The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.
By: Shane Neagle
When most people think of Bitcoin or other digital assets, one word comes to mind: Volatility. While high-frequency traders thrive on volatility, it’s certainly not something one would associate with blue-chip stocks. Yet, as an emerging market holding $56.5 billion in assets, some DeFi projects have the potential to eventually become something of a blue-chip stock, despite their volatility today.
The DeFi space is best understood when it is contrasted with the stock market. The latter is highly regulated and influenced by monetary policies, coming primarily from the Federal Reserve. On the other hand, DeFi projects are free to explore what is possible as if a central committee doesn’t exist. Because of their reliance on merit and financial innovation, DeFi protocols can be viewed as pioneers, claiming new lands that are currently cheap but could become future Manhattan.
First, let’s see what it means for DeFi to not rely on federal monetary policies. When we take a look at the S&P 500 blue-chip index, it is easy to see why the benefits of blue-chip stocks would be the preferred route by many traders and investors. After all, they provide stability for your portfolio and tend to generate reliable long-term returns.
Image credit: fred.stlouisfed.org, source: S&P Dow Jones Indices LLC
As you can see in the chart above, the S&P 500 has increased over 62% throughout the last three years. However, this growth had been temporarily nullified two times: in March 2020 due to emerging Covid-19 fears and in December 2018. The latter dip is more telling because the Fed’s interest rate hike was one of the major factors involved. Seeing the negative effect on the stock market, the Fed soon corrected course, gradually dropping the interest rate from 2.4% during 2019 to the current range of 0 - 0.25%.
Image credit: fred.stlouisfed.org, source: Board of Governors of the Federal Reserve System (US)
Suffice to say, this dynamic between the Fed and the stock market infers heavy support. Otherwise, we wouldn’t have seen a stock market reversal from March's Black Monday. For the first time in monetary history, the Fed successfully intervened in the market by creating Primary and Secondary Market Corporate Credit Facilities and buying $750 billion in corporate bonds. Consequently, the S&P 500 — along with the majority of the market — was quickly back on course.
Unfortunately, alongside the unprecedented increase in money supply and supply chain disruptions caused by economic lockdowns, we are seeing an increasing inflation rate as a consequence. June’s consumer price index rose to 5.4%, the largest monthly gain since as far back as August of 2018.
Therefore, with inflation continuing to increase and interest rates remaining low, this leaves the economy in a precarious position with many uncertainties. Never before have so many unprecedented monetary events occurred in such a short time span.
When it comes to safeguarding your financial future, there are many ways to guard against inflation. DeFi projects can be seen as one of such methods because they exist outside the Fed’s domain. Instead of relying on monetary policies, they draw value from cryptographic math, the blockchain, and algorithmically enforced smart contracts.
The DeFi landscape remains nascent, and is therefore subject to change considerably in the future. Yet, as the space looks right now, let’s examine a few emerging DeFi projects that hold the potential to one day be comparable to blue-chip stocks in terms of long-term value propositions.
FinTech and DeFi Projects as Independent Ecosystems
Last week, Wells Fargo bank announced plans to shut down all personal lines of credit. The bank openly recognizes this will likely harm the credit score of its many customers, but is proceeding to do it anyway.
Banks are also offering extremely low interest rates when it comes to savings accounts. Banks in certain parts of the world are even charging negative interest rates for some clients — which means the banks are actually charging clients to store their funds.
Many projects in the DeFi space offer exponentially higher rates when a user deposits funds to liquidity pools. At the same time, FDIC insurance will remain the banking sector’s strong point.
However, if you are just getting started with DeFi, you will quickly see that the environment resides on a spectrum. Some platforms are more centralized than others, creating hybrid products that combine the best from both worlds. The first among them is Gemini.
Gemini – Supplementing Savings Account with a Passive Income
Gemini is one of the few crypto exchanges in the world that are FDIC-insured, to some extent. More importantly, Gemini has never been hacked, having implemented the strictest security measures since its launch in 2014. Created by the Winklevoss twins - Cameron and Tyler Winklevoss – Gemini expanded its services beyond an exchange.
