” (sic). On the other hand, they also accuse them that their solution would cause centralization of smart contracts and even classify it as the “sole guardian of the ecosystem” (sic) that would go against the decentralization and independence of the network.
In summary, they indicate that the characteristics of their cryptocurrency (LINK), the absence of a decentralized ecosystem and the publications of the US Securities Commission (SEC) could lead the company and investors to great risks and, they do not hesitate to affirm that the company and the investors in the short term could be accused of negotiating with securities and even receive court orders and possible controversies for the return of profits.
No wonder all that Russian roulette can go against investors. Until the date this article was studied, Chainlink cost approximately USD 19.26, and the estimate of many is at least to value very close to USD 299.45 and at the end of the Bullrun that is starting in the market. From our point of view, this is the new bubble that any moment can explode.
Synthetix is a decentralized platform which was previously known as Havven that launched an ICO in 2018 through an ERC-20 token. The initial goal was to create a decentralized platform to issue stablecoins using their token as collateral.
Over time, they found that in the DeFi ecosystem they could create other products so they renewed the concept of Havven to what is known today as Synthetix.
Currently, it offers on its platform, tokens known as synthetic assets or “Synths”, which provide exposure to other assets such as gold, bitcoin, US dollars, and on its site they have announced that a Synth of TESLA and AAPL built in the Ethereum blockchain.
To give an example, they have a crypto asset called Bitcoin Synthetix (sBTC), which was launched in 2019 and is considered the first synthetic bitcoin, that is, it is collateralized with the price of BTC in dollars and provides access to value of Bitcoin without having to own a Bitcoin wallet. The fact that it is on the Ethereum network allows it to interact with other products based on that network.
In addition, they have their exchange platform to carry out operations with their listed Synths where synthesizers can be exchanged without counterpart; They have a decentralized application (dApp) for those who own the native token (SNX).
The company indicates that those who acquire SNX receive two types of returns: the first, which is obtained through the market based on supply and demand and, the second, through the operations between the Synths on the Synthetix Exchange.
Regarding the risks in Synthetix, there is volatility at the time of payment of the investor’s debt to unlock the invested SNX; that is, an SNX investor creates a debt which is priced in sUSD and can vary depending on the profits or losses made by other Synths holders. In addition to volatility, there are cyber attacks, let’s not forget that, in June 2019, the platform suffered an attack where around 37 million sETH were lost.
Uniswap is an Ethereum-based token-focused platform that enables the exchange of ERC-20 or Ether. Uniswap has stood out, within the community, for being a decentralized platform that provides liquidity and creates markets automatically.
It is worth reviewing some points and the reasons why it is considered like this:
- Each token has a smart contract and, eventually, it can have its group that gives it liquidity.
- Any token can be included in Uniswap, it does not require the platform to endorse its incorporation.
- A tool for community trading tokens with no platform fees or middlemen.
It uses mathematical programming, tokens, and ETH to set prices and execute trades, unlike centralized exchanges that use buyers and sellers.
With Uniswap, you can add an ERC-20 token which is funded with Ether. Anyone with an ERC20 could do it, and at Uniswap they would issue a smart contract to create a liquidity pool. For example, if we were to enter 10 units of the XYZ token on the platform, there would be a counterpart with 10 ETH.
In general, Uniswap is one of the most prominent DeFi products for the solutions it offers to tokens developed in Ethereum that cannot find liquidity in centralized markets. This is beneficial for projects that face the refusal of centralized exchanges (CEX); However, it also lends itself to, once again, those who seek to carry out fraud and scams.
For example, in April of this year, a hacker attacked one of the groups on the platform stealing more than $ 300,000 in ETH. Finally, regarding Uniswap, it is worth noting that, apparently, the company promises to continue expanding since, from June to July, its liquidity increased from $ 37.5 million to $ 86.6 million, the capitalization volume went from $ 6.2 million to $ 43.7 million and Perhaps the most important news was that they received $ 11 million for various investment funds of Series A led by Andreessen Horowitz.
dYdX is a decentralized platform based on Ethereum which allows users to request loans and also execute positions on the future prices of the most popular crypto assets.
To start using the platform, it is required to have an amount of Ether (which is considered necessary to start operating a product of the platform, which must be stored in a compatible digital wallet, for example MetaMask.
