You probably know what DeFi is since you clicked on this headline, but in case you don't, here's a quick explanation of what it is and why you should care about it:
DeFi is the acronym for ‘decentralized finance’, also known as ‘open finance’ – which refers to the paradigm shift from today’s closed financial systems towards an open and decentralized financial economy.
DeFi was by far the hottest trend in crypto throughout 2019 and continues to be a topic of high demand in 2020.
But why? What makes the DeFi movement so “revolutionary” and so “powerful”?
DeFi is based on open protocols that are interoperable, programmable, and composable.
Interoperable - DeFi is defined by platforms and protocols that complement each other and work together with a degree of transparency.
Programmable - DeFi includes the involvement of new types of financial instruments and assets that are customizable through code.
Composable - DeFi encompasses the value of composability, which refers to the concept that something can be selected and assembled in multiple combinations.
Decentralized finance – or open finance – plays a critical role in the decentralized world that cryptocurrencies aim to create. It encompasses everything crypto stands for by democratizing existing financial systems and making it more equitable with open crypto protocols and transparent data.
This is why, and how, DeFi went from a valuation of nothing to billions in less than 4 years.
Total DeFi data from defipulse.com
As you can see in the chart above, the DeFi movement went parabolic at the beginning of 2020 and has since corrected slightly with a steep drop amid the COVID pandemic. However, the DeFi movement is far from dead and the total value locked in DeFi is rising back up once again.
With DeFi’s steady increase in valuation, the movement it encompasses, and the projects involved, it becomes increasingly more clear that DeFi will cause the next crypto boom.
That said, I have a list of 6 undervalued DeFi projects to put on your radar for 2020 and 2021:
1. MakerDAO - $436.5M Locked
MakerDAO (MKR) is the number 1 DeFi protocol in terms of locked (USD) value according to data from defipulse.com. Also, it’s the 2nd biggest project built atop of Ethereum and is the oldest DeFi project in crypto, being founded in 2015.
And guess what? After all this time, Maker is still an undervalued DeFi gem and will likely continue to be a great DeFi pick for years to come.
Let me tell you why.
MakerDAO is a decentralized credit platform on Ethereum that supports the Dai and Sai decentralized stablecoins whose value is pegged to USD. Anyone can use Maker to generate the Dai and Sai stablecoins by locking up ETH, BAT, LINK, USDC or other cryptos as collateral in a collateralized debt position CDP.
To maintain Dai stability to $1, Maker participants have to pay stability fees to the system. These fees are only payable in the MKR token and are burned from circulation forever.
This burning mechanism has a significant impact on the MKR token price as there were only 1 million MKR tokens minted and its amount is shrinking at a current rate of 3,596.62 MKR per annum.
Therefore, as the MakerDAO ecosystem of dapps continues to grow and the Dai stablecoin gets generated more and more, the price of its token - Maker (MKR) is expected to rise as its supply decreases.
2. Synthetix - $119.1M Locked
Synthetix (SNX) is ranked the 2nd most valuable DeFi protocol in terms of locked (USD) according to data from defipulse. Like Maker, Synthetix too is built atop the Ethereum blockchain and is also one of the biggest projects on Ethereum.
Synthetix is one of the newer DeFi protocols in crypto as it was only founded in 2018 and launched on Ethereum’s mainnet in February 2019.
Despite being so new, Synthetix quickly climbed to the top of DeFi as it became popularized for its unique SNX token incentives, synthetic assets, and its non-custodial decentralized exchange, synthetix.exchange.
So, what exactly is Synthetix and its SNX crypto token?
Synthetix is a decentralized platform on Ethereum for the creation of “Synths”: on-chain synthetic assets that track the value of real-world assets such as fiat currencies, commodities, and crypto-assets. As well, the platform plans to add support for stocks, indices, and other derivatives too.
The native token of the Synthetix protocol is SNX, which can be locked in as collateral, along with ETH, to mint Synths (synthetic assets). These Synths are freely traded as ERC-20 tokens on the non-custodial DEX, synthetix.exchange, and transaction fees generated on the exchange are paid out to SNX holders/Synth minters.
