The Decentralized Finance (DeFi) Thread

Coja Petrus Uscan

Crow
Orthodox Inquirer
Gold Member
DeFi refers to decentralised platforms that offer financial services via publicly viewable smart contracts.

Most DeFi platforms are based on Ethereum (ETH) and trade in ETH tokens. As ETH itself is not an ETH token it has to be 'wrapped' to be used in DeFi. Wrapping is a process in which an asset is tokenised as an ETH/TRX token. BTC is also wrapped for use in DeFi. They are known as WETH and WBTC respectively.

There are three primary functions that DeFi platforms offer:

1) token swaps - this is an exchange function, swapping one token for another, e.g. USDT -> BAT; PAXG -> WBTC. The trades are made via assets held in liquidity pools (see below) and incur platform fees equivalent to what you would pay on a centralised exchange. You also have to pay gas fees for the transactions, which is not cheap at current and I wouldn't expect it to change any time soon. You also have to be careful (like you would if you were using an exchange) that large orders don't push the price up dramatically. Another consideration is that transactions between less common tokens will likely involve multiple token swaps, which I believe will increase the price of the transaction.

2) liquidity - for token swaps to work requires people to deposit tokens into liquidity pools. In these pools providers must deposit an equal amount (in $ value) of two tokens, e.g. USDT -> WETH. When someone wants to, say, buy WETH with USDT they deposit USDT into a liquidity pool and take WETH from it. Those who have deposited in the pools then get a share of all/most of the exchange fee. This fee is usually paid in the form of the platform's token, but can be in numerous tokens. If you are providing liquidity you will get a daily (seemingly on all platform) interest payment. However you need to be aware that you will loose $ value as the price of your deposited assets change, see. The more volatile the asset prices the higher the interest payment is likely to be, i.e. there are some interest payments that are 100s of percent per year.

3) governance - platforms have their own tokens, which allow you to vote on how the platform operates

Currently all of these functions are somewhat slow and clunky. Using these platforms reminds me of using the internet on a 56kbps modem waiting for 1 hour for an MP3 to download. But it is also a quicker and safer experience to move funds around on DeFi than centralised exchanges. If you just want to swap on a platform you have used before the experience is very quick.

To use DeFi you will need a wallet. I think you can use just MetaMask (a browser plugin), but it is obviously best to use a hardware wallet, but though MetaMask, which will often be the only way you can interface with a DeFi platform. MetaMask also provides better support. Just using Ledger (which few platforms support) is more likely to give you wallet errors.

Most platforms are listed here: https://coinmarketcap.com/yield-farming/

But two other fairly large ones are CREAM and Crypto.com DeFi Swap.

For passive income generation you can provide liquidity as mentioned above. There are also vaults, which typically do not come with the any or little possible losses as mentioned above regarding liquidity (impermanent loss). These vaults are used to perform various income generation strategies as decided by the platform's governance. With vaults you can expect about 10-40% interest per year for stable coins and around 8% for WETH, WBTC. Currently you can earn about $110 per day if you deposit $100,000 TUSD (TrueUSD) at HarvestFinance, i.e. the same amount many want to make from passive income from $1 million. This is paid in the platform's token FARM. So if you want to use it, you'd need to convert it.

In terms of security, I can't say much. The platforms are governed by publicly viewable smart contracts, which provides a vector for exploitation and there would be the possibility of exploitation by the governance. These platforms are also very new. But once there are established platforms they should be quite secure. Many platforms have had their smart contracts audited.
 

Arado

Pelican
Gold Member
Very basic overview here for beginners.

Decentralised Finance (DeFi) is an ecosystem of financial services, facilitated through the use of smart contracts deployed on Ethereum. These smart contracts remove the need for an intermediary, creating a cheaper, faster, more secure and efficient way of providing financial services. DeFi extracts value from the traditional finance sector, where intermediaries are paid large fees to facilitate financial transactions. Being primarily built on Ethereum, ETH is required to use DeFi services, hence the adoption of DeFi will increase demand for ETH.
...
Here is an example of how a smart contract can be programmed to work: Person A wants to borrow $100 at 10% interest from Person B, due for payment in one month. A sends $150 worth of Gold certificates as collateral to a smart contract. B sends $100 to the smart contract, and the smart contract transfers the $100 to A.

