Investing in DeFi: Part 2

Market Recap

Ethereum Standing Tall


Investing in DeFi: Part 2

Last weekend we outlined the current opportunity afforded to us by the invention of blockchain. To summarise, blockchains offer an alternative to our existing financial infrastructure where brand-based trust is replaced with math-based trust.

Layer one blockchains such as Bitcoin, Ethereum, Binance and Solana act as the underlying accounting system for their respective internets of value. They provide mathematical guarantees that transactions of value will be processed, executed, and settled. On top of these blockchains are smart contracts that increase the expressiveness of the underlying blockchain/internet of value.

These smart contracts act as rule sets that help standardise basic financial primitives. For this to make sense, think about all the “money verbs”, things that you can do with money. Some money verbs that come to mind are: hold, earn, lend, borrow, invest, trade and spend. For each of these money verbs, there is a smart contract or protocol that anyone can use to perform their desired task.

The internet of value that we find most exciting is Ethereum. Ethereum is a decentralised and secure blockchain that has captured the attention of financial innovators and software developers around the world. These individuals can harness the Ethereum internet of value and its complementary open financial protocols to create, manage and settle financial products.

We are witnessing the birth of new financial protocols. Think about the internet protocol, a standardised means through which information can be disseminated globally. The internet of value will be a suite of protocols through which value and financial services can be disseminated globally.

Asset Issuance:

Blockchains are disrupting capital formation. Traditionally when seeking capital to power your business ideas and ventures, you had two possible routes to acquiring it, you could sell ownership/equity in your business or raise debt. Today blockchains such as Ethereum offer another option, which tastes and smells similar to your options of the past but present efficiencies, reductions in costs and levels of transparency that just weren’t possible before.  

Cryptoassets, like shares, present a way to coordinate resources to produce something of value. They offer a more dynamic option to the issuer as they are incredibly flexible and can pass value through to stakeholders in various ways. This could involve direct cash flows (dividends), token burns (share buybacks) and even targeted rewards to areas of the network that need growth (loyalty points/discounts/ customer rewards).

Asset Exchange:

Moving between assets in the traditional world is an administrative nightmare. Being able to buy offshore assets is not a facility that everyone has access to; having the ability to purchase foreign currency isn’t a given either. This is changing quickly with asset exchanges protocols like Uniswap, SushiSwap, Balancer and THORChain.

These exchanges make it easy to swap one asset for another; they also provide the opportunity for asset owners to put their idle assets to work in market-making activities. Decentralised exchanges allow for the creation of any trading pair. In the future, traditional financial assets will leverage this technology allowing traders to frictionlessly exchange Apple shares directly for Glencore shares eliminating many expensive intermediate exchanges involved in reaching your final goal.

This frictionless exchange can be plugged into any application and/or website. Fintech companies can build their own front ends and provide access to any asset their user may want. This is, after all, a permissionless, open protocol for exchange.

Lending and Borrowing:

The debt markets of crypto have gained tremendous traction since 2020. Networks like Compound and Aave allow users to take out collateralised loans and deposit funds into “savings accounts”. These debt markets are different from the traditional as their interest rates are freely set by the dynamics between the deposited assets and demand to borrow those assets. 

The most significant limitation of these markets is that they only provide over-collateralised loans; in order to borrow money, you would need to already hold a digital asset such as bitcoin or Ethereum. You would then be able to lock those assets as collateral and borrow against them. This is a short-term problem, and the creation of reputation systems will give crypto networks the ability to issue under collateralised loans.

Asset Management:

Having started our own fund, we are well aware of the limitations, and huge costs asset managers face when creating and managing financial products. Asset management is, after all, a “trust business”; individuals only make investments if they can trust you. In order to give our clients peace of mind, we need to spend significant resources on recourse deterring guarantees which come in the form of multiple intermediaries who eat into the bottom line.

In the future, asset managers will be able to use networks like Enzyme, a protocol for facilitating asset management. This will mean the end of high administration costs, expensive audits, custodians and brokers for asset managers. By utilising the internet of value, asset managers can continue to provide the same level of guarantees that previous brand based trust afforded them whilst eliminating costs and performing activities in a far more transparent manner.

If you are interested in exploring some of these services, you can click on the links below:

Decentralised Exchanges

Uniswap

SushiSwap

Balancer

THORChain

Lending and Borrowing

Compound

Aave

MakerDAO

Asset Management

Enzyme

Yearn Finance


Notable Articles and News Stories This Week:

Goldman Sachs Offering Bitcoin Derivatives to Investors

Goldman Sachs has announced that it will offer investors access to non-deliverable forwards (NDFs). NDFs are a type of derivative that is tied to bitcoin's price but will payout in cash. This is the story of another institution that has started offering digital asset products to clients. Goldman Sachs also has recently relaunched its crypto trading desk after a three-year pause.

Read more here

VanEck Launches’ First of Its Kind’ Digital Assets ETF in Europe

The investment firm VanEck has launched a thematic based ETF in Europe that offers exposure to companies involved in the digital asset and blockchain industry. The full name of the ETF is “VanEck Vectors Digital Assets Equity UCITS ETF” and is listed on both the London Stock Exchange and the Deutsche Boerse under the ticker DAPP. The qualifying criteria for a company to be included in the ETF are that it must generate at least 50% of its revenue from digital assets otherwise, it must have over 50% of its assets invested in digital asset holdings or projects.

Read more here

Sotheby’s to Auction ‘First NFT Ever Minted’

Sotheby’s, the auction house founded in 1744, has announced it will auction off the first-ever NFT minted. The artist is Kevin McCoy, and the artwork titled “Quantum” is widely regarded as the first NFT ever created. The artwork is timestamped 05-03-2014 09:27:34. This is the second NFT auction that Sotheby’s has run and shows the increased interest in the industry.

Read more here


Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge, we aim to lower the barriers to understanding this fast-growing digital economy.

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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.