Ethereum-based DeFi apps have accumulated a staggering $50bn in total value locked (TVL), but many retail investors are priced out by high transaction costs (“gas fees”). New alternatives to Ethereum appear every day, but in order to maximise returns, an investor needs a variety of components to all to come together in a stack.
Blockchain and Native Token
The blockchain itself provides the basis infrastructure for the decentralised apps (dApps) on top. The dominant blockchain is Ethereum, with its native Ether token (ETH). Any user wanting to invest in the Ethereum stack will need Ether to pay for transactions (“gas”).
All alternatives discussed in this blog post also have a native token which, at the minimum, is needed for transaction costs.
Stablecoins play a very important role in the DeFi stack, because they represent fiat money. Many investors are paid in USD and other fiat currencies in their day job, or may want to spend their DeFi yields in a store on the high street, requiring good old cash.
Stablecoins live in the crypto world, so they are not exactly cash, but they don’t expose the investor to currency risk. They are not as volatile as all the other crypto currencies.
There are quite a few different flavours of USD in circulation, with Tether USD being dominant (USDT, $150bn daily volume). Alas, other currencies are still underdeveloped. For example, the only stable coin I know for GBP, TrueGBP, is not widely traded on exchanges and does not have a lot of liquidity on DEXes either (for more on DEXes, see below). Binance, a leading crypto exchange, supported BGBP for a while until dropping it for lack of volume.
There is also precious little trading in Euro stablecoins, and Asian currencies are only beginning to emerge in the crypto ecosystem (see Terra).
Decentralised Exchanges (DEX)
A crucial element in DeFi is the ability to trade in a trustless, permissionless manner. In Ethereum, the dominant DEXes are Uniswap, Sushiswap, and Curve. They allow a user to trade one asset (e.g. USDT) for another (e.g. ETH). 1inch plays the role of aggregator, routing trades via one or more other DEXes.
At the time of writing, these were the top 10 pairs on Uniswap by volume. There were 165 pairs listed today in total, all with at least some significant volume.
New currencies (tokens) appear all the time, and usually the first place they trade at is a decentralised exchange. Anyone can start listing a token and provide some initial liquidity, allowing speculation to happen. For a recent example, take a look at SAREN, launched by an individual entrepreneur in Australia. He decided to “list” his token at USD 0.001, and 8 days later it trades at USD 0.08, a factor of 80x.
New tokens often shoot to the top of the charts with furious speculation trading. There are a lot of investors and speculators who chase quick gains on new projects and sometimes are spectacularly rewarded. Clearly, there are also fiascos, where investors gets “rekt”.
Each trade incurs a small fee (between 0.2 and 1%) which is paid out in large parts to “liquidity providers”, i.e. investors willing to take a risk on some trading losses in return for the trading fees. This can be quite lucrative and it is a major difference to centralised finance, where retail investors cannot easily replicate this kind of income stream.
A new version of Uniswap (V3) will make all this a lot more sophisticated and at the same time complex. For now, all decentralised exchanges discussed in this article work more or less like Uniswap. (Curve and Ellipsis use different pricing mechanisms more suited for stablecoins.)
Debt is the foundation of modern finance, and whole books have been written about the importance of credit for the modern financial system. The ability to deposit (lend) and borrow is core to DeFi, too.
In Ethereum, the top lending protocols are Compound, Aave, and Maker. Users deposit digital assets (mostly stablecoins and well established crypto tokens) as collateral, and can either just collect interest on their deposits, or borrow against their collateral and trade with the debt.
A common use case is an investor who has accumulated a certain amount of wealth in Bitcoin or Ether and wants to borrow some money to buy a car or a house without selling BTC or ETH.
In contrast to lending in traditional finance, DeFi users can lend and borrow without asking anyone for permission, and interest payments are calculated to the second (technically, to the block). There is typically no lock up, and no concept of a penalty for repaying a loan early or taking a deposit out on a whim.
Synthetic assets are financial derivatives designed to track the price of another asset, e.g. BTC, USD, or TSLA. Derivatives play an enormous role in traditional finance, and it reasonable to expect that this phenomenon will also materialise in DeFi. The biggest provider on Ethereum is Synthetix.
One big use case for derivatives is shorting an asset, i.e. attempting to provide from the imminent decline of an asset.
Another useful synthetic instrument is an index, allowing an investor to spread her risk over all the assets in the index.