If A deposits $110 back to the smart contract in one month, B gets $110 back and A gets the Gold certificates back. If A does not deposit $110 back to the smart contract by the deadline, B receives the Gold certificates and A loses his collateral.
...
With a DeFi exchange, you are able to utilise a smart contract to mitigate third-party risk, reduce exchange fees and trade any time you want. The only requirement is that you have the ETH to pay for the execution of the smart contract. Since smart contracts are programmable and deployable on the blockchain by anyone, an ever expanding number of DeFi applications are created on Ethereum and are being used today. From lending platforms, investment funds or even platforms that facilitate the creation of derivatives, tracking real world assets like Brent Oil or the Nikkei Index.

I still don't really understand this space, and many Bitcoin maximalists say that Defi is a scam and ponzi. If there's a super simple Defi application that is of use to normal people then that will help me wrap my head around it.
 

Coja Petrus Uscan

Crow
Orthodox Inquirer
Gold Member
I will add to this that I since found that Harvest Finance (not the most trustworthy looking of platforms) and Yearn have both suffered from hacks or maybe have been compromised is the better term; as I believe they were both compromised due to issues in their smart contracts, which are, of course, public.

In the case of Yearn is was a pre-beta test product with live coins that was hacked. Harvest's live product was hacked.

So at the moment I am more partial to use certain centralised platforms like Nexo, Binance and Crypto.com.

I also like Nexo's coin Nexo, which is one of the few coins that has a very solid and realistic basis. It pay's a dividend of 30% of the revenue of the loans the platform processes. The coins has been very steady and appreciating slowly over about 2-3 years. One downside is exchanges are wary of offering security tokens, as it risks the wrath of the likes of The SEC. Not up to date on the price, but last I checked it is looking at a forward dividend of 8% per year, if you factor in past growth that would be more like 24%.

So currently I am loaning out stable coins there at 12% with the interest paid in Nexo. Over the near-term I see that ending up as a lot more than 12%. Probably more like 30%.

The downside of it is the fees and this is a big issue for now. I made a test deposit to Year and it cost at least $6 in fees for a $250 deposit. Currently ETH fees are something like $2.5 for a transaction. I always remember them being more like $0.25, which is essentially relevant for any one who can justify a hardware wallet. The fees on DeFi exchanges are also a bit higher at about 0.3%; while I believe most centralised exchanges are at about 0.01% for maker and another 0.01% for taker. In DeFi only the purchaser pays fees, which are distributed to liquidity providers. Hopefully ETH 2.0 will get these fees down.
 

Mikeyd03

Woodpecker
most of my holdings are in BTC....but I think a lot of maxis are missing the vast potential of DeFi.

I’d say buying solid DeFi Projects now is like buying BTC in 2012.
 

Blade Runner

Ostrich
Orthodox
Strange back and forth there. Pretty funny actually. I used to have a RV subscription. I wonder if they are doing just OK. It went to a sad degree of monetization early in the year, where they changed the status of all existing subs to tiers. At that point, even though I like the service, I figured I couldn't re-up. I think that's why Grant Williams bounced too, btw.
 

Coja Petrus Uscan

Crow
Orthodox Inquirer
Gold Member
How does one actually buy a defi project? Is there an associated altcoin?

In the top 100, that I am aware of, there is Aave, Yearn, Uniswap, Compound, Sushi, Kyber.

If the tokens can have any real value is a question.

Most DeFi platforms offer a platform to exchange tokens and offer their tokens as collateral for which they get a share of platform trading fee.

Of the above Yearn does not offer any of those. It is a platform that tries to get you the best yield for assets you deposit.

Tokens may be used to allot voting rights in the platform's governance.

I believe the Kyber token gives you a share of the fees.

