Crypto Market Commentary
16 June 2019
Doc's Daily Commentary
On 6/14 Doc conducted the first “House of Pain” coaching session, which is posted in the “Trade School” archive. Let me know if you have any interest in being a participant.
Our most recent “ReadySetLive” session from 6/13 is listed below.
Decentralized Credit Markets
The Decentralised Finance (DeFi) or Open Finance movement is certainly gaining traction and is supported by Ethereum as the dominant platform these protocols are being built on. This is arguably the strongest case for ether acting as money where it is essentially locked up in return for either interest payments or as collateral for a loan in a stablecoin like Dai or USDC.
There are a number of competing money market protocols which are production ready and each one has its own nuances and applications. Today I want to touch on a few of these and discuss the advantages, limitations and potential applications for each one.
One thing to note is that setting up these money marets requires a number of initialization smart contracts. In order to lend, borrow and setup accounts on any of these platforms, you must spend around $1-2 worth of ETH on gas transactions to enable various collateral types, enable lending and borrowing contracts amongst others. Therefore, I would suggest that you establish a specific wallet address (with appropriate OPSEC considerations) that you hold your ETH and setup all the smart contracts for to save you having to spend this multiple times.
When would I use defi money markets?
There are three primary use cases for utilising DeFi in its current state:
Leveraged Long – Borrowing a stablecoin against your collateral ETH means you don’t need to sell your ETH but can gain additional funds to go long on ETH or another asset. This is advantageous if you see price going higher and believe the interest rate is reasonable considering potential gains.
Going Naked Short – Borrowing ETH against collateral stablecoin means you can sell ETH on the market and buy it back cheaper if the market falls off.
Locking up Collateral (ETH, Stablecoin or other token) for Interest – Providing liquidity either to a money market like Compound, Nuo Network or Dharma or to a DEX protocol like Uni-swap in return for interest payments. When you provide liquidity you facilitate the borrowing of others described above and this is a great way to earn passive income on your assets that are sitting in your wallet.
The largest money market on Ethereum is the ‘de-central bank’ MakerDAO which is responsible for maintaining the stablecoin Dai. Maker is a central pillar of the DeFi ecosystem and enables these truly trustless and uncensorable financial markets to exist. Dai has generally held a reasonable peg of 1:1 to the USD with a few fluctuations but as I have talked about previously, Maker has done an incredible job bootstrapping a central bank and stablecoin in a live market environment.
To leverage MakerDAO, you need to lock ETH in a smart contract which you can then borrow DAI against up to a collateral ratio of 150%. This means that for every 1.5 ETH you lock up, you can borrow 1 ETH worth of DAI and is the most common leverage ratio amongst all these money market platforms.
The primary advantage of Maker is that the interest rate is relatively stable for a reasonable period of time, although has been slightly more volatile lately. I do expect it will become increasingly stable and predictable as time goes on and data becomes available. Given Maker is the ‘de-central bank’ you can think of Maker’s stability fee as the reference interest rate for comparison against other protocols. With Maker, you will be able to watch the governance proposals for advance warning of any changes to the stability fee and adjust your CDP accordingly. One big difference with Maker is that you only interact with your own contract, you do not provide liquidity for anyone elses.
Figure 1 – MakerDAO stability fee (Blue) has generally been more stable that other money market protocols
Compound is a money market protocol that pools liquidity of various assets to facilitate over-collateralised borrowing. Similar to Maker, in order to borrow you must provide 150% value of another the asset as collateral. The biggest difference between Compound and Maker is that the interest rates adjust dynamically based on the amount of liquidity available. In general, the rates are similar to Maker’s and particularly if you are posting stablecoin collateral, it is common to get returns on your ‘savings’ between 12% and 20%.
Compound is best used when you are borrowing for a short term and the interest rate is better than that available on Maker. You have a lot more control of your position as you can post and borrow multiple collateral types. The other dominant use is locking up your assets for ROI to facilitate lending.
Overall, I prefer Compound to any other DeFi protocol due to the super clean and easy to use interface, relatively competitive rates and the ability to top up or pay down the collateral or loan as required. What is extremely useful is that you can see exactly how much interest you have accrued with every few seconds both on a loan or on your interest payments.
Figure 2 – Example of Compound.finance dashboard showing the top three markets
Nuo network is a money market as well as leveraged trading platform where you can lend your assets for interest payments or post collateral to go leveraged long or short by 1x, 2x or 3x. Nuo functions slightly differently to Compound and Maker in that you must send your tokens to a specific smart contract address before they are available to use on the platform. I believe it remains non-custodial however personally do not quite like the feel of this system and the fact that you don’t pay gas once the tokens are on the platform seems like there is some custodianship going on. I have not looked too deep into the back end of this platform as I personally did not enjoy my experience using this compared to Compound.