Therefore, SNX token holders are incentivized to lock up SNX as collateral for the creation of Synths, because the more Synths that are created, the more trading that will happen, which results in more transaction fees for SNX holders. Also, when more SNX is locked up, it tends to decrease the selling pressure, thus increasing its price as long as demand remains the same or increases.
At the time of writing (April 22, 2020), 83.68% of the total SNX supply (151M SNX) is locked up, which gives value to the underlying collateral (the SNX token) and incentivizes synth creation.
As the DeFi landscape continues to grow throughout 2020 and beyond, and when Synthetix adds support for more synths including stocks, indices, and other derivatives, we can expect to see a massive increase in demand for synthetic assets and the SNX cryptocurrency.
3. Aave - $50.9M Locked
Aave (LEND) is yet another open-source non-custodial DeFi protocol built on Ethereum and it’s the 5th most valuable DeFi protocol in terms of locked (USD) according to data from defipulse.
The Aave DeFi project is for decentralized lending and borrowing, where lenders earn interest on deposits, and borrowers have a variety of options to choose from.
Unique Aave Features
For lenders, you deposit the supported assets you would like to lend, and the protocol mints ERC20-compliant aTokens at a 1:1 ratio to the supplied assets. These aTokens then accrue interest in real-time directly in your wallet. The earned interest from aTokens can be redirected to any public Ethereum address at any time.
For borrowers, users who take out loans can switch between variable and stable interest rates at any time. This gives the borrower more control over their loans by allowing them to always secure the best available rate. As for the borrower's collateralization ratio and liquidation threshold, it depends on the asset.
Another unique feature Aave offers is Flash Loans – the first uncollateralized loan option in DeFi. Flash Loans are designed for developers and enable you to borrow instantly and easily as long as repayment occurs in the same transaction block. If not in the same transaction block, then the whole transaction is reversed.
Aave’s LEND token
LEND is Aave’s native governance token and is used to pay fees; 0.25% of originated loans and 0.09% of flash loans. These fees go toward burning LEND, rewarding lenders, and compensating affiliates.
All in all, I think it's safe to say that Aave (LEND) is an undervalued DeFi gem as it’s currently ranked number 5 in terms of locked (USD) value in DeFi but only ranked number 95 in terms of market cap.
4. Kyber Network - $4.4M Locked
Kyber Network (KNC) is an on-chain liquidity protocol that aggregates liquidity from token holders contributing liquidity (called reserves) to power instant and secure token exchange in any decentralized application.
The Kyber project made headlines in early 2020 and found itself hovering around the top ~50 coins on CoinMarketCap. This rise in popularity was warranted as Kyber provides an excellent user experience for instant, secure, and decentralized token exchange and is also one of the very few projects that Vitalik Buterin advises.
Moreover, Kyber differs from the previously mentioned DeFi protocols listed here, in that its purpose is for the decentralized exchange of digital assets, rather than for lending, borrowing, and derivatives.
Kyber can be directly integrated into a wide range of decentralized products and services including wallets, websites, and applications to enable instant, secure, and seamless token exchange directly into the application logic.
Kyber Network Protocol Token - KNC
The native cryptocurrency of the Kyber Network is KNC, which is used to align the Kyber ecosystem incentives. KNC holders can participate in the governance of the Kyber Network by staking KNC and earning rewards.
Additionally, reserve managers pay fees and receive rebates in KNC, and dapps who integrate Kyber receive a portion of fees in KNC as well.
Also, Kyber utilizes a burning mechanism to take a portion of its KNC token supply out of circulation with every token swap. Whenever a user swaps tokens on Kyber, they pay a small transaction fee in KNC, in which some of it is burned.
The chart above shows the accumulated KNC fees which have been burned and removed from Kyber’s total supply forever. The amount of burned KNC continuously increases through time as the Kyber Network grows, thus reducing the supply which should result in an increasing KNC price.
