So, DeFi started to power down after such an enormous hype over the past three months. We saw everything from Lending platforms and DEX’s taking off to everybody releasing their supermarket DeFi token to take advantage of the hype (YAM, PASTA, SUSHI, etc.).
DeFi is here to stay for sure and a ton of new products will be developed behind the curtains. For now, however, the price craze might be over.
Whales have made a ton of money and let me tell you, they like to put their money to work. They'll be looking after another 'hot thing'.
What is it you may ask?
What's the next WOW thing in crypto people will hop on?
Aside from the DAO gold rush that is about to happen (see Aragon or Kleros) I predict it will be NFTs that will spark the next gold rush within the defi itself.
Just like DeFi, NFTs have been around for quite some time. Nevertheless, even if you haven’t been under a rock for the past three years, you might still think NFTs are some gimmick that is only used in games like CryptoKitties.
Remember Cryptokitties? That was the first time when we experienced the Ethereum blockchain slow down, and fees become sky-high (for the time).
At the same time, NFTs were also used sparingly to monetize collectible art on the blockchain. They were also used to represent plots of virtual land in the Decentraland virtual reality world.
However, things have changed quite substantially for NFTs over these past three years, and it is looking ever more likely that NFTs will be the next big craze after DeFi.
Let me explain...
Where are NFTs as of 2020?
In 2020, the NFT space is entirely different from what you or I remember.
Before I tell you about NFTs in 2020, let me tell you what Non-Fungible Tokens are.
You see, Bitcoin, Ethereum, Litecoin, Binance Coin, and just about every other cryptocurrency on the market are what are known as fungible tokens. This means that 1 BTC will always be worth 1 BTC, and you can swap them interchangeably with no issues.
On the other hand, NFTs are a type of cryptocurrency token in which there is just 1 in existence. So, if I owned an NFT token that represented this unique blog post on Publish0x, I could always prove that I wrote this piece, and there would be no other token on the planet that it is precisely like it.
NFTs are built on a different standard to all the previous tokens. You will have heard of the ERC-20 standard that most DeFi projects run on. Well, NFTs are built on top of the ERC-721 standard.
Sure, they are also still used to represent art on the blockchain as it keeps expanding in its capacity. People start to realize that collecting NFT art will become a hobby for entrepreneurs across the board;
However, NFTs are also used for new technical features such as licensing, documentation, or INSURANCE.
With DeFi exploding, there will inevitably be hacking attempts made on the smart contracts in the protocol. I mean, there is a total of $7.75 billion locked inside these smart contracts - which hacker worth his weight wouldn’t try and have a go of breaking in? We have seen defi hacks recently, see Balancer hack or even Opyn itself experienced one.
In addition to this, more black swan events are likely to happen.
All built using NFT tokens.
Opyn is a smart contract insurance platform built on the Convexity Protocol. It offers option-based insurance models to provide DeFi insurance solutions through what are known as Protective Put options. These are risk-management strategies used to guard against the loss of owning an asset and are typically used to hedge losses toward the downside.
Currently, users can obtain insurance for ETH, DAI, and USDC deposits on Compound.
Users that would like to sell insurance (option sellers) would lock up ETH in the Opyn vault to mint oTokens. The option seller would then set the parameters according to the following table;
Once the oTokens have been minted, the seller then can sell this insurance on the open market and obtain the premiums paid by people buying the insurance.
Nexus Mutual is similar as it can be described as a discretionary mutual offering an alternative to insurance for Ethereum. Users have to join Nexus Mutual and become a member (which includes a KYC process) to have the opportunity to buy cover against hacks in Etheruem smart contracts.
To make things clear, let me run through a quick example for you.
Let us say you were yield farming through the Balancer platform. You have around 8 ETH locked inside the protocol while it is farming, and you know you plan to farm for about three months. The Balancer protocol is pretty damn secure. However, there is always a slight possibility in the back of your mind that your funds at risk of theft.
This makes you nervous.
To protect yourself against this, you could easily take up the following cover option;
This cover is provided through another service called yinsure.finance (part of the Yearn Finance family) would cover your entire 8 ETH (plus more) stack in Balancer for a period of 90 days. If anything was to happen that would result in theft of your tokens, the insurance contract would payout to you and return your funds. However, as it is with all insurance coverage, you will be required to pay premiums.
Andre Cronje, you might know him from being the creator of Yearn Finance, is starting to push NFT coverages himself;
What is essential for us to remember about all of this is the fact that when an NFT bearing policy is created, the ERC-721 token can be sold on the open marketplace, creating an entirely new breed of asset classes;
Let's sum things up.
1. We have decentralized payments in place, be it DAI or ETH. You can easily send tokens from A to B.
2. We have decentralized trading platforms. Think dYdX or uniswap.
3. We have decentralized lending where A can lend funds to B. Think of Aave or compound.
4. The fourth core pillar of DeFi is insurance which protects A when B cannot payback.
In my opinion the fourth pillar, the insurance sector is the next hot thing in DeFi and will have its own bull run.
Today, however, it's still small, very small. These defi insurance tools are still complicated (opyn) or you need to pass a KYC (nexus mutual). I predict more players are yet to emerge in the upcoming months.
Aside from my bets on the insurance space in Defi, the fifth pillar are decentralized autonomous organizations or DAOs for short. I will leave that topic for another article.