I understand this will be surprising to many of you. Dividend investors are generally more conservative than average so seeing someone who has the core of its portfolio in etf’s and dividend stocks invest in crypto and using defi seems unusual you could say. I’ve always been interested in technology, in money, in more efficiency so in many ways crypto offers many opportunities. What is Defi? Decentralized finance is often defined in opposition to Tradfi (traditional finance).
Key Features Currently Possible In Defi
Permissionless lending & borrowing. When is the last time you called up your bank to offer your deposit and get an idea of what rate they were willing to give you? 🙂 On a platform such as Aave you can deposit assets that will generate yield and then use that as collateral to make a loan. Both will start compounding within seconds and you can see interests accumulate. No need to fill a dozen forms or meet a teller. Doesn’t that feel more efficient and much easier?
This type of financial activity reduces counterparty risk because trust is not required. Assets are deposited and borrowed with collateral and everything else happens automatically. No need to trust that the loan will be repaid because that is the only way the borrower will be able to get back its pledged assets.
As I read and hear about the challenges involved in moving stocks settlement from t+2 to t+2 (they will settle the day after the trade happens), I smile about the fact that crypto settles within a couple of seconds at most, offers 24/7 trading windows in a growing number of assets. Defi is also usually able to offer its most loyal users and contributors a “share” of its tokens through airdrops. I have been a lucky recipient of those a few times and they are definitely game changers. Given the blockchain keeps a history of past transactions, it’s easy to go back and send tokens to any user that has done x or y activity in the first year of a platform. Try doing that in a traditional business.
Speaking of tokens, while we hear a lot about the “Meme coins”, similar to “Meme stocks” such as GME, there is increasing real world usage for tokens. Banks such as JP Morgan and Socgen have been moving certain assets to tokens. Why? Because it makes the tracking, transfers and more much easier and cost effective. I also really enjoyed reading about “Tree News” a simple news service that launched by selling a token “Tree” that generated some money from investors. Then, tree uses a portion of any fees generated by the business to flow through to the token (through buying back tokens for example).
Payments are an obvious but significant use case. Sending a few dollars to someone in your country is usually close to cheap and easy to do without crypto. But try sending money abroad or in a different currency and you will quickly notice the fees grow quickly. Some businesses such as Western Union will make 7,8, 10% or more on simple payments. Crazy.. It will take days to reach its destination in many cases as well. How about buying USDC (a stablecoin that is backed by $US dollars) and sending it anywhere in the world for a few pennies, within a few seconds at most.
More Innovative Cases Arising
A few projects on solana are using the ease of sending/rewarding tokens to build real business. Think of Helium, a company that pays users to provide access to their network/internet through their token and can then sell access to anyone willing to buy. Or Hivemapper that is paying its users through tokens for mapping the world to compete with Google maps or other mapping services. This might be based on my background in traditional finance, but I also see incredible potential in a use case such as Pyth that will allow publishers access to its market data and then sell that data to any interested parties. Data is a BIG business and in traditional finance, it’s access is very restricted and expensive because of the fact that so many users (brokerage firms, etc) need it. The existence of tokens and ease of using them in real world cases is a game changer and I believe we’re only getting started. There are an increasing number of cases for use of NFT’s by traditional companies as well.
Unique Risks Of Crypto
By now, you might be thinking about jumping aboard into this magical world. Unfortunately, given its a new technology, many risks exist and while things are getting better, it still feels like we are in the first inning of the game. The scams, security issues, fact that you need to hold your private keys (series of words) and that anyone that is able to get that information gains access over your portfolio remains an issue to onboarding the masses. Starting to use crypto remains a challenge.
Many use cases also remain unclear legally (mostly from the token issuer perspective) and unfortunately we need the government to act to clarify what is and isn’t allowed. Having the SEC in the US be forced to accept Bitcoin “physical” etf’s was a big deal but there remains so many other aspects that would ideally be clarified in the near future. Many of the use cases I described earlier run into securities laws and it’s clear we need new guidelines and rules to govern them.
Incredible Opportunities Arise
Because of the complexity in getting started and the fact that it is so early, there are incredible opportunities and returns that are possible. Something that looks too good to be true in crypto is just as likely to be true as it is in traditional finance.
Keep Risks, Fees & Costs Front Of Mind
There are probably 100 different levels of risks that can be done in defi from simple trading to complex defi opportunities and its important to stay within your lane in my opinion. I prefer missing what could be big opportunities rather than jumping into something I don’t clearly understand or have a clear idea of the risks involved.
How Big Is My Crypto Portfolio?
I will get into this a bit more soon but it is probably a bit bigger than it should be simply based on success I’ve had and reluctance to take too many chips off the table in an environment that I continue to believe in and be fascinated by. It does remain much smaller than my traditional (dividend+etf) portfolio but has grown quite a bit. That said, it remains a minority of my portfolio.