Kyber has been around for a while, but was not fully operational. In that time a lot of these other projects have come up and very quickly moved DeFi on.

But in the crypto world fundamentals aren't that important, what is important is buzz, the prospect of fundamentals. Right now it's about Yearn, but I believe Uniswap has the highest volume.

Uniswap is doing about $350m in exchange volume now, while Kyber is at about $10m. About six months ago the total DeFi exchange volume was about $10M across all platforms. Now it's about $600m. While centralised platforms claim to be doing $100b, a considerable portion is fake and there is likely a lot more API trading on centralised exchanges. Right now the fees are putting the breaks on growth. With the launch of ETH 2.0, that should change over the coming 1-2 years. If you take out that DEXs are likely 5-10% of exchange volume after a few months of operation. Hence, if there is a crash I think these will be the best buys; plus keeping your eyes out for new DeFi tokens. In a few years DeFi will likely be everything that is not fiat onboarding, unless someone can come up with solid solutions - something like Bisq. And all this is why ETH was most of my purchasing this year. The whole crypto space is moving to requiring ETH to work and trade in ETH-pairs. Bitcoin as a store of value doesn't match up to that. And ETH can take the store of value role.
 
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Arado

Pelican
Gold Member
In the top 100, that I am aware of, there is Aave, Yearn, Uniswap, Compound, Sushi, Kyber.

If the tokens can have any real value is a question.

Most DeFi platforms offer a platform to exchange tokens and offer their tokens as collateral for which they get a share of platform trading fee.

Of the above Yearn does not offer any of those. It is a platform that tries to get you the best yield for assets you deposit.

Tokens may be used to allot voting rights in the platform's governance.

I believe the Kyber token gives you a share of the fees.

Kyber has been around for a while, but was not fully operational. In that time a lot of these other projects have come up and very quickly moved DeFi on.

But in the crypto world fundamentals aren't that important, what is important is buzz, the prospect of fundamentals. Right now it's about Yearn, but I believe Uniswap has the highest volume.

Uniswap is doing about $350m in exchange volume now, while Kyber is at about $10m. About six months ago the total DeFi exchange volume was about $10M across all platforms. Now it's about $600m. While centralised platforms claim to be doing $100b, a considerable portion is fake and there is likely a lot more API trading on centralised exchanges. Right now the fees are putting the breaks on growth. With the launch of ETH 2.0, that should change over the coming 1-2 years. If you take out that DEXs are likely 5-10% of exchange volume after a few months of operation. Hence, if there is a crash I think these will be the best buys; plus keeping your eyes out for new DeFi tokens. In a few years DeFi will likely be everything that is not fiat onboarding, unless someone can come up with solid solutions - something like Bisq. And all this is why ETH was most of my purchasing this year. The whole crypto space is moving to requiring ETH to work and trade in ETH-pairs. Bitcoin as a store of value doesn't match up to that. And ETH can take the store of value role.
I'm still at the stage of just knowing what a smart contract is. Is there a war to simplify this into very basic language on what website do I go to, how do I deposit money/crypto, what should I expect to get back, what is the counterparty risk and who is on the other side of the trade, etc.
 

Coja Petrus Uscan

Crow
Orthodox Inquirer
Gold Member
I'm still at the stage of just knowing what a smart contract is. Is there a war to simplify this into very basic language on what website do I go to, how do I deposit money/crypto, what should I expect to get back, what is the counterparty risk and who is on the other side of the trade, etc.

1) The most popular DeFi platform is Uniswap - https://app.uniswap.org/#/swap
1a) The above page is the page for exchanging ETH tokens. To use this you need a compatible wallet. I am not sure what all the options are - I use a Ledger via MetaMask, which is a browser plugin. If you have used a hardware wallet it is very easy to set up MetaMask. I think you can use MetaMask as a stand alone wallet. Once your wallet is connected, select the token you want to swap and what you want to swap it to.
1ai) Connect wallet t o Uniswap

1.png


1aii) Select the tokens you want to swap/exchange; here 2,400 GEN is being swapped for 0.545784 ETH. This swap is carried out via a pool of tokens provided by others (outlined in OP). There is a fee of 7.2 GEN paid to the pool for them providing tokens form which the swap can be made. 7.2 GEN is currently $0.98 cents and amounts to a 0.3% fee.

