I’m fascinated with DEFI. I find it’s a world worth exploring before the inevitable crack down occurs.
I can’t tell you how many hours I have spent over the past month sticking things into DEFI. I can’t tell you how many new assets I purchased or what the USD value of any of these assets I purchased since they do not yet have a pair against a stable coin.
About the only thing I can tell you is that what I’m about to explain was very difficult for me to do. This took an extremely long time and is not for most. Know also that the amount of my crypto I put into these things is really small, sometimes only a dollar’s worth and the purpose was not to make a yield, or get rich – it was just to see what would happen.
I’m fascinated with DEFI. I find it’s a world worth exploring before the inevitable crack down occurs.
I currently have assets on the following networks: Ethereum, Avalanche, Solana, Terra, Kucoin Chain, Tezos, Zilliqua, Harmony, Kava, Polygon, Atom, Polkadot, Fantom, and a few others that I can’t remember at this moment.
In order to understand DEFI, one must first come to grasp the concept of money.
Money is a funny term – when you think of that you may think of a dollar bill, or coins, but a house isn’t really money, is it? What about a stock, that surely can’t be money…
Real estate is deemed a “Store of Value” type of investment rather than money. This is the other type of wealth in the world. Store of Value wealth is meant to carry forward your buying power inside an appreciating asset whereas money is used daily for your living expenses. You can also use money to purchase a Store of Value asset and presumidly you’d sell back that store of value asset to money when you’d like to realize your gain, sell the house, or exit the stock position.
It’s important to consider the widest fiscal landscape when speaking of the world’s wealth but how is it possible to compare a house and a ten dollar bill? Is a house worth 100000 ten dollar bills or is the ten dollar bill worth 0.000001 houses?
For these reasons wealth in the world is split into multiple categories called “Asset Classes” and each asset asset class is extremely unique. Unique characteristics prevent the ability to clearly compare individual opportunities in different asset classes without a central denomination. This is why a global reserve currency is needed, so comparisons can always be drawn with a peg against the same value. The US Dollar has been the world’s global reserve currency for some time now, but none of this really helps us understand DEFI. So houses anywhere in the world can be rolled up to their US Dollar value and compared against other things that are rolled up to their US dollar value no matter the asset class.
For the purpose of my analogy I find it easy enough to think of the world’s monetary worth as a big pile of money kinda like Scrooge McDuck’s silo of gold coins that he swims in. One great big large pile of money representing the world’s total wealth. The asset classes represent the largest contributions to this pile as they are the first category of wealth.
Rolling into the larger pile from the bottom there are smaller piles that we each have as money in our banks, equity of our real estate, stock portfolios, 401ks. All of these unique assets are custodied by the institutions we hold our wealth with, making their section of the pile larger. Gaining new wealth contributes to making the pile even larger but exchanging one type of wealth for another only moves the wealth from one portion of the large pile to another portion not contributing to the growing of the pile. The pile that contains everything, all money in the world – that’s the pile that is the largest.
What I mean by this is not only does money sit in bank accounts but it is used to purchase gold, crypto, stocks, houses and other things like investments. In crypto these piles, sub-piles, and assets are still being defined, but this DEFI thing really creates a new concept: The concept of independent money networks.
The crypto verse is vast enough to contain many dozens of money networks, each with specific assets that are price pegged to one central main asset.
Take for example the Avalanche ecosystem which is nearly fully built out (but still young). Just like in traditional money systems, the Avalanche ecosystem has many savings accounts (staking) and trading services called Decentralized Exchanges (DEX for short.) Just like a bank exchanging USD for a foreign currency before you travel abroad these DEX’s.
Pretty much everything a traditional investor may need has been built in some form on most of these DEFI networks but pushing crypto into DEFI isn’t like buying a stock and holding on to it and selling it for a larger amount. The products that are being utilized in DEFI currently the most are replicas of existing financial instruments in the Centrally Financed world we know so well. The difference is that in a CEFI world, these products are incredibly complex and have buy-ins starting in the hundreds of thousands of dollars yet in the Crypto world there is no barrier of entrance.
