
Creators are hard-driving, focused, dominant, independent risk-takers. Who are the emerging players on top of the Monopoly board in DeFi?
DeFi update Feb 5, 2021:
DeFi is becoming a cash flow machine. These protocols are generating annualized earnings (est.):
Uniswap = $140M (60% of swaps)
Aave = $100M (interest & flash loans)
Sushi = $90M (15% of swaps)
Maker = $45M (seniorage-based credit swap lines)
Most protocols are <2 years old. Ponder that.
We’re on the ground floor of incredible change that is on the way in DeFi!
The current DeFi narrative depends very heavily on the future of Ethereum. It is highly questionable now if it can ever evolve into a network, that has e.g. identity, governance, privacy, and scalability issues completely resolved in a manner, that’s required from a true financial services network. My bet is on something, where those four things are solved first.
I think paying attention to the volume of the coin of dollar business they do will give us clues who will crush it on ETH 2.0 monopoly board I spoke about earlier in this series. It will also tell us ETHER 2.0 is the real ground to rebuild the new monopoly board under DeFi financial services.
Genius isn’t necessarily coming up with everything from scratch, it’s knowing how to take some existing ideas and perceive them in a radically different way to come to a new way of thinking that can unlock value in something that’s very, very new. Your ability to critically think you must engage your imagination. This blog is about my synthesis of where the axis of value is being built on the Monopoly board. The true sign of wisdom is not the knowledge you acquire, it is how the data you feed into your brain is filtered through your imagination to get to a place where you can see the results of innovation before anyone else does.
My top 5 crypto right now Feb 2021:
1. Bitcoin
2. Aave
3. Uma
4. YFI
5. ETH
I think 2, 3, 4 are the first pieces being added to the Monopoly board. I think they are lots on the board with foundations being poured now. It is early…..but what they do is all about how many of us are getting yield on our crypto accounts.
WHAT IS Aave?
For example, Aave is best described as a decentralized system of lending pools.
Users deposit funds they wish to lend on ETH2.0, which are then collected into a pool. Borrowers may then draw from those pools when they take out a loan. These tokens can be traded or transferred as a lender wishes.
To make it clear regarding revenues of ($aave): Estimated weekly Income : USD 2,067,975 Weekly incentives : USD 143,655 Yield APY : 6,1% Price to Sales : 67,5 x Volume/Market Cap : 19,58% DeFi is growing faster that anyone can imagine.
Why does AAVE have intrinsic value?
As the Patreon blog says, ETH 2.0 is not decentralized but Aave protocol is. That is why I think it becomes a key property on the monopoly board. AAVE plays a central role in the management of the Aave software, allowing users to vote on changes to its rules and policies.
Aave was released in mid-2020 and has went from 80-430 since I first bought it when I was in my last few days in Mexico in Dec 2020.
AAVE owner are able to vote on interest rates for certain loans and aspects of how deposits are managed. This makes it interesting to me. Interest is how banks operate. Aave is a replacement for bankers in the DeFi space. Aside from this utility, AAVE derives value from its finite supply, and the fact that it uses revenue from fees to buy AAVE and remove the cryptocurrency from circulation. This makes it decentralized.
Currently, 80% of fees collected by the Aave system are used to burn AAVE. THIS TELLS ME SUPPLY IS SHRINKING SO THE PRICE HAS TO GO HIGHER. I believe it might go higher than any other coin in 2021. The remainder is used to pay lenders in their space. The constant burning of AAVE is expected to reduce its supply, thus driving up the price of the token if demand remains constant. So far it has worked as I thought.
The 4 elements I have cited here (identity, governance, privacy, & scalability) are essential elements for a truly decentralized financial system. They are four legs of the DeFi table, if you don’t have one the system will eventually be out of balance and mean revert to the intrinsic value of the labor put into the code. For me, this is why I am not yet sold long term on ETH 2.0 as a chronic winner. I do think what is being built on it, may far surpass its value. I want to discuss how I see the “early axis of this monopoly board” is being built today in front of eyes.
