DeFi — niche analytical report
DeFi, or decentralized finance, is the counterpart of TradFi, or traditional finance. Traditional financial systems are technically, as well as logically, in “centralized hands.” Whereas decentralized finance can be technically, and logically in the hands of the users, such as with a DAO (distributed autonomous organization). DeFi can, and even generally works independently of human interaction, algorithmically or trustlessly and openly, provided that open source smart contracts are used for this purpose.
Traditional Financial products, like PayPal or other centralized financial service providers, can be controlled or disabled by a team of people (Management/Leaders) or by lesser individuals with personal decisions, and all without any transparency into the how’s and why’s of those decisions. Decentralized financial applications aren’t under control and nobody should take control — that is the point of DeFi, afterall.
As you might already guess, this is also all about trust. Do we want to trust? And can we actually verify? Decentralization can be like a perfectly obedient and intelligent robot-brain. It does what it is supposed to do and is not driven by emotions, or other blackbox operations, as is often the case with traditional finance, run by humans, under the control of undisclosed directives and incentives.
It makes sense here to identify “issues” and “challenges”. At the end, TradFi and DeFi face more or less the same issues and challenges. But the way to solve them is very different or even unique. Check the image:
Here we will look at Niche in DeFi and discuss why most of the TradFi can or even should be replaced by DeFi applications (dApps).
The “Total Value Locked” in DeFi applications (in USD) is currently tracked by https://defillama.com/ with a value of $41.74b (+4.64%)
DeFi is accepted by more users, MAYBE because TradFi experts are more likely to associate with DeFi protocols than with basic “blockchain/DLT” architectures like Bitcoin or other successful projects like Ethereum based on Market cap (top #1 & #2). If we are honest, non-IT people are often not able to evaluate or even use Blockchain or distributed-ledger-technologies. So a person from the financial or any other sector has found some commonalities that he may know from previous experience. This means that DeFi can theoretically emerge from the niche catalog as a winner by attracting more users with the focus on “user experience”.
Market overview
Before we talk about DeFi products in general, there are still important points to consider.
The important categories are:
- General Regulation (1)
- DeFi Categories (2)
- Decentralized market leader (3)
(1) the most sensitive topic: Regulatory and Investment opportunities are offered completely outside regulatory oversight
In spite of the number of authorities having some jurisdictional interest, DeFi investors generally will not get the same level of compliance and robust disclosure that are the norm in other regulated markets in the U.S. For example, a variety of DeFi participants, activities, and assets fall within the SEC’s jurisdiction as they involve securities and securities-related conduct. But no DeFi participants within the SEC’s jurisdiction have registered with SEC, though SEC continue to encourage participants in DeFi to engage. Investors and other market participants must understand that these markets are riskier than traditional markets where participants generally play by the same set of rules.
Source: https://medium.com/@imaltsev/token-analytics-pstake-7177840386a1
The non-participation of the largest DeFi applications can only be speculated, but the probability is very high that some market participants do not like the definitions and views of the SEC and cannot identify with them. This is also often due to the fact that some dApps identify their tokens as a product as well, like the so-called Liquidity Mining. But let’s be serious. Which company in the world gives “customers” shares by buying a Bosch washing machine or an LG TV or an Apple device?
DeFi has become very complicated with new processes and changed “traditional” business models by using “Token-strategies”. It is only a speculation of mine, but if there were a hybrid form between “Utility Token” and “Security” Token, which protects users and providers and gets a legal scope to build, launch and manage, then there would certainly be more popularity and positivity.
But here the next issue begins. What happens if a project team only wants to build and launch the project, but the project is to be managed by a governance algorithm or set of smart contracts (such as a DAO) and so it stays decentralized, so it is no longer managed by the founding team? How do you regulate something like that? This is a very complex topic and unfortunately too complex for non-lawyers like me..
(2) DeFi Categories
When we talk about “DeFi”, then we are mostly talking about some of these categories inside DeFi:
- Dexes
- Lending (2)
- Liquid Staking
- CDP (4)
- Bridge
- Yield
- Services
- Derivatives
- Yield Aggregator
- Algo-Stables (10)
….
These are the TOP 10 DeFi categories today (27/11/2022) with a total of $62.95B TVL. You can use Dexes to swap/trade cryptocurrencies or lend and borrow assets or use providers to access their stablecoins to earn yield on any other DeFi protocol. So there is a wide variety of different types of “DeFi applications or dApps”, and just in top 10 categories alone there are at least 1613 protocols. Each category deserves its own attention, but in this article we will focus on Lending (2), CDP (4) & Algo-Stablecoins (10), as this is also where my expertise can be found.