The Avalanche ecosystem (and most others) have rapidly re-built many of these services and upgraded them for digital currency whilst democratizing their access. This means that anyone with the know-how, will and risk-tolerance to get involved on any level of these new systems are able to facilitate proper capital on-boarding.
Things like liquidity pools, and Automatic Market Makers are traditionally only available to central bankers therefore their large profits are re-invested to make them wealthier – but when we’re in the crypto world without barriers, we are able able to participate with as little as a $5 investment properly formed into the needed liquidity pool token. Crypto’s number one goal is to democratize capital investment, and that means cutting out the middle man (or middle woman) when making investments, improve the efficiency, reduce the cost to participate, and lastly to fire the gatekeepers. If there is a protocol you want to invest in, there’s nothing technically stopping you from moving forwards with your wishes on how to spend your money.
Going back to Avalanche as our example, it was NOT easy making this whole system. It took lots of people many years to cook up what we see now and it’s really only about 25% complete. This ecosystem includes many different crypto assets, players and, most importantly, in order to thrive it has multiple moving parts. In fact, all of the DEFI networks contain the same ingredients. As they attract new capital, each ecosystem offers incentives to entice folks like me to invest into their future.
I think Liquidity Pools are a great place to start as I believe this is the underpinning of any good DEFI system. Liquidity is needed to facilitate trading activity. Essentially folks like myself join together two assets into a single token and stake that token into a Liquidity Pool. This guarantees me a portion of the trading fees for each transaction as well as whatever bonus is being offered by the liquidity provider. Let’s step back and dissect this from another angle.
Centralized Exchanges like Kucoin and Binance allow their users to exchange one token for another. They do this by purchasing enough of each asset that they can fulfill the addition and subtraction of their clients funds as trades happen. This is why they are seen as centralized, as the pool of liquidity they pull from is owned and maintained by the entity that is facilitating the trading. These assets the exchanges hold are called their private Liquidity Pools.
In DEFI, the places you can exchange tokens are called Decentralized Exchanges. This is because they don’t have a centralized liquidity pool managed by a single entity. Instead they pull from liquidity pools that anyone can participate in. So if I choose to join two crypto assets together, say AVAX and JOE – and I choose to stake that into a liquidity pool, any decentralized exchange on the Avalanche ecosystem will be able to use the pool I participate in to facilitate any trade of AVAX to JOE or JOE to AVAX. I will get a piece of the trading fee as a result no matter which way the trade goes.
The payout I receive is really small but the transaction volume on some of these pools is high enough that the gains can get pretty awesome over time. Not only do I receive the trading fees, but I would also gain a benefit if the assets were to appreciate over time. So, let’s say AVAX and JOE both go up 10%–that means if I were to remove the staked liquidity and get my tokens back I’d be able to sell them with that 10% gain.
It’s a little more complex than this and there are things like impermanent loss that one must consider before going into a liquidity mining situation, but it’s important to understand that these opportunities exist in the traditional financial world with the same issues. The folks that participate in these things are called Market Makers and are traditionally large institutions and/or extremely wealthy individuals. They are required to have an amazing amount of assets invested to participate. Compare that against my liquidity pools, many of which have a USD worth well below $10.
It’s my thought that small investments left alone in these liquidity pools early on in their growth cycle are a reasonable idea for decent gains in the really long term (years, not months.).
This is the million dollar question that few are able to answer and is the true reason why this took so long. It’s still a very technical process to transfer crypto via these DEFI networks. This part of crypto has not yet been made user friendly and as a result I have lost assets in the process or abandoned assets on chains that I can’t use them on, and even sent assets to the wrong address never to see them again… I use such small amounts to gamble with, so it doesn’t matter much to me, but one must be very careful. After my round of failures I came up with, what I believe to be, a really safe way of sending things around that I want to share with you.
Each network has its own core coin.
These are the core coins for each network and this coin trades with each of the coins inside each DEFI network. So ETH pairs against ANY Ethereum asset, so too does ZIL pair with every asset in the Zilliqua DEFI ecosystem. I believe all coins above are good coins to own at the right price and I have my initial investment already pulled from these coins, so my price is just right! I planned this DEFI investment strategy out a year ago but only just recently were there enough roads and places to send crypto. In other words most of these DEFI networks were only just born in the past few months, so my action on my plan needed to take place at lightning speed.