That said, Kyber Network (KNC) is still an undervalued gem as its usage in the DeFi ecosystem is showing steady growth and is expected to grow even more as cryptocurrencies and the DeFi market gains widespread adoption.
5. Loopring - $4.6M Locked
Loopring (LRC) is a non-custodial order book-based exchange protocol in which scalable decentralized exchanges (DEXes) can be built on.
The Loopring V3 protocol, released in November 2019, utilizes zero-knowledge (zk) technology and a zkRollup DEX design that allows for high-throughput trading with low settlement costs and Ethereum’s level of security.
Loopring’s zkRollup DEX design was developed solely by Loopring. They took Vitalik’s notes/ideas from 2018 and worked on it quietly for 2 years with no hype whatsoever.
In fact, in a recent interview with Loopring’s CEO, Daniel Wang, he stated that till now, they barely spent any money on marketing as they wanted to have their product ready first.
So, since the Loopring.io launch in February 2020, they barely started the marketing part, which means there are still very few people who know about this tech that proves itself to work as the fastest DEX protocol out there.
What makes Loopring stand out from other DEX protocols is that it provides throughput that’s on par with centralized exchanges. Loopring 3.0 can settle up to 2025 trades per second with transaction costs as low as $0.003 per trade on the Loopring Exchange.
Loopring.io exchange interface
Loopring’s Protocol Token - LRC
The native cryptocurrency of Loopring is LRC, which is designed to ensure the economic security of Loopring-based DEXes and align stakeholder incentives. LRC can be used in 3 types of staking:
- LRC token holders can stake their LRC to earn protocol fees.
- DEX owners can stake LRC for economic security & reputation.
- DEX owners and traders can stake LRC to reduce protocol fees.
In addition to protocol fees being awarded to LRC stakers, 10% worth of the fees in LRC will be burned and removed from the total supply and circulation forever.
Moreover, since the Loopring V3.0 protocol was only released in November 2019 and went live in December 2019, the protocol is just getting started and is only powering 2 DEXes thus far, Loopring.io and WeDEX.io.
Therefore, as DEX trading and the Loopring protocol becomes more popular, Loopring’s LRC token stands to gain immensely as the LRC token will be in high demand and its supply will dwindle.
6. 0x Protocol
0x (ZRX) is an open-source non-custodial DeFi protocol that enables the peer-to-peer exchange of assets on the Ethereum blockchain. Like Loopring and Kyber Network, the 0x protocol is used to power decentralized exchanges (DEXes).
The 0x protocol launched in August 2017 and has since evolved into one of the most successful DeFi projects by facilitating a total of 1.16 million trades, $940.34 million in volume, hosting 37.87 thousand active traders, and accruing $41.19 thousand in accumulated protocol fees since launch.
The 0x protocol has experienced a ton of growth in the DeFi space and yet it’s native cryptocurrency token (ZRX) still has a relatively small market cap of just $113,805,758 USD as of April 23, 2020.
In addition to 0x’s stunning usage and growth stats, the project’s ZRX token became the first token for Coinbase’s Earn program, which aims to educate people on the decentralized space.
0x (ZRX) Coinbase Earn course
The fact that 0x became the first token added to Coinbase Earn is a huge deal. Coinbase is pretty much the most trusted company in the space, so it’s a big deal for 0x to get there, and it should be a sign for the investors that 0x, despite being at ~50 on CMC, still has plenty of room to grow with this type of connection and awareness that the Earn program has given them.
That said, there is lots of room for the ZRX price to go up, especially considering that ZRX staking was only recently launched this year in January 2020.
With ZRX staking, ZRX token holders can put their ZRX to work by staking with 0x market makers to earn rewards. Also, the 0x team is working on implementing tools needed to participate in the evolution of the protocol through governance and staking.
Therefore, as more and more participants enter the crypto market and as more market participants transition to 0x DEXes (we can see consistent growth at 0xtracker.com), then 0x’s protocol token (ZRX) should benefit immensely.
What do you think about these 6 undervalued DeFi projects? Which one do you think has the most potential upside? Let me know in the comment section below.