Source: https://defillama.com/categories
(3) Decentralized market leader
Now let’s take a look at a few decentralized leaders, continuing to focus ONLY on lending and (algo) stablecoins here.
Top 5 Based on TVL (based on our categories)
- MakerDAO (CDP) Rank #1
- Aave (Lending) Rank #3
- Justlend (Lending) Rank #8
- Compound Finance (Lending) Rank #9
- Frax Finance(Algo) Rank #12
Source: https://defillama.com/
Top 5 Based on MC
- MakerDAO (CDP) Rank #1 based on $DAI
- Aave (Lending) Rank #9 based on $Aave
- Maker (CDP) Rank #10 based on $MKR
- Neutrino USD (CDP) Rank #11 based on $USDN
- Fei USD (Algo-Stables) Rank #16 based on $FEI
Source: https://coinmarketcap.com/view/defi/
Based on the TVL and also based on the MC within the DeFi world (regardless of categories) are the 3 categories: Lending, Algo-Stable and CDP very dominant — besides decentralized exchanges. It could be because people are very familiar with “money” and lending businesses (after all, both are the oldest businesses of humanity, as is well known, right?). But it could also be due to other reasons, such as utility within WEB3 and beyond like interest farming and investment opportunities. But let’s take a closer look at the past performance of these top projects. This is also one of the reasons why I specialized within this DeFi niche, but there are many more reasons.
FYI: The ranking based on MC could be better if Coinmarketcap team removes blockchain technologies from the DeFi section. CMs Marketing confuses the user.
Performance of the niche
Before we can measure performance, we need to agree how and what exactly we are benchmarking. Investors and Retailers like to distinguish factors of SUCCESS, but currently there are ultimately two that are consistently and fairly measurable alongside brand, marketing, great partnerships and speculated growth potential:
Two benchmark factors:
- TVL (Total value locked)
- MC (Market cap)
For reasons of more readability, we decide to use only the TOP 3 projects.
Benchmarking Token development (MC)
Maker price development looks healthy since 2021 and has based on the chart development (comparison with BTC) some supporters (among others also some very well known VCs as backers). The early times were hard, it could not follow the bitcoin trend until 2021.
Aave’s price performance is lagging behind BTC on average. Based on the chart you might think that Aave has no innovation to offer. But I would say that is WRONG. Aave is the most successful lending protocol currently and has many supporters. Also there is news about new features with maybe huge impact and potential to establish for the next 5 years.
Justlend has decoupled from BTC in the meantime (May 2021), which may mean that the community has grown and more supporters have joined, however if we follow this logic further it looks like new as well as old supporters have given up their reinforcement and sold their tokens (selling tokens means no support anymore) in the open market since May 2022. Do you think Justlend can attract new & old supporters with new innovations or huge partnerships/backers? Justlend is seen in the DeFi sector as a kind of depot of the Foundation, which is why it loses its “decentralization” status. This is the opinion of the general public that can be found in Cryptospace. It does not directly devalue the project, but it is an important factor why I would not use this platform if I were looking for a decentralized protocol. DYOR.
Benchmarking TVL
From the chart, we can see that Maker has taken what feels like an eternity (measured in crypto times) to prove itself in the market, and acceptance in the DeFi world. But today they have become well established with deserved success. Today, MakerDAO is possibly the most successful DeFi protocol in the world. Since mid-2020, we see strong upward movements in TVL and the community continues to trust the protocol, although there is a departure in the current “bear cycle”. But this is not a devaluation in the classical sense. MakerDAO position looks strong.
Aave is probably one of the first lending protocols (previously called ETHLEND) and, similar to Maker, it took a while for the market to accept it and Aave has managed to get quite a bit of TVL from users with its innovations (e.g. Flash Loan) or even collaboration with other blockchain technologies and enjoys a very high level of trust and they also deserve their current success. Aave’s potential is still there and they are already working on new ideas to keep Aave successful — a very strong position.
Justlend is a very young project compared to the other 2 projects (tracking TVL from 2021 on Defillama), and based on this data it is one of the most constant projects in the world based on TVL. Despite being in a bear market, TVL has not pulled away and the community continues to trust in the project, even in somewhat “pessimistic” times. It is not possible to judge Justlend at the moment, but an analysis of goals, research, and reputation would be recommended if you are interested in the project. Position looks strong, but with some question marks.
Risks
When talking about opportunities, we should not forget the risks.
For reasonableness and given context, we will limit ourselves to the three given categories.
- Deppeging (related to the Stablecoins)
- Centralization
- Regulation
- Hacker attacks on Smart Contracts or infrastructure
- Exit from the supporters (VCs or Retailers)
- Poor UI for “real” adoption in the next 5–10 Years
- Collapse of the concept (maybe with new upcoming updates)
- The danger of bridges (Hyperlink: Vitalik Buterin ETH Founder)
- The Complexity for beginners (Leaving of the current users without gaining new users)
- Paradoxical DAOs that will soon not (no longer) be accepted by regulators or can be “attacked” by regulators because of the past and non transparent que.
