DeFi10 Part2: Becoming a Programmable Money Fund Manager

Hello defiers! This is my DeFi10, Part 2. I’m running an experiment where I’m putting in an equal amount of money into 10 different decentralized finance protocols and tracking their performance throughout the year. Last week I invested in what will be the fund’s benchmark, MakerDAO’s DSR, and four other projects.

[Click here to read my DeFi10 Part 1: Lessons in Building a DeFi Portfolio]

This week, I invested in the other six.

I’m documenting here what the experience was for each project, and will periodically track their performance. At the end of the year, I will rank them based on metrics including, total return, some measure of risk-adjusted return, user interface, risk disclosures, and others. Given the highly dynamic nature of decentralized finance, which is barely two years old, it will be interesting to see if any of these projects will have failed, and how many new contenders will surely have emerged.

Here’s the final DeFi10, divided into categories and explained.

This isn’t an exhaustive list of projects. I selected them with the attempt to have a high diversity of strategies.

Benchmark:

MakerDAO is DeFi’s central bank. It issues Dai, a stable cryptocurrency that’s pegged at one-to-one with the U.S. dollar and is backed by other digital assets like ether. The system’s participants vote on deposit and lending rates, which impact the supply of Dai so that it can keep its peg. These interest rates serve as the benchmark for all the other DeFi lending platforms. That’s why I’m using the Dai Savings Rate as the benchmark.

1. MakerDAO’s DSR

Interest-bearing tokens (IBTs):

One of the best innovations of decentralized finance has been to tokenize savings accounts. These tokens represent the capital users deposit in lending protocols and also the interest that capital is accruing. While funds are in a smart contract earning interest, the token is in users’ wallets, growing in value to represent the capital plus the interest it’s earning. Interest-bearing tokens can then be used for other financial transactions, such as trading or used as collateral. IBTs in my fund are all pegged to Dai deposits, as that’s what’s yielding the highest return right now. Having a common underlying asset will also allow me compare the protocols.

1. Fulcrum’s iDai
2. Aave’s aDai
3. Compound’s cDai
4. Chai

Liquidity pools:

Decentralized finance is allowing anyone to become a market maker. While in traditional finance you’d need a huge amount of capital, in DeFi anyone can add liquidity to an exchange and earn a portion of the trading fees. One of the most popular places to do this is Uniswap Exchange, which enables users to instantly swap tokens. Instead of an order book, it has pools of tokens and ether, guaranteeing liquidity between trading pairs. The concept was first implemented by Bancor.

I had intended to also stake SNX to the Synthetix platform, but then I realized it requires management of collateral ratios and to periodically redeem rewards, which was too active for this passive investing fund. So I invested in two Uniswap liquidity pools instead, picking tokens with the highest return. I did this via DeFiZap, which reduces the number of steps in the process.

1. MKR Unipool, via DeFiZap
2. SNX Unipool, via DeFiZap

Automated fund managers:

Robo advisors are becoming hugely popular, with TradFi fintechs like Betterment and SoFi taking market share from traditional fund managers and pushing management fees down. But not everyone can access these apps, as they’re mostly based int he U.S. and Europe, and even then, you need a bank account. Their functionality is also limited to mostly buying stocks and ETFs. Open, programmable money on the other hand, allows for 1) universal access to these passive investment strategies (which has consistently proven to beat active asset management) and 2) for more sophisticated strategies.

I invested in three types of automated fund management dapps. Staked’s RAY and Idle Finance automatically invest my Sai in lending platforms offering the highest yield. RAY and Idle Finance are in the process of adding Dai; I will change my Sai to Dai when they do. TokenSets automatically invests digital assets following popular indicators such the Relative Strength Index and the Daily Moving Average.

I had intended to use Melon Network, which lets anyone invest in funds created by others. Funds’ investments and performance are open for everyone to see. I had trouble getting the app to work and gave up after many tries, as the solution suggested for the error message I was getting was more technical than what I wanted to try.

