Understanding Decentralized Finance: DeFi 101

Decentralized Finance 101

Decentralized Finance 101

In 2020, the cryptocurrency market cap surpassed $1 Trillion. This year, you owe it to yourself to learn how you can get involved in digital asset investment opportunities.

We get it. We live in a digital age full of constant technological changes – keeping up with these changes can be overwhelming. This is especially true for digital assets like Bitcoin. With access to an abundance of information on the topic, sometimes it can be hard to make sense of new terminology and the cultural memes born from societal change. As this ecosystem surfaces, it can be hard to understand even the most basic terms that industry experts take for granted. 

Despite the seemingly overwhelming nature of the digital asset industry, it really isn’t so complicated once you learn the basics. In our view, once you understand the basics, you’ll see that adding digital assets to your portfolio is one of the most critical investment decisions you’ll ever make. That’s why we left Wall Street – to bridge the gap between crypto and traditional finance. You don’t want to be on the sidelines for this emergent industry. 

Start your cryptocurrency and blockchain education with some basic themes and terminology, here:

Decentralized Finance (DeFi)

Decentralized Finance, also known as “DeFi,” refers to a broader series of financial services that uses blockchain technology to reimagine traditional finance. Using publicly available and verifiable ledger systems, DeFi systems support financial transactions that remove many of the costs of counterparty risk. For example: instead of paying an organization to act as an escrow service, you’d use software known as a smart contract to verify financial transactions. 

One example of how DeFi is changing the world is how money is transferred through it. Global remittances total nearly $700 billion a year. Remittance services typically charge high fees and take time to transfer money from one country to another. With DeFi, those transactions can be done rapidly, for a fraction of the cost, and are done directly from peer to peer, offering a more private and secure transaction. 

According to the OCC, DeFi is on pace to overtake traditional financial services.

Smart Contracts 

But what exactly is a smart contract? And why does it matter whether there are 3rd parties involved in a transaction? Smart Contracts are a new type of software that facilitate a cryptographically secured transaction on a blockchain. Smart Contracts function as rules written in code which dictate the execution of the transaction. 

Decentralized Applications – DApps and DEXs

Decentralized Apps (DApps in the crypto world) are unique applications that use smart contracts for different purposes. Smart Contracts have allowed for the creation of decentralized exchanges (DEXs), which are smart contracts that facilitate peer-to-peer market making using complex smart contracts, rather than relying on 3rd party clearing houses, broker/dealers and bank custodians. These applications run exchanges using a permissionless network (no 3rd parties are involved), therefore making DEXs secure. Popular DEXs include Compound and Uniswap.

You may be wondering, why wouldn’t you just use a centralized exchange like Robinhood or Coinbase? The real value behind decentralized applications like a DEX is that you own and maintain custody of your asset up until the transaction takes place. The application cannot restrict your ability to transact with any asset as what recently occurred with the Robinhood’s restriction of Gamestop stock. 

Becoming your own Bank: Decentralized Lending Platforms 

Lending platforms offer a flexible alternative to traditional banking services. They provide users the ability to borrow and lend cryptocurrencies on a peer-to peer network, insinuating the idea of “being your own bank.” Privacy is heightened as classic bank requirements such as identity and credit scores are not required through the platforms.

Stablecoins 

Most people are familiar with Bitcoin and the cryptocurrency industry because of industry wide price volatility. Stablecoins were created as a way to mitigate volatility risk in the DeFi space. These coins are pegged to the value of traditional fiat currencies. For example, USDC is a stablecoin pegged to the U.S. Dollar.

Decentralized finance is in for a wild ride in 2021. As you follow along, it will be critical to be educated on what powers these technological advances and how they are changing the future of finance.

Final Thoughts

At Sarson Funds, we understand that you’re not going to jump straight into a new investment opportunity without educating yourself first. That’s why our core mission is to thoroughly educate financial advisors on this emergent investment class with Wall Street-grade standards. To learn more about how digital assets can support your investment objectives, stay tuned for more educational materials or reach out to schedule an appointment with one of our experts today.

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For more updates on the world of digital assets, follow the journey via our Twitter, LinkedIn and Facebook, or here at: https://www.sarsonfunds.com

By Abigail Almonte

Harvest Finance Hacked: Flash Loans and How to Mitigate Risk of Loss

Harvest Hacked and how to protect against losses

Weekly Analyst Thoughts

This past weekend, Harvest Finance, a Defi yield farming protocol, was hacked using a Defi transaction mechanism called a flash loan. A flash loan is a specific type of transaction where the borrower must repay the loan in the same blockchain transaction. If the borrower does not repay the full loan (principal + interest), the transaction reverts, so as to seem like the flash loan never happened. Like Harvest, Aave also supports flash loan transactions and credits much of its meteoric 2020 price rise to this feature.

