DeFi in Action
The DeFi space is getting really interesting and hotting up. DeFi is a term for decentralised financial services run on the Ethereum blockchain. Sometimes also referred to as #dopefi, short for decentralised, open finance.
We can see the volume of DeFi assets being used as collateral in these new nascent DeFi services is increasing hugely over a yearly comparison.
DeFi services such as MakerDAO, Compound, Dharma, Uniswap, Nexus Mutual and Melon offer a new way to manage, swap, lend and protect crypto assets to build new types of services without a central party. MakerDAO is perhaps still the most impressive DeFi project as it’s product is a fully decentralised stablecoin called DAI that’s backed by crypto assets with distributed self governance over risk parameters and collateralization ratios. It has five times the reserve as collateral so it can handle fairly hard crypto crashes and still peg to close to a dollar per DAI, keeping it nice and stable. It’s really one of the early prime examples of governance of MakerDAO working fairly well with no direct central controlling entity. It is real decentralisation in action. Ultimately, DeFi services are all about trust-less ‘quicker, cheaper, better’ services than the current services on the internet that are out there and hopefully the DeFi services come without much friction.
Part of what we do at KR1 is getting involved in the actual usage of the software we invest in, eating our own dogfood. As an example we have done some cool things using the latest DeFi applications over the past few weeks especially;
Swapping, lending and protecting our crypto assets with Uniswap, DAI and Nexus to generate some yield
Lending is at the heart of the DeFi movement and is growing rapidly as seen above, mostly driven by Maker and Compound Finance. Other services are exchanges or ‘autonomous liquidity pools’ like Uniswap.
This month we started with converting some cash that’s been sitting on the balance sheet into ETH to then Uniswap-ping those ETH for some DAI, a form of decentralised, digital cash (disclosure: not the actual amount as seen below, this is just a test).
Once we had those DAI in the wallet, we went on to Compound Finance to lend the DAI out to Compound Finance’s DAI supply pool to generate some yield on the DAI by lending it out to people who want to go margin-long some crypto. At current market conditions (those change daily, almost as volatile as crypto prices), we’re looking at an approx. 12.21% current supply APR for deposited DAI. On the other side, people can take some DAI out as a loan with an approx. 17% current borrow APR (those people are posting excess crypto collateral to secure their loans, a minimum of 1.25x of whatever they’re borrowing). The big gap between the supply APR and the borrow APR is coming from the fact that not all currently supplied DAI is lent out and that there is a safety margin as well.
Using Compound couldn’t be easier. It’s really a great experience to use it and lend crypto. Compound is becoming an increasingly active platform for DeFi, imagine the hassle and pages over pages of legal documents if you were to engage in such a structure in the traditional world. A very powerful service to demonstrate the utility of smart contracts intermediating supply and demand market places, in this case applied to borrowing and lending.
Next, with our DAI in the Compound Finance smart contracts generating some yield, we took out Nexus Mutual cover for exactly those DAI that we deposited into Compound Finance. As announced previously, we seed funded Nexus and helped the liquidity pool in the first place.
The cost of cover premium to protect the the DAI we deposited into Compound Finance was a mere 1.3% for a 365 days period, thus leaving us with quite some profit percentages between the 1.3% cover cost against technical smart contract exploits or errors (that would result in us loosing the DAI in Compound Finance) and the initially 14.94%, at time of writing though closer to 11.84% supply APR. In case of a hack or exploit that results in us losing access to the DAI in Compound Finance we could raise a claim with Nexus Mutual to be refunded those DAI given our purchased cover. Saying this, it needs to be noted that this approach is not a scalable strategy as of right now given that the we reached the maximum cover limit with our purchase for the Compound Finance contracts on Nexus Mutual and also the Compound Finance supply/borrow APR are fluctuating heavily with more DAI deposited and borrowed. Thus, this is not material enough for any announcement on our business activities side.
Nexus Mutual is a cornerstone of the DeFi movement as it offers technical risk cover to smart contracts and projects in the ecosystem and has seen great traction for users buying cover across MakerDAO, Compound Finance, Uniswap, Edgeware Lockdrop, and many others.
Here is a good overview of the DeFi space if you want to dig in deeper.
Ethereum’s 4th Birthday!
KR1 News & Investments
We completed a buyback of deferred shares to clean up the KR1 plc share structure, see details in our announcement here.
We have some news to follow in the next month or so on some new investments we have made, it’s been taking much longer to properly finalize project funding rounds this year compared to ’17 or ’18 thus we’ve been a little silent lately.
KR1 in the Press!
George was interviewed by CityAM.
George in Bitcoin Magazine:
“Imagine giving Donald Trump a money printing machine and then asking him kindly not to use it. My thoughts exactly … This is why the U.S. economy is $22 trillion in debt and why the average lifespan of a government backed fiat currency is 27 years,” George McDonaugh, the CEO of the London-based KR1 blockchain investment firm, wrote in the email. “[Bitcoin] belongs to everyone, always. Think software for money with a free license to use it how you wish in perpetuity. It’s not possible to win a fight against this kind of utility, and just like all the other software we’ve invented, in time it will eat the world. No wonder old men in suits are shaking their fists at it.”
George wrote in The Merkle:
Blow up a balloon, hold it tight in your fingertips and then let it go. See how it farts its way around the room in all directions? This is Donald Trump’s brain and today his brain decided it would be a good idea to write about Bitcoin.
Keld in CityAM:
Libra has big issues. Even though its a foundation and Facebook is hands-off, it’s still a Facebook initiative and a US centric project (with British technology from a London startup that we were previously advising called Chainspace).
Meet us at…
Starting mid/end August we’ll be representing KR1 at the Web3 Summit, hosted by the Web3 Foundation featuring Polkadot, Cosmos, Tezos, Ethereum, Filecoin/IPFS and lots of other exciting technologies. Even Ed Snowden is confirmed as a speaker, exciting! After that we’ll stick around in Berlin for the rest of Berlin Blockchain Week.
In October we will be at the annual Ethereum unicorn rally, this year in Osaka, Japan.
KR1 is Europe’s leading digital asset investment company supporting early-stage decentralised and open-source blockchain projects. Founded in 2016, KR1 has been a notable first investor in many key projects that will power the decentralised assets, platforms and protocols that form the emerging Web3 infrastructure.