This platform offers Gemini Earn - a bank-equivalent savings account with no fees. It is based around depositing cryptocurrencies and stablecoins, with 25 in total on offer. In the traditional financial sector, the current average yield sits at around 4.17%, while financial services firms within the S&P 500 can give you up to 2.5% dividend yield.
For a savings account with a local bank, you would get a 0.6% interest rate if you are lucky. In our current environment, banks consider this a high-yield interest rate now. On Gemini Earn, the interest rate is orders of magnitude higher compared to both stock dividends and savings accounts – up to 7.4% APY (annual percentage yield). There are also no transfer or withdrawal fees.
In this hybrid DeFi space, BlockFi is another platform with highly competitive interest rates. While not FDIC-insured itself, Gemini serves as the cryptocurrency custody provider for BlockFi. Moving toward the more decentralized side of the DeFi spectrum, insurance becomes one’s personal responsibility. Nexus Mutual is one of the largest such protocols which offers insurance services, and currently covers $426.8 million worth of digital assets.
Uniswap – Decentralized Lending Protocol and DEX
Uniswap pioneered the first decentralized exchange and lending protocol, operating on the Ethereum blockchain. After May’s v3.0 upgrade launch, Uniswap reworked its fees to make them more flexible, along with a number of other improvements.
To make the lending more precise, users can now take advantage of concentrated liquidity and higher capital efficiency, in addition to setting up customizable price ranges of staked tokens. Uniswap’s native token UNI is used for staking in liquidity pools, receiving rewards from staking and for on-chain governance.
Image credit: TradingView.com
Uniswap’s current market cap is $11.9 billion accounting for a total of one billion UNI coins, of which over half are in circulation. After 2024, UNI will have an inflation rate of 2%.
The DeFi protocol currently holds $1.6 billion worth of assets locked within liquidity pools. To give you an idea how much more efficient Uniswap is compared to a centralized platform, it has over 30 times fewer employees than Coinbase, while transacting over half of Coinbase’s monthly trading volume (on average).
In addition to Uniswap, other platforms that could be of interest include Aave and 1inch, as they both offer unique twists and value propositions. Aave provides uncollateralized loans, unique collateral vehicles, “rate switching”, and flash loans for instant borrowing. On the other hand, 1inch is the most audited project in the entire DeFi space. Its unique value comes from aggregating token price rates across 50 liquidity pools. They are not only limited to Ethereum, but extend to Polygon and Binance Smart Chain (BSC) as well.
Chainlink (LINK) - Connecting Off-Chain and On-Chain Resources
The importance of Chainlink cannot be overstated. DeFi protocols would not be as nearly as valuable if they are totally isolated from the outside world. Chainlink is there to link them up with real-world data via so-called oracles and then relay that data back to blockchain platforms.
This valuable information can be used for DeFi insurance protocols for calculating premiums, real-time tracking of products, receiving banking info for executing smart contracts, verifying valuation of assets, verifying user identity, and much more.
LINK is the network’s token for paying the data transfer, already in use with the aforementioned Aave, but also for Synthetic, KyberSwap and many other smart contract platforms. LINK’s total supply of 1 billion LINK is divided into three broad categories:
- 24% distributed to oracle node operators
- 35% locked among smart contracts
- 41% in circulation - 438.5 billion LINK - available for purchase
As a result of May’s crypto crash, the price of LINK has receded to levels seen as far back as August 2020.
Image credit: TradingView.com
However, as DeFi activity ramps up again, it is inevitable that platforms will have to connect to off-chain resources, with Chainlink as a leading data-feed provider. In turn, LINK price should outpace its annual inflation of 4-5%, returning to its pre-May upward trajectory.
In conclusion, most digital assets exhibit relatively small market caps and high levels of volatility - showing some of the same traits found in penny stocks. However, the key difference is that DeFi protocols are at the cutting-edge of financial innovation, recognized as such by the world’s largest banks. When viewed in this light, being a part of the first wave of stakeholders might not be such a bad idea.
Author bio: Shane has been an active supporter of the movement towards decentralized finance since 2015. He has written hundreds of articles related to developments surrounding digital securities - the integration of traditional financial securities and distributed ledger technology (DLT). He remains fascinated by the growing impact technology has on economics - and everyday life.
The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.
© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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