The Harvest Finance attack was executed through the Curve Finance Y pool with a flash loan. As seen below, Harvest’s near $3 billion in volume and over 170% APY raised concerns that there was irregular activity in the Curve Finance pool.

Source: Curve.fi

The takeaway from this clever arbitrage on Harvest Finance is that even if a yield farming protocol has multiple layers of audits (as Harvest did), it can still be vulnerable to attacks. So, don’t let the fact that a protocol is audited give a false sense of security when investing in Defi yield farming protocols. Instead, it is safer to diversify risk by investing with several reputable yield farming platforms (Ex: Uniswap, Balancer) to mitigate the risk of lost funds through sophisticated flash loan attacks.

By Jacob Stelter

Balancing Act: Balancer Brings Automatic Rebasing to Defi

Balancer Incorporates Stablecoin Rebasing to Defi

Weekly Analyst Thoughts

Ampleforth-USDC Smart Pool

Before Uniswap, decentralized exchanges were plagued with low liquidity and trade volumes. Decentralized exchanges had orderbooks, complicated cryptocurrency wallets and several functional problems for users. The advent of automated market making by Uniswap revolutionized decentralized exchanges. The AMM model consists of liquidity providers who provide 50% of one asset and 50% of another asset into a pool and earn a 0.3% fee anytime someone trades one asset for the other inside the pool. However, one big problem that comes with the AMM model is the impermanent loss for liquidity providers. An impermanent loss is what an LP incurs when they provide liquidity to a pool and the assets in the pool diverge from the price established when the liquidity was first provided. It is called impermanent loss because the 0.3% trading fee revenue is meant to offset the loss from providing liquidity, but in some cases where the asset price diverges too much from the other asset, the impermanent loss could become a permanent loss.

The Ampleforth-USDC Smart pool on Balancer aims to mitigate impermanent loss with a smart contract that automatically rebalances the Ampleforth-USDC pool to a 50-50 weighting based upon Ampleforth’s daily rebases. Ampleforth is an elastic cryptocurrency that has a target value of $1. As Ampleforth trades above $1, the token does an automatic rebase where it increases the AMPL supply to push the value down to $1, which signals the Balancer Smart pool to adjust the AMPL-USDC weightings to mitigate impermanent loss. In summary, if a liquidity provider is looking to mitigate impermanent loss risk and is looking for innovation in the Stablecoin pooling space, look no further than the AMPL-USDC smart pool on Balancer.

By Jacob Stelter

Cream Finance: New Crypto Exchange Rivaling Uniswap and Balancer

Weekly Analyst Thoughts

Cream Finance: New Crypto Exchange Rivaling Uniswap and Balancer

Introducing Cream Finance, a new Defi liquidity exchange that is as robust as competitors like Uniswap, Balancer, and Compound. Cream stands for “Crypto Rules Everything Around Me” and its token jumped 145% just last week. Cream Finance allows the borrowing and lending of multiple cryptocurrencies and offers better yields than Compound Finance, as pictured below.

Cream Finance also allows liquidity providers to yield farm Cream on Balancer and Uniswap pools, pictured below.

Finally, Cream Finance has its own Uniswap and Balancer exchange, “Cream Swap,” that delivers yield farming rewards for being a liquidity provider on their platform. One of their liquidity providing pools has a 200% APY just for depositing a different type of Ethereum into a pool, as seen below.

In summary, Cream Finance provides a platform to borrow and lend a multitude of cryptocurrencies, yield farm and become a liquidity provider on their Cream Swap exchange, and yield farm in Uniswap and Balancer Pools.

By Jacob Stelter

Multi-Platform Yield Farming With Curve’s CRV Token

Weekly Analyst Thoughts

Curve Dao Token- CRV

In the Defi ecosystem, three major decentralized exchanges, Dexes, are used. These Dexes are Uniswap, Balancer, and Curve.

Balancer’s BAL token incentivizes Defi users to become liquidity providers within their Balancer pools to earn BAL tokens, while Uniswap has the network effect of being one of the first Dexes to have liquidity pools. Curve, on the other hand, is known as the stablecoin Dex where users can seamlessly exchange stablecoins like sUSD, DAI, USDC, and USDT, making them one of the most popular Dexes in the ecosystem. To add to their fervor, Curve has released their own CRV token to incentivize Defi users to contribute to their liquidity pools.

The rewards for CRV tokens are between 57-150% for contributing to a Curve liquidity pool. I would recommend that Defi users combine Compound liquidity rewards with CRV liquidity rewards to maximize their yield farming earnings.