When you lend out on Nuo, it goes into a liquidity pool and your interest accrued is updated once per day. I have found that the interest rates proposed on the website are not exactly the same as what you get payed out (generally pays lower than what is suggested) and I generally don’t like the UI of the platform.
Figure 3 – Snapshot of the top three markets on Nuo Network
Dharma is the newest kid on the block and provides lending and borrowing facilities at extremely competitive rates (best on the market at this time). The biggest difference with Dharma is that your collateral is locked up for 90days unless you pay it back sooner. However, even if you only borrow it for 1 day, you still pay back in interest required for the full 90day term.
What is great about Dharma is that you know exactly how much interest you must repay and if the 90day lockup is no issue, the borrowing rates are very competitive . At this stage, the platform is best for borrowing as the ROI for locking up stablecoins on Compound is more lucrative at the present time. This is in part because Dharma has some degree of centralization and the company is currently subsidizing the rates to attract users to the platform. I believe that there is some centralisation risk with the platform, it is not as fully decentralised as say Compound is but the rates are very compelling.
The user interface of Dharma is extremely clean and it is my second preferred choice of platform, especially when lending out or borrowing for an extended period of time.
Figure 4 – Dharma current lending and borrowing rates
To support the DeFi ecosystem, a number of toolkits have been developed to simplify the process and provide users with dashboards to monitor and manage their lending and borrowing positions.
The first tool worth checking out is loanscan.io which collects and posts the latest lending and borrowing rates across all DeFi platforms and all assets which are hosted on these platforms. This can help you find the best rates and keep track of where more competitive rates may show up.
Figure 5 – Loanscan.io mapping out of DeFi rates in the industry
Settle.finance is a developing dashboard system that can be used to manage and track your Ethereum token portfolio as well as open up CDPs on Maker, swap tokens via Uniswap or even just keep track of exchange rates on DEX’s. This can be complimented by DEX.AG which helps you find the best swap rates for tokens available on the various DEX protocols.
Figure 6: Snapshot from Settle.finance which contains the DEX.AG app to find the best DEX trade rates on the market
Another great platform is InstaDapp which combines access to MakerDAO CDPs, Compound.Finance and Uniswap liquidity Pools and I believe more DeFi services are in the pipeline. As of right now, this tool is a great single point of application however I did find the interface with Compound.Finance was not quite as clean as the original protocol. This is simply because I prefer to see where my lending and borrowing returns are in real time. That said, I strongly expect InstaDapp to continue to grow and attract a user base as it is a very clean and useful interface.
Figure 7 – Snapshot from InstaDapp which combines access to multiplte DeFi dAPP platforms
DeFi is a growing ecosystem and the protocols and liquidity pools that underly them are becoming increasingly interoperable as time goes on. I strongly suspect that these platforms are here to stay and will continue to compete for liquidity and lending rates. What I do like is the growing focus on User interface and the newer dAPPS clearly have this front of mind which will go a long way.
It is possible to make reasonable leveraged bets long or short using these platforms as well as a passive ROI by providing liquidity without having to sell your tokens. It is important to be aware of the additional gas fees in setting up accounts and interacting with the smart contracts. There is also the limitations of getting transactions confirmed on the blockchains which is obviously much slower than using a centralized exchange service as a trading mechanism. That said, I like the trajectory of these DeFi platforms and the ecosystem in general and as of right now, it provides the strongest use case for the ETH token.
Platform reference links
MakerDAO – https://makerdao.com/en/
Compound.Finance – https://compound.finance/
Nuo Network – https://app.nuo.network/
Dharma Protocol – https://www.dharma.io/
Loanscan.io – https://loanscan.io/
Settle.Finance – https://settle.finance/os
DEX.AG – https://dex.ag/
Instadapp – https://instadapp.io/
Press the "Connect" Button Below to Join Our Discord Community!
Please DM us with your email address if you are a full OMNIA member and want to be given full Discord privileges.
An Update Regarding Our Portfolio
We are pleased to share with you our Community Portfolio V3!
Add your own voice to our portfolio by clicking here.
We intend on this portfolio being balanced between the Three Pillars of the Token Economy & Interchain:
Crypto, STOs, and DeFi projects
We will also make a concerted effort to draw from community involvement and make this portfolio community driven.
Here’s our past portfolios for reference:
RSC Managed Portfolio (V2)
RSC Unmanaged Altcoin Portfolio (V2)
RSC Managed Portfolio (V1)