DeFi Gems: Planet Finance
AVAX and Fantom have the DeFi buzz, but a novel project on BSC is quietly working on some pretty profound DeFi innovations.
The art of progress is to preserve order amid change and to preserve change amid order — Alfred North Whitehead
DeFi is high-risk, but it doesn’t have to be
Right up front, I am a beneficial holder of AQUA, which is the governance token of Planet Finance. I’m not paid by them, or associated with them in any way other than holding and staking. With that said, I’m not recommending you buy in. I’ve been following the project for months and I think it’s worth talking about.
If you’re brand-new to decentralized finance (DeFi), the space can be very confusing. People with experience in legacy finance will recognize some of the terminology. Annual percentage rate (APR) and compounded annual percentage yield (APY) are common to both DeFi and legacy finance. The way they’re generated is different though.
Wait, banks used to pay us for deposits?!
Back in the day, if you deposited money in a savings account, the bank would pay you to do that. The basic idea is: you lend the bank money, they lend your money to someone else and give you back a portion of the profit from interest.
The interest rate the bank charges to borrowers is tied to the interest rate the Federal Reserve (the Fed) charges to banks. In a healthy economy, the rate is usually around 4–5%. This is slightly higher than the target inflation of 2–3%.
The interest rate today is 0.25%. In terms of financial ‘health’, our economy is basically one Big-Mac away from a heart attack. Put another way, you don’t want the US economy shoveling snow off the driveway any time soon.
With Consumer Price Index (CPI) inflation running at around 8% (the actual rate is much higher), you are losing quite a lot of money just keeping it in the bank. Because the Fed rate is so low, your savings are only earning a fraction of 0.25%. In case you’re wondering, that’s not great.
One of the neat innovations in banking was the creation of money market funds. These funds made it possible for retail banking customers to receive interest payments from the commercial paper market. In a nut-shell, commercial paper is a short-term loan between large corporations.
The benefit to the corporation is easy access to money for paying short-term obligations, like payroll. The benefit to the lender (like a bank) is a higher percentage interest rate return on the loan. For example, if the bank lends to a retail customer, they might charge 7% interest, but if they supply commercial paper to an institution, they can charge 10%.
Thus, a retail customer could walk into a bank and earn 3–5% interest on their savings account, or they could buy into a money market fund where they might earn 7–8% interest. This was working pretty well up until the financial crisis in 2008, when the whole thing started to break down.
But up to that point, money markets were a relatively safe way to increase interest income for retail investors. I think sooner or later the bankers will figure out how to fix the problems in the commercial paper space. That’s a topic for another day though, because we’re here to talk about DeFi.
Earning interest with DeFi
Interest payments in the DeFi space work a little different. US financial markets are enormous and have massive amounts of liquidity. Liquidity is the lifeblood of any trading system. If assets are illiquid, it makes efficient trading nearly impossible.
If you are thinking about investing in crypto, or already have, I highly recommend you read this article. Without that basic level of understanding, it will be almost impossible to assess the risk of a crypto investment you might be considering. It is 1000x more important before you start investing in DeFi.
With DeFi, investors are generally earning interest from supplying liquidity. In essence, you ‘lock’ your assets into a trading pool and you receive a percentage trading fees from that pool. The interest rate (APR) is based on how big that percentage of trading fees is.
If the assets you are providing liquidity for are very stable and highly liquid, the fees will be pretty low, usually less than 10%. But if the assets are unstable and/or have low liquidity, the APR can be really high, like 2000–3000%. Generally speaking, the more illiquid or unstable the asset is, the higher the APR — and the higher the risk.
I’ll be writing a lot more about DeFi in future articles. For an introduction, you might check out this article. In it, I’ll introduce you to some really interesting projects that are (currently) generating some pretty impressive APRs.
Right now, the vast majority of DeFi opportunities are on the Avalanche (AVAX) and Fantom (FTM) blockchains. I’ll take a moment here to stress all blockchain protocols are experimental. Likewise, all DeFi projects are experiments built on top of those experimental blockchains.