These networks operate completely separately from each other but are inter-connected via several migration methods. I had / have a few choices on how to push my crypto into these networks.
Probably the easiest concept to understand is marching the asset over a bridge from one network to another. There are MANY bridges with many levels of efficacy. Some are really easy to use and others difficult. Some networks you can’t bridge from and others you can’t bridge to. This is all growing day by day and what is available now is not an indicator of what will be perfected in the future.
I tried bridges at the beginning and I found that they were, in most cases, really annoying to deal with and nail biting to send more than $100 worth of anything. There’s always this time where the website says “do not close this window” and that freaks me out. What if the lights go out? If I’m sending thousands of dollars through a bridge that uses my browsing session to facilitate the change I feel like I’m the weak link in that equation.
More than 10% of my portfolio’s value is still stuck in really small cap assets on the ETH network where it’s cost prohibitive to move it. I bridged some things from the Ethereum network but largely have transferred assets to centralized exchanges after they increase in value. This way I can sell and never look back into the Ethereum network since prices to move assets are so expensive.
As with everything, each network (and some of the protocols within the network) allow you to purchase on-chain assets with credit / debit cards and even some offer ACH or wire transfers – but that stuff isn’t for me. I don’t like buying crypto with credit cards because the first time I tried I was levied with crazy fees that made my purchase foolishly over-expensive.
Thankfully the credit card companies have gotten a little better, but why chance it really when I have crypto already – I don’t need anymore, I can make more as I need it.
I don’t know if others are doing this, but as I on-board new liquidity into each of these networks I kinda just buy that core coin and transfer it in, allowing me to sell to stable coins or buy anything else within the network. This has provided me with a really good way to not only on-board fresh capital into each ecosystem, but to put this capital in assets that I believe should be appreciating well over the next few years.
Certainly I have no crystal ball and it’s hard to know which of the ecosystems will survive the test of time. I’m well aware that putting money into an ecosystem could be sending it out to pasture never to see it again if that particular network fails somehow. So, I limit my risk by limiting the capital I invest. I have a staggered amount of wealth in each of these ecosystems and I monitor them as a whole in comparison to each other.
For example, by purchasing the coin called ONE and transferring into the Harmony ecosystem, those new ONE coins are ready to purchase any asset within the Harmony network, even the assets that are ONLY currently available within that environment.
You see, assets/coins HAVE ALWAYS started on a home DEFI network and expand from there. Some assets never make it onto a proper centralized exchange whereas other assets do. Some assets end up on multiple exchanges and others die on the vine so to speak. Some assets are highly capitalized and price everywhere follows closely along a single chart whereas others have different prices on each network. This makes purchasing, valuing, holding, and tracking very difficult – but if you are able to do it right there is wealth to gain by arbitraging between the networks.
It was far too confusing for me to track down every asset I wanted to buy so my method of moving in new core coins helped as I was able to purchase the proper amount of those core coins to send into each network as capital, then sell to whatever assets I wanted to retain.
At this time I’m set with all my network investments except Terra. That network is AWESOME and one of my strategies is to utilize their 19% APY savings account for UST as my personal savings account. The UST coin is an algorithmic stable coin and therefore pegged to around 1 USD per 1 UST. I believe this is the strongest stable coin and, although you can’t trade with it much yet, holding any long term liquidity in the UST staking account seems the wisest use of sidelined cash.
It’s my dream that eventually I’ll gain enough UST to have that 19% gain to pay my monthly bills. Stability is the name of the game with the Terra ecosystem whereas the Solana and Avalanche ecosystems both appear to be geared towards speculators, traders, and large money holders.
As for the other networks, they really haven’t yet taken proper shape to understand where they may go. If I were to guess, I’d peg the Zilliqua ecosystem to go towards supporting governmental crypto needs, Harmony / Fantom may lean towards gaming, whereas I believe Tezos, Kava, Ethereum, and DOT will focus on funding and institutional investments over time. Lastly we have the Atom ecosystem. I wrote about this in detail in a prior article.