Many don’t understand how projects using the Ethereum 2.0 protocol equates to higher Ethereum token prices, so here is how it happens. As the DeFi projects continue to go up like Aave, UMA, UNI, YFI it means ETH has to be used up to complete the transactions.
The way ETH 2.0 goes up is Gas. ETHER is the gas that makes the DeFi projects operate. So for a more accurate answer, I suggest doing some homegrown research.
My understanding is that actions taken on the Ethereum blockchain have operating costs per transaction. Right now early in the ETH 2.0 game gas is expensive. If you have to pay for the gas you hate this increased cost. If you do not, and just own ETHER you’ll love this because consumption of ETHER because it cuts supply and this eventually will drive the price. The problem is there is too much ETHER in the market now to drive huge price gains, but this is going to change over time and makes ETHER look like a great play ten years out in the way I view the market. Since ETH 2.0 just started in the last 6 months, gas is giving people sticker shock, but if you when you realize there are 37 billion money transactions already in DeFi projects you’ll begin to understand why this situation is something to pay attention to and understand clearly.
When you want to compute something on the blockchain, you have to pay for that privilege. That action can take the form of sending tokens from one ledger to another, or it can be the execution of a smart contract. That cost replaces the subtracted middlemen. This payment happens in something called Gas = ETHER. And Gas comes from ETH tokens. So any project on the ETH blockchain needs ETH to run. It burns Gas. Gas comes from ETH tokens. Every project on the ETH blockchain creates a demand for Gas, which creates a demand for ETH tokens. And this increase in demand leads to a higher token price. This is driving ETHER price movement now. This begs the question, if ETHER IS going to move, then what crypto assets are fueling this momentum?
UMA = the VIX
The Chicago Board of exchange (Cboe) Volatility Index, or VIX, is a real-time market index representing the market’s expectations for volatility over the coming 30 days. Investors use the VIX to measure the level of risk, fear, or stress in the market when making investment decisions.
For those of you who do not know what UMA does……it is the VIX of crypto. The VIX of crypto right now just got off the ground in the DeFi space. It controls 60% of DeFi swaps in this space as of today.
Professional traders use volatility data to make informed decisions and be on the right side of trade. Therefore, the CBOE Volatility Index, known as the VIX, is popular with equity traders.
Bitcoin is known for its high volatility and Universal Market Access (UMA) plans to offer traders an opportunity to trade volatility in a decentralized way. I think this coin has huge potential. For that, the protocol plans to launch a uVol-BTC product that will be settled at the end of the month. Traders could use the token to speculate on the increase or decrease in volatility, or hedge their Bitcoin positions they do not want to sell during sharp corrections. Today on Feb 5, 2021 options expired on BTC and the price is moving. I expect the derivative market for BTC to skyrocket over the next ten years. If the product turns out to be successful, a uVOL-ETH token is also planned in the future.
Other than the regular synthetic tokens that track the price of an asset, traders keep looking for new opportunities that do not give institutions a direct edge. In order to cater to this demand, UMA plans to launch a new synthetic token called ‘uSTONKS’ that will be based on the ten most commented stocks on the r/wallstreetbets Reddit forum. This is another reason I am bullish on UMA. The new uSTONKS token offers retail traders a unique way to benefit from the movement of the most popularly discussed stocks on the forum.
Early discussions are also in progress to create a “Big Mac Synth” based on the index invented by The Economist back in 1986. Launching innovative tokens attracts new traders. New traders = Metcalfe effect for the entire DeFI space. Another reason that could have added to the short-term demand for UMA was the negative 15.5% annualized yield for depositing Ether as collateral to borrow USDC.
UMA has soared from an intraday low at $11.234 on Feb.2 to an intraday high at $43.998 today, a 291% gain within three days. I began buying it in December 2020.