None of this is settled science. These DeFi protocols and blockchain experiments seem to be stable and (mostly) functioning as expected. That absolutely does not mean that they will remain stable and functioning as expected. In other words, you have to be really careful.
In a sense, the DeFi space is not so much investing as it is gambling. I firmly believe the odds are much better than the craps table in Vegas. But they’re still odds. You can, and very well might, lose every penny you put in. Participate accordingly.
This is also one of the things I find most compelling about Planet Finance. As I said, I’ve been following the project since last summer. From what I can tell from Discord and Telegram, the dev team is highly motivated, technically saavy, community focused, and actively engaged. They’re also (potentially) offering some pretty amazing innovations to the DeFi space.
A legit sleeping giant?
As we speak, there are a ton of DeFi influencers talking about Fantom (FTM). There is a good reason for this — a lot of money is flowing in. One of the metrics I’ve seen used is the ratio of market cap (Mcap) to total value locked (TVL). I think this might be a good indicator of an ecosystem’s value. Unfortunately, it’s also one of the very few indicators we have at the moment.
The rough theory is, the TVL should be reflected in the price (based on market cap) of the native token. Here is what the ratios of the top 5 blockchains looks like:
I’m not convinced anyone knows what a ‘good’ Mcap/TVL ratio is. What is evident from the picture above, the ratio of Fantom is much lower than the rest. According to the theory, the value of FTM should rise to more closely match the ratios of blockchains like Terra or Avalanche.
I think there is merit to the theory and I also have doubts. If we take it as true though, the 0.5 Mcap/TVL for FTM is a bullish signal. And if that’s true then, what does it mean for Planet Finance?
Again, I’m not convinced this is a reliable signal. But if it is, this might point to a hidden gem in Planet Finance. This isn’t a great comparison though, because the TVL for Planet Finance AQUA is much lower ($63.4m) than Fantom ($7.8b). Hard to say how it will play out, but it certainly drew my eye.
Planet Finance V2
As it sits right now, you can earn pretty incredible yields on Planet Finance for single staking Pancake Swap’s CAKE (84%), the utility Gamma token (50%), and decent rates for stables (BUSD @ 15%, USDC @ 10%, and UST @ 7.5%). They’re solid returns on BSC for sure.
There are also good stable pair returns available, such as USDC/UST and USDC/BUSD at 10% each for the risk-averse (like me). Moreover, you can get exposure to DOT, ETH, ADA, LINK, XRP, and quite a few other pairs with APRs ranging up to 150%.
Another exciting prospect to me is the creation of crypto money markets. This is appealing to me, because I tend to be very risk adverse. And as I mentioned earlier, money markets in legacy finance were higher yield, low risk assets.
With the proposed lending protocols on Planet Finance, coupled with a pretty robust swap router, cross-chain compatibility (e.g., Wormhole Terra and perhaps more…?) and (so far) reliable roadmap functionality deployments, I feel like I found something a lot like those money markets. In short, I think there is a lot unrecognized value here.
There’s actually more going on than I’ve outlined. I could go on, but I won’t. Like I said at the start, I’m a beneficial holder. I’m definitely not suggesting you go ape into the project. And, in case you’re wondering, I don’t think it’s a moonshot play. It’s a strict deflationary long hodler with decent interest for the trouble.
All I can say is, what I’ve seen so far encouraged me to put my hard earned $$ in. The Telegram group has been super respectful, the dev team instills a lot of confidence in me, and I think they’re doing some novel and interesting things.
I know I’m shilling a bit here. I’ll own it. I like these guys (and gals) and am rooting for their success. I also know the protocol is making me decent returns on things I quite literally never worry about. Of course, I’m not a financial advisor, this isn’t advice and definitely DYOR before you make a move.
As a closing thought, and probably the most exciting part of all this is Planet Finance gave me a fourth lane to earn yield. I’m into AVAX and Terra, I’m degen ape on FTM, and now I’m in BSC via Planet Finance. The takeaway thought is: my yield earning risk is distributed across four of the top 5 blockchains by Mcap. If nothing else, I sleep better this way.
Until next time, be safe, be smart and be sure to tie the camel.
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