I was taken by ATOM from the beginning of its existence. It has promised the world and not until recently did it start delivering. Essentially there is a hierarchy of the blockchains and each of these networks is one blockchain. It may be a blockchain on another blockchain like Polkadot, or a blockchain of it’s own in Harmony, or a built-in Cosmos blockchain like KAVA or Zilliqua. Or the mother of all blockchains, ATOM.
ATOM is what I refer to as blockchain layer 0. If you can think of these blockchains as layers on an ice cream cake, layer 0 is the bottom crumb layer separating the cake stand from the ice cream. This layer establishes the size of the cake and lays in proper support for each of the above layers. ATOM is properly named as its project has the ability to be used to create blockchains and to get assets from one blockchain to another. Therefore ATOM is layer zero in my mind since you can jump from the atom ecosystem into any other (properly integrated) network.
An example of a layer 1 ecosystem is Ethereum. There are many others and in our ice cream cake, imagine that there are balls of different flavor and different sized ice creams on top of the ATOM cookie base. Ethereum would be one REALLY large scoop of ice cream but with many other really small ones attached.
Layer 2 is where it gets really interesting because layer 2 blockchains are a part of a layer 1 blockchain. Think of them as the fillings inside the ice cream scoops – you have MATIC (Polygon) as some cookie dough sprinkled inside the Ethereum ice cream scoop. There are other blockchains that exist within Ethereum as layer 2 and there are layer 2 blockchains inside other layer one blockchains as well.
Layer 3 blockchains are coming. The only one I know of so far is Kusama (KSM) and it’s starting to roll out features now. But, as you can imagine, layer three is inside layer 2 which is inside layer 1 which is accessible by layer 0… Get it? Good. Lol…
It’s overly complex certainly but one thing the crypto community decided early on was that ALL folks needed to play by the rules. Given that crypto is full of open sourced code certain things don’t need to be rebuilt many times over. Once something is built it can be copied legally and integrated into another use case. This makes for easier development and increased compatibility.
Many of these traits were handed down by the code base and white paper released in 2009 by “Satoshi Nakamoto”, whomever that was. Everyone has decided to play on the same playground. All of these interconnection points are replications of each other. Meaning that once integration between one network and another is done, each network has a standard integration that can be reused for future expansion.
It’s truly like a spider web with lines of silk that connect many players (but not all yet). With each developmental accomplishment, the network of networks gets bigger and stronger. ATOM is starting to come out of it’s hibernation and I’m on the tail end of transferring in my ATOM tokens and placing some liquidity within that layer. I only hope that over time the pools I picked become popular enough to make proper gains. But there’s really no way for me to tell as I deal in more of a shotgun approach. I seed tons of things, then sit and wait, watching the whole time, eventually feeding the positions that are growing the hardest.
I do believe ATOM will be the lynchpin as the future promises that there may be one wallet where all of these network pools can be controlled. Meaning that I may not need to keep track of a dozen different liquidity providers ON EACH blockchain I stake on. Perhaps in the future I’ll be using a Cosmos wallet that watches over everything.
And the strangest thing to think about is that each of these assets never leave their blockchain. When Ethereum is bridged into the Avalanche network the ETH asset doesn’t actually leave the Ethereum blockchain. Instead it gets locked into an Ethereum holding contract that the Avalanche development team built on the Ethereum Blockchain. Then a synthetic (or wrapped) Ethereum asset is minted in Avalanche with the exact same price as the proper ETH. That can be traded in the Avalanche ecosystem as if it’s ETH.
So as you can see, DEFI is still confusing and ripe for potential errors–but it’s also relatively new. How long did it take for banks to streamline the process of applying for a loan? Decades? And some would argue they still haven’t accomplished this. While DEFI is brand new (relatively speaking) it’s been around for a decade. DEFI is getting to a point where enough people are starting to use it, making it more resilient and usable to more.
With all the new capital flowing into and out from each defi network, it’s becoming a proper infrastructure to grow upon. I only hope I have picked the correct networks and assets to stake my future on. Pun totally intended.