The first batch of tokens to be listed is uSTONKS-MAR21 with 10 stocks: GEM, AMC, NOK, BB, SLV, TSLA, PLTR, SNDL, AAPL, and SPCE. UMA is launching the index in collaboration with YamFinance which is one of the most popular farming DeFi projects.
UMA price could surge even higher according to various metrics
It’s important to note that despite the recent price surge, the number of whales holding between 100,000 and 1,000,000 coins has increased by seven since January 28. Similarly, other large holders with 10,000 to 100,000 coins have also joined the network in the past week which indicates investors believe the digital asset has the potential to rise higher.
WHAT ELSE?
Aave is a digital finance app on ETH 2.0 that is building a digital trust score which is analogous to an Equifax credit score in the finance world. Aave is a money market that is attempting to establish the time value of digital assets by paying interest on the movement of things with value on Blockchains. It does not have to be just money or coins. It can also be a property that is tokenized. It is the world’s first true digital lending market in my opinion.
For example in Sept 2020, UniSwap exceeded the crypto exchange CoinBase in terms of exchange of value as a Decentralized market. That got my attention last year and I decided to look at all the players that were just beginning on the ETHER chain. How Uniswap made money was more shocking to me.
On Coinbase exchange the exchange owner gets the transaction fees from trading volumes. They also had the risk of building and funding the exchange. What Uniswap was, as if you owned their token you would share in the transaction fees directly with coin ownership because the Dapp called Uniswap would cut out the middle which in this case was Coinbase. Once I understood this I began building a position for all these companies collecting fees in swaps. Uni, UMA, AAve, Market, YFI are right now my favorite ways to play this DeFi trend. Owning them is a bet on future commerce in the DeFI space. I will say not all of them will succeed long term. Some will go to ZERO. Be aware of this. Another way I think about this speculative play is that one of these companies might become the Amazon or Goldman Sachs of the DeFi space. That excites me and I think this space might offer more upside than BTC will. But it filled with execution risks.
The person who holds the coins is getting paid as transactions go up by the value of the coin going up. In reality, it is like being paid a dividend yield. It is a new way to own a bank without the equity risk. This group of coins is actually building the Yield curve for the DeFI world. In the centralized world, these companies are worth a fortune. Right now you can buy these coins very cheaply.
The problem is knowing which one is winning the battle of supremacy. I follow the money flows to make a decision and I add to those positions. I am fully aware that 90% of these names might go to zero but I have faith that one will become the 300-pound gorilla of the DeFi space.
The biggest development I think is each one of the companies makes money every time someone buys BTC and decided to get a yield on it. Many people. like, me, are doing this. If you view BTC as pristine collateral that is growing 200% why in the hell wouldn’t the market want another 6-10% of BTC yield as the BTC sits in a cold storage vault run by YFI, as you wait for BTC to go to 1 million a coin? The way I think about it, if I want this so will a lot of others. Therefore, I want to own some of these coins.
This is a market that has no need for venture capital when you really understand it. The market is self-funding. That means this space is going to eliminate the VC in the analog market. How much is that worth?
In 2019, North America had the highest value of VC deal funding globally, with approximately 113 billion U.S. dollars in financing. Right now these companies market cap on crypto exchanges is only 15 billion dollars. That tells me they are worth a ton more.
Can this space be used to create easy free profit via arbitrage? What is arbitrage?
Have you noticed BTC or ETH have different priceson different exchanges at the same time when you’re buying? This is how you arbitrage the price.
Arbitrage is already profitable in DeFi.
Arbitrage traders are an essential component of the Uniswap ecosystem. These are traders that specialize in finding price discrepancies across multiple exchanges and use them to secure a profit. For example, if bitcoin was trading on Kraken for $35,500 and Binance at $35,450, you could buy bitcoin on Binance and sell it on Kraken to secure an easy profit. If done with large volumes it’s possible to bank a considerable profit with relatively low risk. Uniswap and Aave do this now.