2.png


1aiii) When you approve the swap, you'll be promoted to confirm it in MetaMask and on your hardware wallet (if you have one)

3.png


1aiv) Once you have confirmed the tokens will be swapped and the ones you swapped for are instantly in your wallet. Currently, due to high fees, you will likely want at least a few hundred dollars to make a swap. Fees are prohibitive for small transactions, but increasingly negligible for larger ones.

1bi) You can also pool your tokens to be used as liquidity in the swaps (https://app.uniswap.org/#/pool). In the below screen .55 ETH and 2400 GEN is provided to the pool. These are equal dollar value amount of each token (see OP for more details). In this case the provided tokens amount to 0.56% of the pool. This means you get 0.56% of all the fees generated from trades using the liquidity pool. So if you provide 1% of funds and the pool generates 1 ETH per day in fees, you get 0.01 ETH ($5.5)

4.png


2) You can't deposit money, though you can deposit stable coins and tokens (either ETH, TRX)

3) What you should expect to get back
3a) If you are swapping/exchanging tokens, you should instantly get the tokens you want in exchange for the tokens you bought them with
3b) If you provide tokens for liquidity you accrue the 0.3% fee on your share of the pool; when you deposit the tokens to a smart contract and you can request them back at any time. N.B. if you want to harvest your accrued fees you have to pay a transaction fee on the ETH blockchain
3c) If you provide tokens to yield farming platforms like Harvest and Yearn, you despoit to a smart contact and can request they are returned at any point

4) Counterparty risk - there are two risks: the smart contacts being compromised and tokens in pools stolen; or those in charge of the smart contracts thieving from pools and/or swaps. I think the risk from swaps is very low and I've not heard of any comprimises for them. However, with the pools you are depositing your tokens and taking the risk the contracts are compromised.

5) Other side of the trade - for swaps it is people who have deposited tokens to liquidity pools (thought they are controlled by the smart contacts) and for liquidity providers it is the person purchasing (again controlled by the smart contracts)

The swap facility is really very simple. I conducted my first swap direct from a Ledger in about 2 minutes and was not left bewildered. It's a much nicer experience than spending half a day messing around with logins, authenticator and then waiting hours for your exchange to process withdrawals. When having a coin move day on centralised you can easily sink half a day in with all that. With Uniswap you can get it done in a few minutes, while controlling your private keys. By making a trade you put your faith in the integrity of the smart contract, as you do in the exchange when trading on there.

I am more edgy on providing liquidity, as DeFi is new and there is bound to be more hacks in the future. I am curently earning a few hundred dollars per month from that, but will likely take it out and put it into a centralied platform, which I have greater trust in (for now).

There is one platform, Fulcrum.Trade, that has an insurance fund which is filled by taking a share of fees. I can't immediately see what is in that fund.

Potentially it is a very nice system. Let's say you have $1m in crypto on your Ledger. You can have it all loaned out, at say 7% interest p.a., with no banks, no permission, no government etc. And when you want to unlock some funds pay the $0.50 fee and move some interest to your debit card.

Here is a short video showing a swap on Uni:


Seems the fees have come down a lot already since ETH 2.0. His fee in that video is 4X what it is in the above screenshot.

And here is one on the pools:



The reason fees were so high in those videos is the huge growth in DeFi in the last few months pushed up fees. I believe over the next few years we should see the transaction price go back down to about $0.25.

UniSwap is now responsible for $12.7m / month in gas fees. And that is why I am so bullish on ETH. ETH is the undisputed backbone of the infant decentralised economy. Every day that passes more people need ETH to conduct activities. The backing of fiat currencies are the goods and services that people will exchange them for. The same will ultimately have to be true for crypto if it really wants to be a store of value. Anything is a store of value, so long as someone will buy it for the same or higher price later. The anti-current-financial-system narrative is a good argument for crypto. But it's going to need an infrastructure to replace the functions of financial institutions. ETH is coming in again here.