There are many more (other) risks, but for now this is a serious list which you should know and be aware of (!)
Summary with niche future projections
It is hard to imagine that the presented niche in Lending, Algo-Stable and CDP can become smaller in the next 5–10 years or even that the whole of DeFi could disappear. The crypto community measures success and failure through token prices, TVL or market capitalization. These are good factors, but they are not “True” or even not enough. There are projects that have little MC but still perform well. The same for projects that have high MC but less TVL (not so often).
It is easy to see that with the improvements in blockchain infrastructures and faster technology solutions and regulations, DeFi will become more widely accepted (even by large institutions): See Figure: There are now new players entering WEB3 (e.g. BlackRock) & big players will join the DeFi space and have a big (positive(!)) impact.
What I do NOT believe, however, is that the above categories can sustain themselves over the next 5 years in the current feature state and offerings. The competition is too close and moving up too fast for that. These Top DeFi projects can lose their dominance over a short period of time.
I would like to give you an example:
LendeXe Finance, a decentralized Lending, CDP, Stablecoin project is a new StartUp dApp project from a passioned Team with huge experience in Financial and Computer Science sector with innovatives ideas. Simply explained, the project has “upgraded” & “improved” MakerDAO, Liquity (which we have not presented here), Compound and improved the concepts by new ideas, but in addition to the upgrades: LendeXe has combined all successful concepts in the world and has added powerful new concepts.
I am a participant of this project and I know the research and implementation of a new Algo Stablecoin which can be implemented on TOP of these ideas with new possibilities and overcollateralized-peg opportunities. As already explained, LendeXe is a combination of the most successful projects in the DeFi world. This “Ultimate Loan” innovation allows a NEW financial instrument of over-collateralized “Flash Loans” over %100 loan-to-value (150% actually). Indeed, it converges on a mathematical proof of a 233% over-collateralized CDP stablecoin. But that’s not all. The project claims to be the safest stablecoin in the world based on the integration and distribution as collateral of the TOP established stablecoins “USDC, USDT, and BUSD” — they are backed by FIAT, and together they back the new stablecoin via the Ultimate Loan. On top of this, the team has implemented an “Automated-Stablecoin-Risk-Manager” and all of this is already successfully audited by (CertiK). As you can now imagine, if this player is accepted by the market, it could climb the top rankings very quickly. Multiple Chains are key, and that is the long-term goal of LendeXe Finance. They already tested the protocol on Ethereum, Avalanche, Shimmer and other Blockchain/DLT. Just have a short look into one fo the new concepts the LendeXe Team have invented.
Ultimate Loan
What is Ultimate Loan? What are the differences compared to normal loan?
The Ultimate Loan is a own invented product what the team have designed after a very long time of research.
Let us categorize it to 3 topics:
(1) UL helps for better collateralize (overcollaterellize) the stablecoin
(2) Offering a new undercollateralized kind of loan for $LEXE holders.
(3) New opportunities for loans — professionals.
(4) New kind of loan (Non technical Flash-Loan)
(5) Fair distribution of accumlated fees.
Simple description:
It is a kind of “Flash loan or Short time loan”. You secure the loan proportionally, the rest of the loan is secured by the protocol. You get the loan for a time window of X days, weeks. Then you have to pay it back. The idea is to enable new possibilities of loans for the right target groups. The peculiarity is that you can get a loan of $150 with backing it by you with $100 and the rest of is backed by the LendeXe Ultimate Loan treasury.
How does it work?
Simple, the protocol secures your loan & the security main idea is: you have to deposit $LEXE to participate, if you don’t pay your loan in the timefrime of X back, you will be automatically “liquidated” and you have to pay a penalty, which increases the security of $XSD permanently — your learning: its a security mechanism.
Ultimate Loan positions itself as a new concept and can completely change the financial world. The team is excited to see how the market receives the concept and look forward to the launch.
At the end
the TOP projects are not untouchable & at the same time crypto market can set great new milestones by further acceptance by attracting new crypto users in the next 5–10 years (for example by improving the entry low with the UI). DeFi growth potencial is definitly huge. Basicly science study has already confirmed, competition is healthy and it’s necessary for crypto market can grow further.
Read more about LendeXe:
Twitter: https://twitter.com/LendeXeFinance
Homepage: https://lendexe.fi
E-Mail: info@lendexe.fi
Visit: https://3xcapital.fund/ for more information and analyses about crypto trends and investment opportunties without having expertise in the field.