How does this actually work?
Getting started with Uniswap is relatively straightforward, however, you will need to make sure you already have an ERC-20 supported wallet setup such as MetaMask, WalletConnect, Coinbase wallet, Portis, or Fortmatic.
Once you have one of those wallets, you need to add ether to it in order to trade on Uniswap and pay for gas – this is what Ethereum transaction fees are called. Gas payments vary in price depending on how many people are using the network. Most ERC-20 compatible wallet services give you three choices when making a payment over the Ethereum blockchain: slow, medium, or fast.
Slow is the cheapest option, fast is the most expensive and medium is somewhere in between. This determines how quickly your transaction is processed by Ethereum network miners. Right now the gas fees on ETH 2.0 are high. That is great for ETHER owners because it uses ETH supply up to lower the supply and this makes ETHER less centralized the more it is used by DeFi application. So in essence I am saying these decentralized apps and tokens are what is driving ETHER real value right now. It is not ETHER itself. It is a giant feedback loop being built in the DeFi space. The more Aave, UNI, UMA, and MAKER money they move, the better it is for ETHER price.
If my thesis is correct over the next 4 years we should see ETHER price moves move away from BTC moves and it should happen after these DeFi apps keep driving capital across the DeFi ecosystem.
Now that I understand this space well I think each one of these DeFi apps is fully composable onto many other businesses that will get built on ETH 2.0. I personally think banks are going to favor ETH 2.0 because they believe it is a centralized platform they can control. DeFi apps are going to make ETH 2.0 more decentralized. So I see Aave, UMA, YFI, Maker, as the main competition for banks in the next few years. They have a huge advantage because the yields they are paying on crypto exchanges cannot be matched in conventional banking. Banks however, know when interest rates go negative money will flow out of their bank into something else. They will adopt blockchain and hope their clients use their payment rails into the world of crypto. I think they are nuts to think this way. DeFi is the best way to unbank and this is why I love these coins over the next 5 years. These coins compete with one another, but unlike banks, they fit together like lego blocks in the DeFi system and there is no longer a financial problem of Bank of America connecting with JP Morgan in this financial world. I think that is a really valuable that legacy banks won’t understand how to adapt too. I think Avanti bank in Wyoming is going to disrupt them in a big way. If you do not follow Caitlin Long you should. She is a Wall St. veteran who is now going fully digital with Avanti. She has deep ties to Kraken and to Senate banking committee via Senator Lummis.
My Take
- Senator Cynthia Lummis has been assigned to the Senate Banking Committee.
- Lummis has been vocally pro-digital assets in both her candidacy and since taking office.
- Lummis said she plans on forming a Financial Innovation Caucus to educate her fellow senators on emerging financial technologies. She was key in changing Wyoming laws for the benefit of Kraken and Avanti who are both based in Wyoming. She is going to be a big player in the Senate for Bitcoin.
The Office of the Comptroller of the Currency (OCC) granted another crypto-focused firm conditional approval to operate as a national bank.
Protego will join Anchorage as a banking editor with approval from the federal government, according to a new announcement from the U.S. banking regulator.
Protego & Anchorage aim to serve institutional clients interested in digital assets. The Seattle-based firm plans on being a “vertically integrated and fully regulated bank built on blockchain.” Now, as a nationally chartered trust bank, it can hold, trade, lend and issue digital assets to clients. These will be its four primary services, according to the bank.
However, Protego is still in the organizational phase of development, according to the OCC’s announcement. It will have 18 months to meet the terms of its conditional approval. It will be able to convert to a national trust bank when it begins to operate. Currently, it’s a Washington State-chartered trust company.
I am not sure which lego block DeFi app is the most valuable yet, so I decided to spread my bets across a bunch of them.
This video lays out why the leaders of ETH 2.0 cannot be trusted.
Tolerance of ambiguity is a necessary condition for creativity for wealth and health creation.
Tread carefully with your bets on DeFi.