Decentralised Finance (DeFi) — the new hotness in cryptocurrencies

Since the great cryptocurrency boom and bust of 2017/18, I basically didn’t touch my holdings. Mainly I didn’t have the spare cash to speculate on Bitcoin, but a part of me was also exhausted by the constant cycles of hype and disappointment.

Hopefully I don’t regret my inability to buy more Bitcoin between 2018 and 2020 too much when I’m old(er).

Anyway… my wife recently sent me an article that piqued my interest in the cryptocurrency space all over again.

It originally ran on Moneyweb, but there is an un-paywalled version on the writer’s personal site: http://www.writersroom.co.za/crypto-pioneer-buys-a-r600k-house-with-crypto-and-it-ends-up-costing-r200k/

Here’s the YouTube video the article is based on:

Richard de Sousa’s talk got me interested in this burgeoning new Decentralised Finance (DeFi) space.

A whole banking ecosystem is starting to evolve on Ethereum including lending, and investment funds (managed, indices, all sorts!).

Except what DeFi is doing is lowering the barrier to entry into the space. You still need a sizeable sum of money to meaningfully participate, it looks like to me, but it has the potential to democratise banking services in a big way.

There are other big barriers to entry — being technologically inclined and having time to burn are two major ones off the top of my head — not to mention the ridiculous transaction costs on the Ethereum blockchain at the moment because of the bull run happening at the moment.

This weekend I set about trying to figure out how to actually use these emerging DeFi platforms and aside from the Ethereum transaction fees it was a lot of fun.

Have any of you dabbled (or made fortunes) in DeFi?

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I wont lie, I don’t even have bitcoin - so nope - cant afford to get in on these -mainly because I just don’t understand it all.

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Same. The closest I’m ever going to get to DeFi is a new washing machine.

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I’ve been quite active in crypto but I haven’t really looked into DeFi yet, just heard the term being thrown around. This article was very interesting, but unfortunately I don’t have enough crypto to buy a house yet as that would be really useful right about now.
Lately though, I have been thinking of ways of how I’ll get my crypto back into Zar/Usd without attracting the taxman’s attention.

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I can’t picture the authorities appreciating decentralised finance (currently we need regulation because people will always fall for the next MTI) or even a decentralised anything.

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DeFi started off as mainly decentralised exchanges before expanding to collateralised loans, but it’s become this whole interconnected system of providing liquidity to various decentralised exchanges and lending platforms.

So it’s not just about taking out loans to buy big-ticket assets like houses. Like De Sousa said, you can take out a loan on your Ethereum, get DAI in exchange, and immediately use that DAI to buy more Ethereum.

But the new new hotness in DeFi is “yield farming”.

With basic DeFi, you can become a lender and earn interest on the assets you loan out. The interest is paid out of the fees a particular platform charges for its services.

What a lot of these decentralised lending platforms started doing is to—in addition to paying you interest—is also give you a governance token in exchange for providing liquidity. The governance token then gives you a say in proposals made for that particular DeFi system.

However, the governance token is also a token with value, so you can sometimes loan out that token on a different platform and get another set of governance tokens in return and so on and so forth.

These DeFi platforms also want liquidity for swaps/exchanges, so you can for example provide Ethereum and another token (let’s say DAI) to a swap market and then get a liquidity provider (LP) token in return. The LP token essentially represents the tokens you provided to the market and can be cashed in to get your tokens back.

These LP tokens are also just like any other token which you can lend out or add to liquidity pools in exchange for the relevant governance or LP tokens, essentially building chains of leverage.

This way you can get returns upon returns upon returns, provided you can pay the Ethereum gas fees to initiate all the smart contracts involved in doing something like this.

It’s a super interesting development. When I first read about it, it sounded like basically just a high-tech Ponzi scheme. After playing with it this weekend I can see that it is not, though there are other substantial risks.

The fees right now are also incredibly high because of how busy the Ethereum network is right now, so after all the deductions you do have quite a bit of ground to make up before you start showing a real profit.

Can’t wait for proper Ethereum alternatives to come online where hopefully it isn’t so expensive to interact with smart contracts.

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Yeah, I know… I was just referring to home buying because that’s actually where I’m at :slight_smile:… pretty much in the same boat as the guy in the video: the banks won’t loan me the amount I need because my total bond repayments would be more than “30%” of my income (due to covid, they exclude over half of my rental income), so in order to qualify, I must first sell my current house which is not ideal.

I’m not too clued up with the technical stuff so I’ll have to do some research into this when I have some time. I trade passively so after all this time, I’ve only finally this month looked into and started trading in futures… so this initial post is the most I’ve heard about defi other than “it’s great, it’s the future, etc, etc”. I’ll start reading up more on this once I’ve finished my current project.

I’ve heard there are a bunch of Ethereum-killers on the rise so proper alternatives shouldn’t be too far away.

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Yeah, it’s incredible how fast the space exploded last year. I wonder if it’s what’s fuelled the increase in Ethereum’s price?

I see that Ethereum’s price has also seems to have become somewhat detached from Bitcoin’s in the past few weeks… When Bitcoin surged these past few days, Ethereum’s price relative to BTC decreased. Not quite proportionally, but almost proportionally, keeping ETH at around R27000 / $1800 per token.

Anyway… as an illustration of how fast the DeFi space has been moving: some platforms have launched Collateralised Debt Obligations (CDOs) and Credit Default Swaps (CDSs)…

Consensys reckons that CDOs in the crypto world won’t cause the same kind of meltdown as we saw in 2008 because there are no ratings agencies to cook the books in crypto. :upside_down_face:

OK, yeah, I’m pretty sure the interest in DeFi us what caused ETH gas prices to become as ridiculous as they are right now.

Even at the height of the 2017 crypto bubble the gas prices weren’t as high as they are now.

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