One of the goals of dYdX is to bring the tools of traditional financial markets to the cryptocurrency ecosystem. The dYdX proposal not only focuses on offering loans but also seeks to develop derivative products that exist in traditional financial markets. Some features are:
- It allows trading on the margins in a decentralized way; that is, it is a form of negotiation where a certain amount of money is requested to make a “bet” (it is also known as financial leverage).
- It is a platform available to any user.
- Digital assets are managed in smart contracts.
- The funds deposited on the platform are generated and distributed.
One of the attractions of the platform is that it allows decentralized trading with low risk, for example, the trading of a certain asset can be up to 5x (5 times more than what has been placed in order), which could be considered low when compared to other platforms like BitMex which allows leverage up to 100X.
Like other platforms, dXdY has shown significant growth, in 2019 trading volumes were registered around $ 30 million dollars and by April, more than $ 500 million in ETH had been traded through the placement of $ 1,000 million dollars in credits. Despite this, they have not been saved from frauds around them, for example, last July it was reported that fake dYdX tokens had been created, with the aim of selling them on Uniswap.
We are also a platform that offers credits and the third-largest credit platform for a long time. It was created in 2017 in Switzerland and launched an ICO from which I could claim 18 million dollars.
Initially, it was known that the EthLend project and services were offered credits and custody for investors. It focuses specifically on a type of product that includes flash loan credits, aimed at developers, which basically consist of asking for a certain amount of cryptocurrencies with a specific purpose to return them immediately after interest. Also with other products such as Tokens and recently Delegación de Crédito (CD for its acronyms in English). Some of the main features of the sound platform:
- It has integration with Uniswap and Set Market.
- Credits flash loans no guarantee required.
- Delegation of Credit is a simple transaction in which a depositor of the Aave Protocol delegates a line of credit to someone who trusts.
- There are credits from where the user can grant a security interest through a legal claim.
- Commission for a flash credit is 0.09% of the total credit.
- Funds are backed by a smart contract without the custody that is on the Ethereum blockchain.
Regarding the Delegation of Credit, it is necessary to comment that any user who has tokens on their bill can delegate their credit through the implementation of a bvv within the same platform.
With regard to security, it seems to be one of the priorities for Aave that I suggest that, in a recurring manner, audit and improve their protocols and updates, they are available every five days on your blog. It is indicated that, in the event that there is a problem, Aave maintains the property of the protocol for the purpose of keeping itself safe.
As of 2020, Aave has registered 158.8 million dollars which are blocked in smart contracts and are in the current position of the CoinMarket Cap list with a capitalization volume of $ 597,567,496 million dollars. Additionally, I recently received an investment of around 4.5 million dollars from the ParaFi fund.
Derived from the previous review, it is necessary to emphasize that all of these platforms have been counted on exponential growth and their wallets, have received a great deal of interest from private equity investors (as in the case of Uniswap).
It is important to emphasize that, although the DeFi ecosystem has gained popularity in this year, it is always important to maintain “sobriety” and count on a posture of analysis that, as reviewed in the case of ChainLink and the study by Zeus Capital, there may be cases where there are overvaluations.
That It is because of this that it is important not only to have knowledge of fluctuations in the market prices; I also mention the use cases and the level of adoption among the people, because, otherwise, we would be talking about the inconsistency between the growth of the ecosystem and the usability of their products.
Finally, in this first delivery, a review of the main decentralized platforms was carried out with the aim of offering to the readers a first approximation about the main products and, whenever there is a greater familiarization with the mismas, there is a second delivery about the products. more highlighted within the DeFi ecosystem.
Regardless of the projects that are emerging in these last days, our greatest advice as experts is to always keep the risk management protocols pending and never stick to just one project.
After three years of studying the market, we realized that the best strategy to take advantage of things is to never stay investing in the same project with the hope of one day becoming a millionaire. Sure, there are exceptions to the rule, but that’s very rare.
From the previous projects, we do not really know the success stories of the ChainLink project and we faithfully believe that the report made by that investment brokerage will soon have a serene place in people’s minds when the Bullrun is over. Simply ChainLink is the new bubble.
We give credit to Uniswap for being one of the most complete and well supported decentralized finance projects and we will continue to study the others that were named here.
Whatever our choice, we must always take care of our money and stop with that theory of being an eternal holder. Believe us, the law of detachment is very important for an extremely volatile market.
See you in the next story! With love Rubikav® Team!
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