Yield Farm Aggregators
A relatively recent phenomenon, yield farming, allows collecting yields (interests, rewards) on invested assets. An aggregator is a protocol / web site allowing the investor to invest multiple assets and receive yield income streams from multiple sources, thereby diversifying her risk.
A common yield farm is one that lets you deposit liquidity pool (LP) tokens of a pair, e.g. ETH and USDC. By “staking” your tokens you are making your liquidity more sticky, similar to a longer term deposit on a money market account. (You can still take out your money immediately, but there is a big incentive to leaving it in.)
The most well known yield aggregator in Ethereum is yearn.finance. All yield aggregators rely on components discussed earlier in this article. So for example, a farm may take your ETH and invest in on the lending platform with the highest yield, shifting daily if and when yield changes.
Binance Smart Chain
The Binance Smart Chain, in many ways, is a clone of Ethereum. It was created by Binance, a large centralised crypto exchange. The number of nodes in the blockchain is much lower than for Ethereum, therefore many people call BSC “CeDeFi”, i.e. centralised DeFi.
Many projects on the Binance Smart Chain resemble their equivalents on Ethereum a lot, and many openly admit they forked the corresponding Ethereum protocol and made some small modifications. For example, Ellipsis is an approved fork of Curve. Curiously, it is also often the case that projects on BSC are anonymous, whereas their Ethereum equivalents are very open and public about management and team.
To use the Binance Smart Chain, investors can use the same wallet software as Ethereum, for example Metamask, but the transaction costs are a fraction of the cost on Ethereum, and transactions complete in seconds, rather than minutes. The native coin is BNB, which reached an all time high on April 7, 2021.
Binance Smart Chain therefore attracted many retail investors, who are proportionately more affected by fixed transaction fees (“gas”). It is perfectly feasible to invest $1000 in 3 different farms on BSC, while as investing $1000 even in one project on Ethereum could be unviable.
Pancakeswap, the equivalent of Uniswap, is doing brisk trade on BSC. Unfortunately, the team has failed for weeks to fix a data synchronisation problem and therefore is showing out-of-date data here.
Frankly, I am puzzled that PancakeSwap get away with that. According to the latest available statistics, they were doing $0.5bn in volume compared to Uniswap’s 1.2bn. The value of liquidity pools is currently 6.6bn for PancakeSwap and 7.9bn for Uniswap, according to this data aggregator.
A lending protocol similar to Compound is Venus. It is #3 after Compound and Aave (both mainly Ethereum).
Deposit rates on Venus for stablecoins are currently lower than on Aave. Since rates can change by the minute, this should just be regarded as a data point.
Some yield farms pay out interest in their own farm (“governance”) token, therefore annual percentage yields (APYs) need to be taken with a grain of salt. For example, the price of Venus (XVS) could drop, rendering the interest payments in XVS less valuable.
My preferred yield aggregator on the Binance Smart Chain is autofarm. Unfortunately, the developers behind autofarm are anonymous. Nevertheless, autofarm has accumulated a total of $1.4bn in total value locked.
Looking at the details of the USDC farm, we see that the APY from the farm itself is given as 6%, slightly improved by compounding daily, but the majority of the APY comes from the farm token AUTO, which may or may not be worth the same when harvest time comes around.
Autofarm uses Venus to invest your USDC, sells the XVS rewards, reinvests those, and mints “free” AUTO to reward you. If you want to sell your AUTO, who will buy it from you? The answer is: people interested in farming the AUTO farm, which as you may have guessed, is paying out pretty insane yields.
Investors are encouraged to put their AUTO into this farm, to keep the price up and the liquidity ample.
WBNB is “wrapped” BNB, for all intents and purposes the same as BNB. (Like £5 in notes or coins, still £5)
Note how in order to “stake” your AUTO, you also need to provide BNB. So in other words, you are getting the high yield to compensate you for the risk of losing some of the BNB and getting more of the potentially not so valuable AUTO. (This is called impermanent loss, many articles available elsewhere.)
Synthetic assets are offered by Linear. Similar to Synthetix, an investor needs to stake LINA to mint ℓUSD, with which they can then trade other “liquid” assets. Within the Linear platform, you can find an exchange to trade these, a lending/staking page where you stake your LINA (collateral), and send assets to Ethereum. (Only LINA lives on Ethereum now)
My biggest concern with LINA is the somewhat obstinate assertion that 1 ℓUSD = 1 USD, which at the moment is far from true.
This concludes the overview of Binance Smart Chain, now let’s see what alternatives are available on smaller chains.
