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Crypto Made ✨ Simple ✨: The Basics of DeFi
On Wednesday, we went over the basics of Ethereum, and I mentioned a couple key apps like Uniswap and Aave. These are both at the heart of decentralized finance, or “DeFi.”
Unlike most financial products, these services are available to anyone. There’s no login, no personal information disclosed — all you need is a crypto wallet.
When you go into any DeFi app, you’ll see something in the top right prompting you to connect your wallet. Here’s an example of what you’d see on Uniswap:
Some of the popular wallets that can link you to DeFi products include MetaMask, Coinbase Wallet, and XDEFI.
Personally, I use MetaMask, but I’d encourage you to look into alternatives as well.
To use these wallets, you have to have crypto in them. The easiest way to fund your wallet is by sending your crypto from whatever exchange you use (Coinbase, Kraken, Binance, etc.) to your new DeFi wallet address, which is usually listed at/near the top of the wallet and begins with “0x.”
For MetaMask, it would look like this:
When using DeFi, it’s also necessary to have some ETH on hand, as all transaction fees are paid in ETH.
There are also “hard wallets,” like Trezor and Ledger, that are typically used for long-term holdings (also known as “cold storage”). These can also be used to access DeFi apps.
When I was first getting started with DeFi, I used my Ledger to connect. There are pros and cons to this, such as:
Pro: If your crypto is on a hard wallet, you don’t have to transfer it to MetaMask, Coinbase Wallet, etc.
Con: You have to plug the hard wallet into whichever computer you’re accessing DeFi apps on, and verify multiple actions in order to process your crypto transactions
If you’re interested in setting up your own wallet and getting started with DeFi, here are some helpful videos.
Next week, I’ll do another segment on “The Basics of DeFi.” In the meantime, be sure to comment below with any questions you may have!
Crypto 🪙 Deep Dive
Institutional Lending
Maple Finance
Clearpool Finance
New Trend: Institutional DeFi
Until recently, the crypto market was almost completely dominated by speculation. However, as the market matures, bigger players have started to show lots of interest. This is understandable, as nobody wants to miss out on something with so much potential!
This should go without saying, but these bigger players aren’t like the hype-driven retail crowd that have thrown money (in many cases, never to be seen again) at all sorts of undeserving projects twice in the past five years.
The bigger players may speculate some, but they bring a demand for sustainable yield that most of us retail buyers aren’t usually as interested in.
As you can see in this chart, large institutional players dominated the DeFi scene in the first half of 2021, undoubtedly contributing to some of the price mania during that time:
Hopefully Chainalysis adds an updated version of that chart in its next report, because it’d be really interesting to see how this data has progressed over the past year.
Either way, we’re currently in a time where most TradFi yields (bank accounts and money markets) are still offering relatively low yields between 0% and 3%.
As for the yields in DeFi, all the mercenary capital that flooded the market in 2021 and supported the relatively high interest rates has left the scene, sending stablecoin lending rates on the most popular DeFi apps well below 2%:
However, a new frontier has emerged within DeFi that’s solving this problem while also providing an entry point for institutions. This new wave is vetting institutional lenders and borrowers and passing along high yields to users.
Some of the bigger projects, like Aave and Compound Finance, have welcomed many institutional users as well over the past couple years.
Aave claims to have dozens of users in its “Aave Arc” institutional lending service, and at the height of the last bull market, Compound’s institutional service attracted $250 million worth of capital.
However, both of these projects keep their institutional services private.
One example of a project that allows users to lend directly to institutions is Ribbon Finance, which I went over in last week’s article. This week, I want to go over two more projects who have made institutional lending their primary service: Maple Finance and Clearpool Finance.
Maple Finance Enters the Chat 💬
I’ll start with the No. 1 feature that sets services like Maple and Clearpool apart from the competition.
Most DeFi lending apps require overcollateralized lending. This means that in order to borrow money, you have to deposit a larger amount than what you’re borrowing.