1. Staked’s RAY (Robo Advisor for Yield)
2. TokenSets’ ETH 20DMA Crossover Set
3. Idle Finance

Out of the box:

Finally, one of the best things about DeFi is that it’s coming up with use cases and investment strategies that don’t have a good traditional finance comparison, as they weren’t possible before. A great example is PoolTogether, the so-called no-loss lottery. PoolTogether pools assets and invests them in high-yielding lending protocols. The lottery winner gets the interest generated, and everyone else automatically gets their money back. If you don’t withdraw your “lottery tickets” and your winnings (if any), from the system, they continue participating in subsequent lotteries.

1. Pool Together

🛠How to Guide🛠

Click here for a 10-page PDF HOW TO on each of the five platforms. This will give you a one-glance look at each of these Dapps’ UX/UI. Here’s a peak:

Initial Takeaways

After finishing the first part of this experiment, my view that DeFi is the future of finance has strengthened; everything is just better. Faster, cheaper, more accessible. These protocols make handling money actually fun —though there’s obviously risks to that and time will tell whether that’s a good thing.

These are some common myths this experiment has already helped clear (or confirm):

1. Ethereum dapps are clunky

FALSE. It’s amazing to use investment applications that don’t take more than three to five steps and about 10 to 20 minutes, from connecting your wallet to putting your money to work. These are money apps that don’t control any of your personal information and incredibly, in many cases, don’t control any of your funds either.

The main factors that can slow a user down is not having enough ETH to pay for gas, or not having the right token to make a specific transactions. These quirks should be smoothed out.

1. You need money to use DeFi

FALSE. Because a lot of DeFi revolves around collateral, there’s the misconception that only the crypto rich can use these protocols. I tried out 11 different DeFi dapps, and didn’t put collateral in any of them. There were no investment minimums either, and transaction costs were only a few pennies each. Users will need collateral to take out loans. But you can start earning interest on whichever amount of money you want to deposit, from $10 to $10,000.

1. Ethereum can’t scale enough to support financial apps

FALSE (for now). Ethereum gas costs have remained stable at under $0.2 for most of the past year, even as decentralized finance surged. All of the transactions for this experiments cost no more than a few cents, except for a little over $1 for the most expensive one. Each transaction took less than a minute to confirm. Decentralized finance hasn’t require a high volume of transactions per second, so it hasn’t congested the network. That’s not to say that won’t change in the future, when DeFi expands from 40,000 users. The hope is that Layer 2 scaling solutions will prevent congestion.

Image source: Bitinfocharts

1. Ethereum dapps aren’t ready for mass adoption

TRUE (for now). While the overall process is smooth, it still takes some experience with Ethereum and crypto to understand what’s going on, with things like transaction confirmation popping up at at every step, the occasional impression that your tokens have disappeared before you manually add them to MetaMask, etc. There also are far too few warnings about the high risk involved in using these dapps. These rough edges in the user interface, and the general lack of disclaimers and hand holding to explain what’s going on, showed me that the space is still some steps away before anyone can easily use these dapps. But I’m sure we’ll get there.

That said, they’re still easier, faster and more accessible than most of traditional finance.

So why does this experiment even matter?

Decentralized finance is here to give people everywhere more options with what they can do with their money, and they can start today. Just as an example that’s close to me, my country Chile is in the middle of social unrest that may result in re-writing the constitution and there’s populist rhetoric saying the state should be in charge of managing people’s pensions, for example. This has deteriorated trust in the local banks and authorities. I’m not advocating that anyone put in their entire savings in DeFi, but at least it’s an option anyone can access in extreme cases like Chile’s or if you’re in a more stable nation and just want to earn higher interest rates.

Hopefully, this experiment will encourage more people to try these things out… and I’m happy to see I already have!

ChainLinkGod.eth @ChainLinkGodFollowing the lead of @CamiRusso, I Just deposited 1 $DAI into each of the top #DeFi lending platforms including $CHAI (@MakerDAO DAI Savings Rate) 6% $cDAI (@compoundfinance) 5.88% $iDAI (@bzxHQ) 6.13% $aDAI (@AaveAave) 6.65% I will check back in a year and compare gains

10:20 PM ∙ Jan 14, 202066Likes9Retweets

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About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.