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DeFi Heavy Weights Are Pumping! Do They Make Sense in an Average Crypto Portfolio?

By Michael @ CryptoEQ | CryptoEQ | 15 Jul 2023


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Over the past month and a half, bluechip DeFi tokens, including COMP, MKR, AAVE, and UNI, have demonstrated impressive performance, outpacing Ethereum (ETH) in terms of gains. This trend underscores the dynamic nature of the DeFi market and the potential of these tokens to deliver robust returns.

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Compound (COMP) has led the pack with a remarkable 55% gain since the beginning of June. This surge was triggered by a series of large purchases on Binance, coinciding with news of the departure of the platform's founder and CEO for a new project.

Maker (MKR) followed closely with a 47% increase, driven in part by the introduction of its Smart Burn Engine. This new feature uses surplus DAI to buy MKR tokens, which are then paired and provided as liquidity on the Uniswap V2 DAI/MKR pool, creating a positive feedback loop that has boosted the token's value.

AAVE and Uniswap (UNI) have also posted gains of 14% and 10% respectively, outperforming Ethereum, which has remained flat during the same period. Despite the unveiling of Uniswap V4, the UNI token's performance has been relatively modest, though it still managed to outpace ETH.

These market trends highlight the potential of bluechip DeFi tokens to deliver strong returns, even in a market where Ethereum, one of the leading cryptocurrencies, has remained stagnant. As the DeFi sector continues to evolve, these tokens are likely to remain key players in the market, offering investors attractive opportunities for growth.

Compound

Compound is an open-source, decentralized application (dApp) built atop the Ethereum blockchain that creates permissionless money markets with algorithmically set interest rates based on supply and demand. It enables users to lend and borrow various digital assets with no maturity dates or restrictions while interacting with a smart contract rather than a company. COMP is the native ERC-20 governance token for the Compound protocol. Holders of COMP may debate, propose and vote on all changes to the Compound protocol.

Core Strengths

  • One of the most tenured and successful DeFi applications to date with ~$10 billion in total value locked (TVL)
  • The team has taken demonstratable steps to remove their authority and influence over the protocol, helping to further decentralize the project including the issuance of the COMP governance token 
  • Proven security track record compared to many of the newer DeFi projects

Core Weaknesses

  • General regulatory uncertainty around DeFi, stablecoins, and KYC laws all affect Compound greatly
  • Stiff competition, among DeFi and centralized counterparts, has made Compound's APY rates less attractive to users
  • Compound lists fewer assets (13) than other borrowing and lending platforms

 

Maker

The Maker (MKR) token was created by MakerDAO and its principal purpose is to underpin and secure the DAI token which was launched in 2017. MKR is also used as a governance token for participation in the governance decision associated with the Dai ecosystem. Holders of MKR make key decisions on the operation and future of the system.

The Maker ecosystem contains two cryptocurrencies. The first, called Dai, is a crypto-backed cryptocurrency and the flagship product of the Maker ecosystem. Maker is a Distributed Autonomous Organization (DAO) on the Ethereum blockchain with a platform designed to keep the DAI price stable. MakerDAO uses the MKR token to act as a counterweight to price fluctuations. This combo is the basis of a simple crypto banking system built on blockchain technology that allows for simpler international payments and peer-to-peer transfers.

Core Strengths

  • Maker is one of the first DeFi projects and still currently boasts one of the highest total value “locked” (TVL) in a DeFi application at ~$11 billion.
  • DAI is the leading decentralized, permissionless, trustless stablecoin that plays an integral role in Ethereum’s DeFi ecosystem with ~$8 billion in circulation. It remains a top choice for anyone looking to transact in a stablecoin without a trusted third party.
  • Over 400 apps and exchanges now use DAI, becoming a top-3 trading pair within the Ethereum DeFi ecosystem. 
  • Maker continues its commitment toward the full decentralization of MakerDAO with the return of 84,000 MKR tokens from its development fund to MakerDAO's governance module in Q2 2021.

Core Weaknesses

  • The historic March 2020 Ether price collapse and subsequent network congestion proved to be a long-tail systemic risk to Maker at the time. The system essentially did not perform as intended and allowed some users to lose all their collateral.
  • The issuance of new MKR after the fallout of March 2020 undid years of MKR value accrual and also illustrated the possibility of future MKR holder dilution in the future.
  • Regulatory clarity around the MKR token is non-existent but a strong case can be made for it to be deemed a security under the US Howey Test.
  • In a move to reduce dependence on solely Ether, Maker now accepts multiple assets as collateral, including centralized stablecoins and assets. Introducing centralized collateral may reduce price volatility but opens up new censorship attack vectors. 
  • Because DAI’s stability is predicated on over-collateralization and incentive mechanisms within the Maker system, it exhibits more volatility than its fiat-backed counterparts and rarely trades at exactly $1 while also being less capital efficient due to over-collateralization requirements.

 

Aave

Aave is an open-source, non-custodial protocol for earning interest on deposits and borrowing assets. Started in 2017 under its original name ETHLend, Aave also enables uncollateralized flash loans designed to be integrated into other products and services. It raised $16.2 million in an Initial Coin Offering (ICO) to create a centralized peer-to-peer lending platform. It was later rebranded as “Aave,” which translates to “ghost” in Finnish. 

Aave has established itself as the leading money market in the cryptocurrency space. Its decentralized borrow-lending peer-to-pool model has demonstrated itself to be the most capital-efficient approach for DeFi users to earn interest on their deposits or to obtain immediate access to an asset's liquidity.

The Aave platform functions by allowing users to deposit their assets into a lending pool and make them available for others to borrow. In return, borrowers pay back their debts along with interest.

Core Strengths

  • Ethereum DeFi "blue chip" with Lindy effect around TVL and security which could ultimately attract institutional investors.
  • Aave governance is some of the most active and engaged in the DeFi space.
  • Rate switching and leveraged strategies could attract fixed-income investors. 
  • Portal technology allows for a seamless flow of funds between Aave V3 markets and different networks, creating a step-change in cross-chain liquidity. 
  • Multi-chain strategy now allows Aave to be used by more crypto users and with lower fees.

Core Weaknesses

  • Ethereum congestion long priced out most potential Aave users.
  • The centralization of wealth in the top 10% of wallets could cause governance issues.
  • Yields are typically lower than most, newer DeFi products.

 

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Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


CryptoEQ
CryptoEQ

Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.

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