For example, if you want to use Aave to take out a $1,000 loan in USDC, you have to deposit at least $1,200 in ETH collateral.
However, Maple (as well as Clearpool, which we’ll get to in a minute) enables institutions to engage in undercollateralized lending, which means they can take out loans greater than the amount of their collateral.
The reason for this is because they carefully vet each institution that applies to take out a loan. With Maple, borrowers have to apply as well, which has mostly limited it to other institutional players.
During its short tenure, Maple has facilitated loans between some of the biggest names in crypto, such as Alameda Research, Wintermute, and Maven 11.
So far, Maple doesn’t lend to any DAOs or crypto protocols, but that’s on its radar. This is where I believe the most important use case is: as DeFi matures, DAO treasuries will have to be much smarter with their money (as I talked about here).
This also incorporates another key trend — “real yield,” which I highlighted in this article. Basically, real yield means that people who invest in a certain project get a percentage of the fees that the project makes.
In Maple’s case, all lenders pay a 0.99% fee which is spread out over the life of the loan. This provides a steady income stream for Maple, as well as for investors who stake their Maple tokens. Then, stakers get one-third of the fees, which is a total of 0.33% of every loan.
So far, Maple has generated over $55 million in fees — of which almost $44 million was generated in 2022:
It would make sense that the bad market conditions drive demand for yield, which would be a big reason why 2022 has been such a breakout year for Maple.
On top of the yield, demand for credibility is at all-time highs in crypto, considering what’s happened with 3AC, Celsius, Voyager, etc.
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An Emerging Leader 🏅
Maple is at the head of the pack in terms of institutional DeFi, but there are plenty of smaller players flying way under the radar — like Clearpool Finance.
Clearpool has a very similar business to Maple in that it enables institutions to take out undercollateralized loans. However, unlike Maple, Clearpool allows anyone to lend to the institutions for pretty high rates:
A huge step by Clearpool is servicing Jane Street Capital, a global market making firm that traded about $5.4 trillion worth of assets in 2020.
This puts it a step above Maple in clientele, as Maple has yet to branch out its services beyond the cryptoverse. It also serves some of the same big crypto players as Maple (Wintermute, Alameda, etc.).
Clearpool is also different from Maple in the way it rewards investors.
The Clearpool protocol earns 5% of all interest from the money it lends out, which is all pooled together and will be used for two main purposes:
Furthering protocol development.
Buying back Clearpool tokens on the open market.
Clearly, the buybacks do a good job creating scarcity of the token as they reduce the supply.
However, there’s constant inflation of Clearpool tokens as it’s paid out to stakers and liquidity providers. Over the past three months, the total number of tokens outstanding has gone from 82 million to 296 million:
While it’s always preferable to see protocols pay stakers directly from fees (real yield) rather than by creating tokens and inflating the supply, the token buybacks are at least a step in the right direction.
Their first buyback was split between August 23 and August 24, when it bought back over 1.63 million Clearpool tokens.
Q3 was big in terms of progression for Clearpool, as it had three huge developments:
With Polygon being one of the top blockchains that works alongside Ethereum, launching there was a nice addition. Its buybacks are important as they’ll negate some of that inflation caused by reward payouts.
As for staking, it’ll be putting a checkmark next to that soon — staking went live on October 10.
Closing Thoughts
Reliable yield from credit-worthy institutions is going to be sought after more and more, from entities in DeFi and TradFi alike — and Maple and Clearpool are pioneering this exciting new area of the market.
They are both relatively small projects. At the time of writing, Maple’s market cap is No. 236 ($98.2 million) in the crypto market, and Clearpool ranks all the way down at No. 525 ($31.2 million).
Both are clearly speculative and at different stages of development, but they’re both players that I’m excited to watch in the next bull market.
thank you Ian for going over the basics. I have been with you from the beginning but a lot of the practical stuff gets lost in translation and my go to is to do nothing if I don't understand. Thanks again! ZDG