The effort to grow one on the back of BTC (Omni) has died. Tron is the nearest competitor, but Justin Sun will likely sink the chances of an overtaking due to his need for a cult of personality. Buterin, on the other hand is a low-key, humble true believer.
 
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This is a great write up, thank you! Will take some time to absorb and implement.

Yes, @gework that is an excellent write up and much appreciated. If I understand correctly, I could throw a couple hundred bucks at this to get started and learn the ropes, is that right? Not concerned about making big bucks here atm (although a little pocket change is always fun) and more want to ensure I get a fair understanding of the mechanics with hands-on.
 

Coja Petrus Uscan

Crow
Orthodox Inquirer
Gold Member
Yes, @gework that is an excellent write up and much appreciated. If I understand correctly, I could throw a couple hundred bucks at this to get started and learn the ropes, is that right? Not concerned about making big bucks here atm (although a little pocket change is always fun) and more want to ensure I get a fair understanding of the mechanics with hands-on.

Do you mean for providing liquidity / farming?

It seems a good idea. I am not prepared to up in too much at the moment.

Harvest.Finance is probably the biggest gambler. Right now their stable-coin interest rates are insane.


Screenshot-at-2020-12-13-01-48-44.png


I deposited there 42 days ago, and in that time the overall annual interest rate is 17.3%.

Buying their FARM token may also be a good speculative bet.
 

Coja Petrus Uscan

Crow
Orthodox Inquirer
Gold Member
Will this starve the usury machine? In order to regain financial freedom, that is the most important objective.

I think it will take some time, but I hope so.

One key foothold crypto is taking is anti-dollar international payments. Recent news from Venezuela:

Maduro began to publicly threaten the use of Bitcoin and other crypto assets as a means to bypass sanctions in September, proclaiming his administration would soon “use all the cryptocurrencies in the world, public, state, or private, for internal and external trade.”

Other sanctioned countries are moving towards Bitcoin as a medium of exchange for international trade. Since there is no volume in FX for these currencies, e.g Turkish Lira to Ven Bolivar, and they have been blocked or hindered from dealing in liquid currencies Bitcoin is presenting itself as a liquid alternative. This could essentially back BTC with many billions of real demand.

It is going to be hard for them to gain mainstream use in developed, high-tax counties and anyone who used them would be under pressure to declare them.

The initial growth is more likely to come from countries that have problems engaging in the international money markets, e.g. Russia, Ukraine, Latin America, Africa. Ukraine and Russia are the countries with the most real use as they have a lot tech savvy citizens, earning money from abroad for whom Bitcoin presents one of the best ways to get dollars and euros to rubles.

So it is going to be very interesting how they take to DeFi, as they will likely be the springboard.

Tax evasion is also rife in Eastern Europe, so authorities will have even less tools to deal with DeFi.

The PayPal BTC adoption is significant as it's quite a common international money transfer platform. Skirll, Neteller and Revoult all allow for crypto deposits and withdrawals too. Who knows how the IRS, Fed, EU, OECD and company will deal with this over the next few years. But I think the important aspect is getting people in USD/EUR starved countries into using cypto and hoping they branch out from those highly regulated platforms.

Another milestone would be a major company who decides to offer payouts in crypto, say Amazon, Shopify, Fiverr, Freelancer, stock images, rental platforms, affiliate platforms.

I don't think the money masters will start to go after crypto until we see it being used for real economic activity. Right now it's mostly gambled, used in dark markets and some Slavs bypassing international transfers. That isn't on their radar and it will take them years to get the cogs moving to do anything.

My guess is we will see the above happen, the money master's move against cypto will take the price and probably coincide with them pushing CBDCs and a cashless control-grid society. I think that is the time for real crypto growth. When the writing in on the wall and people can see the financial tyranny.

So I think it's a very long road for DeFi to rival central banks. And it will be a war.
 
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