Terra is a blockchain built on top of Cosmos. Just like all the other alternatives to Ethereum, transactions are fast and cheap. There are two native tokens: LUNA and UST. UST, a stablecoin pegged to the USD, is used for transaction costs. LUNA can be used to mint UST. This similar to how sUSD are minted using SNX on Synthetix. Terra is the only platform I know offering several Asian stablecoins, too.
I have yet to find out the intersection between UN bureaucrats who may use Special Drawing Rights and crypto investors. Apparently the Mongolian stablecoins facilitate bankless banking for Mongolian crypto enthusiasts. This is what Terra says:
The lending protocol on Terra is Anchor (Deposits: $162m). At the moment, the only collateral accepted is LUNA, the native token. You can borrow UST and then trade that for other coins in the terra system. The most interesting ones are synthetic assets offered by Mirror. (Mirror also offers m-assets on Ethereum.)
Mirror is offering investors the ability to trade synthetic stocks and indices (for example VIXY) 24/7, in a permissionless, trustless fashion. Since many of the tech stocks don’t pay dividends anyway, trading such a synthetic asset provides the same utility.
14 of the same mAssets can be traded on Ethereum, and a similar number on Binance Smart Chain. Liquidity is highest on Terra, the native Mirror network. According to Google Finance, 3.88m shares were traded on traditional stock exchanges in the last 24 hours. With a market cap of $240bn, the terra numbers are small, but not insignificant as an absolute number. A more accurate analysis might look at derivates of Netflix in the traditional finance sector, too.
What Terra seems to be missing still is a yield aggregator helping investors allocate their funds.
Polygon is a Layer 2 (L2) extension to Ethereum. Transactions are done fast and cheaply on the Polygon chain, and only summarily recorded on Ethereum. (Simplified.)
Almost $0.25bn are locked in Polygon today, and using Quickswap feels just like Uniswap or PancakeSwap. Again, anyone can add liquidity to a pool and start collecting trading fees. According to an LP analysis aggregator (LiquidityFolio), APYs of over 100% are available:
Again, readers have to be reminded that future APYs are often extrapolated and rewards paid in farm tokens, e.g. QUICK.
Aave, the lending protocol, has started offering Polygon as well, but it’s still early days, as you can see by looking at the liquidity.
It seems Polygon is getting some traction, but it will only take off once we see a full stack of DeFi components like on Ethereum and Binance Smart Chain.
Avalance has its own mainnet, and just like terra you get a wallet address not confirming to the Ethereum standard. The native token is Avax. The Avalance network uses different chains (X, P, C), which make it slightly more complicated than the other chains discussed.
A quick look at the Pangolin (DEX) dashboard reveals the top assets being traded and the volume.
Avax, the native token, is #1, followed by ETH. Pangolin’s PNG governance token is #3. ChainLink, WBTC and Sushi are top tokens in the Ethereum DeFi space, with USDT being the top stablecoin. DAI, Maker’s stablecoin from Ethereum, is at #8.
The top 5 most traded pairs give an indication of the other relevant tokens on Avalanche.
As discussed above, a yet to be logo’ed token, PEFI, has briefly conquered a top spot in the list. It belongs to Penguin Finance, which was only listed on Coingecko a few days ago.
Sidenote: Avalanche is #2 in the Red Tokens list, which seems to have been an April Fool’s joked played by Coingecko.
Just like with all the other DEXes, it’s easy to add a pair of tokens to a liquidity pool and start earning fees, although I could not find an easy overview page showing the current APYs. Pangolin positions itself as less commercial, more community driven than the other DEXes. Perhaps the community will point me to suitable yield farming pages.
DeFi is exploding and there are several alternatives to Ethereum today. Find the one most suitable to you, hopefully this blog post helped with some data points and theses.
Notes and Disclaimers
- This is not investment advice (everyone in crypto seems to say this to CYA)
- It would have been impossible to present this piece without making some simplifications and omissions.
- I am a crypto enthusiast, I don’t work in the industry (maybe one day)
- This blog was written in April 2021. If you read this even two weeks later, the situation will have changed, perhaps dramatically. Always do your own research before making important decisions.
Newcomers to the crypto space can be excused for frowning a bit at some of the project names!
Some of my Sources
There are clickable links in the blog post, too.
CoinGecko: Cryptocurrency Prices and Market Capitalization
Get cryptocurrency prices, market overview, and analysis such as crypto market cap, trading volume, and more.
Crypto Research, Data, and Tools
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