Example Yield Farming Scenario:

  1. Supply $10,000 of USDC to Compound Protocol: Estimated Interest Revenue: $671, Compound Liquidity Earnings: $817
  2. Supply $10,000 cUSDC tokens received from supplying to Compound Protocol: Estimated Interest Revenue: $822, CRV Liquidity Earnings: $6,056

Estimated Yield Farming APY: 83.66%

In summary, with the addition of new yield farming tokens, there is new opportunity to combine different Defi protocols and earn higher than normal APY, all while helping other Defi users trade seamlessly between different Ethereum ERC-20 tokens.

By Jacob Stelter

Curve Pool Gives Investors New Exposures Through Liquidity Pooling

Weekly Analyst Thoughts

Curve Pool

Defi recently welcomed a new development to its space: Curve Pool. Curve Pool brings together stablecoins and wrapped tokens and offers liquidity pools for investors to contribute to.

Below is a snapshot of their website and the potential returns (APY) investors can earn by joining their pools. Notice that Synthetix token (SNX) offers multiple rewards in SNX for providing liquidity to its stablecoin (sUSD) and its synthetic bitcoin (sBTC).

Source:     https://www.curve.fi/

Synthetix app Mintr, pictured below, promotes opportunities to earn SNX with Curve pool.

Source: https://mintr.synthetix.io/

In summary, if you are holding SNX, REN or other stablecoins, but not using Curve pool to provide liquidity and earn interest on your holdings, then money is being left on the table. If this post sparks your interest in Curve pool, consider the sBTC pool (pool 6) because it gives investors exposure to multiple tokens as they could earn SNX, REN, BAL and CRV.

By Jacob Stelter

Balancer Token’s Release Provokes Momentum For the Defi Space

Weekly Analyst Thoughts

Balancer Token

Cryptocurrency enthusiasts have predicted that most future trading will take place on decentralized exchanges, such as Uniswap, instead of centralized exchanges, like Coinbase. Thus far, this prediction has only come true for Ethereum and ERC-20 tokens, which are the standard tokens used for Ethereum smart contracts. On the Ethereum blockchain platform, there is a thriving decentralized exchange (DEX) ecosystem with over $56 million dollars in liquidity pools, fueling the development of decentralized exchanges like Balancer.

Last week, Balancer released their governance token (BAL) and it has exploded in value. As of last Thursday, BAL was up 157% since its release on the main net last week. While BAL has had tremendous success thus far, one of the problems with the BAL token is its’ inaccessibility. When searching for BAL in Uniswap, nothing appears. Instead, investors must navigate to Etherscan.io, a block explorer, find the token contract address and paste it into Uniswap, allowing BAL to appear and be accessible for trade. BAL can also be found in a DEX aggregator called 1Inch Exchange.

The success found by the Bal and COMP tokens in the past two weeks signify significant momentum being gained in the Defi space. Investors must make note of these as well as future developments in the Defi space as these platforms are driving the future of cryptocurrency trading.

By Jacob Stelter

Balancer: Changing the Game With Offering of Self-Balancing Funds

Weekly Analyst Thoughts

Balancer: Offering New Exposure to Crypto Through Liquidity Pools

There is a new addition to the DeFi space this week: Balancer. Balancer the next big decentralized exchange, an evolution from exchanges like Uniswap, Kyber Network and Totle Swap. This self-balancing index fund uses liquidity from arbitrageurs to keep Balancer pools at desired percentages. Liquidity providers use Balancer to create a Balancer pool, or personalized index fund, and determine what percentage of up to 8 cryptocurrencies they would like to manage in their pool by providing the liquidity for each. Once providers have established their pool, they can then alter the portion of each crypto within the pool based on the crypto’s recent performance. In establishing a pool with individually contributed liquidity, liquidity providers are then paid for their contributions.

To demonstrate how the Balancer pool works, the image below depicts a shared Balancer pool in action. Liquidity providers contribute 75% Maker and 25% WETH into this pool. This pool’s skew was altered and had Maker above 75% and WETH below 25% this week because Maker went up 30-40% when it got listed on Coinbase. In this price action, an arbitrageur could have exchanged WETH for Maker at a slightly cheaper price while also helping the Balancer pool out by self-balancing back to its 75-25% ratio.

Source: Pools.balancer.exchange

The first generation of DEFI dexes forced liquidity providers to allocate a 50-50 ratio of any two cryptos to any pool they wanted to provide liquidity for. With Balancer, liquidity providers have a chance to make their own self-balancing index funds with personalized portions of each crypto they choose to include. These highly flexible, personally-managed index pools give arbitragers and investors a new level of exposure to the depth and profitability of the crypto space, bringing the ecosystem one step closer to universal comfortability and adoption.

By Jacob Stelter