HODLer's Den, DeFi Edition ⚖️

HODLer's Den, DeFi Edition By Aromatic

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Disclaimer: Nothing in this report constitutes investment advice—I am just reporting on my accounts and its progress on each platform. You should not use this report to make financial decisions. I recommend you seek professional advice from someone who is authorized to provide investment advice.

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Hey everyone and welcome to the HODLer’s Den, DeFi Edition!

Here you will find information on the DeFi (Decentralized Finance) crypto space. As usual, I will try my best to provide insight from a HODLer’s perspective.

DeFi

So what is DeFi? DeFi stands for Decentralized Finance which is opposite of CeFi, Centralized Finance. The best example of CeFi would be banks because you are putting trust into a third party to hold or custody your assets. Unlike CeFi, DeFi is a new financial system that is open to everyone and does not require trust in a third party or intermediary to hold your assets. Instead, it relies of cryptography, blockchain, and smart contracts to handle transactions.

Currently, the majority of DeFi projects are built on the Ethereum (ETH) network due to its flexible programming language which allows developer to write the required advance logic for smart contracts. ETH also has the most developed ecosystem with many developers which makes it the perfect network for enacting smart contracts.

DeFi hopes to replace traditional CeFi services such as lending and borrowing, stable coins, decentralized exchanges, derivatives, margin trading, and insurance. By utilizing smart contracts, users place trust in codes to settle transactions as opposed to a company or bank—basically, cutting out the middle man and hence never giving up custody of your assets.

Certain smart contracts will require accurate information from the real world and that is where oracles come into play. Chainlink (LINK) hopes to become an oracle that provides reliable data feeds into smart contracts. LINK incentivizes accurate data feed while punishing those with incorrect data.

The great thing about DeFi projects is that they can be combined together in various ways to meet various needs.

Comparison Of DeFi & CeFi

• DeFi

  • Permissionless

    • No KYC (Know Your Customer)

  • Open

    • Available To Everyone

  • Censorship-Resistant

  • Cheaper

  • Built On Blockchain

• CeFi

  • Permissioned

    • KYC Required

  • Closed

    • Available To A Select Few

  • Can Be Censored

  • Expensive

    • Intermediary Fees

  • Built On Legacy Foundation

DeFi Risks

The main risk for DeFi is bugs in the smart contracts resulting in loss. Since it is decentralized, there may not be a way to shut down a project if errors occur. However, certain DeFi projects tackle governance which is another aspect of the DeFi space to help resolve DeFi disputes. Since DeFi projects can be linked together, a systemic risk is inherent which can result in a domino-effect across DeFi protocols. One example is mass liquidation of assets being triggered. Other problems currently still exist such as high network fees and network congestion leading to long transaction times.

Uniswap & Ampleforth

With that said, I recently started dabbling with DeFi, and from a HODLer standpoint, liquidity pools seem to be a good entry point.

Liquidity pools are pools of token locked up inside smart contracts that allow users to exchange any token with one another using Ethereum (gas fee) for each transaction. Since ETH serves as gas for each transaction, there is plenty of ETH locked up in liquidity pools.

Uniswap is one example of a liquidity pool that allows users to swap tokens. Unlike CeFi exchanges that have a set number of trading pairs, Uniswap allows anyone to create a new exchange pair for any token, at any time.

As a HODLer, I am the perfect candidate to become a liquidity provider because I can earn a fee from users that are conducting the swaps in the liquidity pool—just make sure you select a stable pool with stablecoins if you want peace of mind. The DeFi space is still very nascent and risky so invest at your own risk.

C1S recently did a video on Ampleforth (AMPL) so I did a little research on the project. According to the website, “AMPL is a digital currency that adjusts supply daily based on market conditions.”

AMPL's smart contract design allows the increase and decrease of supply to be automatically executed without any need for a transfer between peers, and without the need for a bank.

The way it works is that when the price is high, the amount of AMPL automatically increases, and when the price is low, the amount of AMPL automatically decreases. This process is called “rebase”, and it happens once a day. According to the website, this means that AMPL is non-dilutive in that “if you own 1% of the overall network you will always own 1% unless you actively make a transfer.” Ultimately, what I understand is that AMPL’s smart contract design allows it to best attain equilibrium between supply and demand without causing too much market shock in doing so. Always do your own research as AMPL can get very complex and confusing so avoid investing in something you do not understand.

Anyway, I recently invested into the Uniswap ETH/AMPL liquidity pool and here is what I think about it so far. Since AMPL is fairly new, the market is extremely volatile—I gained almost 30% over a span of 3 days. But what I gained was quickly gone in a matter of 3 days as well and even dropped into the red. At one point my Uniswap ETH/AMPL portfolio was down 40% which was gut wrenching. All of this happened over the course of 1 week! If you cannot stomach the volatility and want something more stable, look elsewhere or invest in stablecoins.

Currently there is an incentive for Uniswap ETH/AMPL called Geyser. It basically generates free AMPL for contributing to the liquidity pool. The more you contribute and the longer you do so, the greater the rewards. Right now there is a set time limit on the Geyser incentive and there is news that they will extend it. There is roughly 70 days remaining before the incentives run out as of writing this article.

Conclusion & Prospect

I recently did some research on the DeFi space and I am super excited for what the future holds. Just the concept and idea of DeFi is revolutionary because it allows anyone the ability to gain 100% control of their assets and finances. Smart contracts are the future. Even though codes can be buggy at times, they usually do not have external motives such as greed which can happen when assets are in custody by an intermediary.

The current problem with DeFi is network congestion and transaction fees which can be deterring to newcomers of the DeFi space. Transaction fees are the biggest problem—in my opinion—because not every can afford such ridiculously high fees just to move around small amounts of assets. Hopefully, ETH 2.0 will resolve the issue and bring DeFi to the modern world.

I will continue to hold my Uniswap ETH/AMPL because I believe AMPL works well in a liquidity pool by design. The concept of rebase is still a bit complicated and I hope to understand it completely as I dive deeper into research. For now, I will take advantage of the Geyser incentive for as long as I can.

If you are interested in getting started with the Uniswap ETH/AMPL pool, please check out C1S’s video tutorial. Final reminder that liquidity pools are new, can be extremely volatile, and are very risky!