DeFi Investment Report: Feb 2021

  • I have invested in $CELO, $FARM, $AAVE, $CRV and $UNI in the ratio of 4:4:1:1:1 .
  • I only invest in tokens where I’m active on Discord and in governance votes.
  • I selected these five tokens to get a taste of stables, yield farming, lending and exchange protocols.
  • My most common concerns are around a lack of collateralisation and a lack of clarity around governance token income.
  • Buy and Hold: Once I buy, I don’t sell.
  • Dollar Cost Averaging: Every quarter, I invest roughly the same USD amount in DeFi.
  • Understand what I own & Own what I understand: I try to get involved in governance proposals in all platforms I own stakes in. I will continue to invest in protocols I understand and believe in, and stop investing in those I don’t.
  • Don’t look at returns: I don’t track prices on a monthly or quarterly basis. I only look at how many units I have invested in each holding. I’m defining a unit as a fixed dollar amount (cost basis). I see this type of investing as all or nothing — either the token will go sky high, or flop to zero.
  1. 4 units — $CELO (locked and earning ~5.5% interest on WOTrust.US)
  2. 4 units — $FARM (staked in the Profit Sharing pool)
  3. 1 unit — $AAVE (staked in the safety module to earn ~5% interest)
  4. 1 unit — $CRV (locked for 4 years on curve.fi)
  5. 1 unit — $UNI
  • Collateralisation. The Celo platform supports a US dollar stable coin called the Celo Dollar (cUSD). This stablecoin is backed by reserves that predominantly consist of the CELO governance token. While reserve levels are high at present, in a down-market, I am concerned that the CELO token will drop in value and Celo stablecoins could become undercollateralised and de-peg. On the plus side, Celo.org is transparent about the level of reserves, and — to date — I find the community responsive to questions. I also find governance to be transparent (although currently quite centralised among early investors and employees). I would prefer to see an updated approach to collateralisation prior to further investing in the Celo governance token.
  • Locking. I am happy to lock my token to vote and earn 5.5% interest. Celo have separated voting out from custody of the token, so I can assign my votes without giving up custody of my Celo, which is comforting. I will continue to lock my CELO if I buy more.
  • Transparency. Engaging on Discord, it is difficult to identify (even pseudonymously) who the real decision makers are. I plan to join some of the coding meetings in order to better understand what is really happening.
  • Financialisation. Harvest recently approved issuance of an iFARM token, which is a staked version of FARM. To me, this is a sign of increasing layering of complexity in the platform, giving it less straightforward and more ponzi-like characteristics. I’ll be looking closely at that the way the Harvest community handles the implementation of the iFARM token, as well as keeping a close look-out for more careful consideration within governance proposals of keeping the platform economics simple and transparent.
  • Token Economics. While Aave tokens earn a portion of platform fees, the details are not clear on the Aave.com website. Ultimately, token economics underpin the financial reasons to own a token, so I’ll be keeping a close eye on improvements in communication of token economics from Aave on this front. Still, credit to Aave for having progressed this further than compound.finance .
  • Collateralisation. The Aave platform (as are most lending platforms) tend to disproportionately service lending of volatile cryptos (like BTC and ETH) collateralised with stablecoins (DAI, USDC, TUSD). Collateralisation requirements are only a fraction of what would be required to cover a fall in BTC/ETH prices to March 2020 levels. This means the platform stability is reliant on a highly functioning liquidation mechanisms in the case of a market crash. I believe this risk is under-appreciated by the platform, although the presence of a safety module is a step in the right direction. (More analysis on collateralisation here).
  • Utility. My understanding is that much borrowing on these platforms is done in order to make leveraged long investments in BTC and ETH. I’ll be keeping an eye out for whether there are less financialized uses of lending platforms like Aave that benefit the general public.
  • Safety Module. I have staked my AAVE in the safety module for about 5% annual interest. In return, my holdings could be slashed by 30% if the platform runs short of liquidity. I think this is a bad deal. I think the real market rate should probably be closer to 15% because I put the chance of needing the safety module (with current collateralisation levels) as quite high. The fact that few Aave holders are staking their Aave also suggests to me that this is an issue. One solution would be to increase the interest payable until staking rises to a predetermined threshold (say 75% of outstanding Aave tokens).

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