The Great DeFi Accumulation
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TLDR: Prices down. Fundamentals up.
The year 2021 will be marked as the year of DeFi accumulation for all who were paying attention to long term trends over short term narratives.
The Beginning: DeFi Summer 2020
It’s Summer of 2020 and a new Open Financial System has emerged, making headlines across nearly every major news station as it shows clear ability to change our current global financial system. Farmers are making money hand over fist during this golden age known as DeFi Summer. The boom is so big, Entrepreneur.com will call 2020 “The Year of DeFi”.
It all began when Compound started giving away ownership of the protocol to users. Curve.Fi was released from an anonymous deployment, using funds withdrawn from Tornado Cash. Yearn.Finance was birthed from Andre Cronje, a never before seen crypto messiah figure; and Synthetix smart contracts were forked nearly a thousand times to make every type of food coin you could imagine.
The sheer insanity of this innovative period is too hard to explain. For those who took part, it was truly a once in a lifetime experience. There was no more unique feeling than to ape into a fresh un-audited smart contract with more money than you would make in a year from your regular job, just to try and get that fresh 5,000% APY. It was honest work.
Now: The Great Accumulation
As we flash forward more than year later to present day, it is clear that what was being built in 2020 was critical infrastructure for the future of finance. I will even go as far as saying it’s the future of entire countries, most notably, France.
As the hype has died down, so has the price for most DeFi assets. This post is simply to document a point in time that shows DeFi fundamentals are rapidly growing, while prices are falling. I called out a similar phenomenon with Ethereum in 2019 when the price was less than $200.
Regardless if you are a casual lurker or a professional investor, it’s time to pay attention.
The Decentralized Central Bank — MakerDAO
Price at time of analysis: $2,300
Market capitalization at time of analysis: $2.08 Billion
MakerDAO is not only one of the first DeFi protocols, but it is a bedrock to the entire decentralized finance industry. It’s a system that allows users to lock up collateral and generate Dai, a decentralized, trust-less and censorship resistant stablecoin. MKR holders govern the protocol and have rights to cashflows.
I believe that Dai will continue to be one of (if not the) most dominant decentralized stablecoins in the industry. The MakerDAO community is moving forward with its scaling strategy, I expect the protocol to continue to grow overtime.
If you want to learn more about MakerDAO, read here.
Price vs Total Value Locked
Total Value Locked: $20 Billion
Fully Diluted Valuation (FDV) / Total Value Locked (TVL) Ratio: 0.12
While price has been in decline since May 2021, the protocol continues to see more use and Total Value Locked (TVL).
Price vs Borrow Volume
Borrow Volume: $9 Billion
Users continue to borrow from MakerDAO with no clear slowing in sight. This is not cumulative data, as you can see from the temporary blip downtrends. As with any financial institution, borrowers pay APY in order to have access to credit. This APY is revenue generated for the protocol, which is owned by MKR holders.
Price vs Revenue
Annualized Revenue: $145 Million
Price to Earnings Ratio: 15.93
A P/E ratio of ~16 is typically considered very attractive to value investors. For comparison, Tesla (TSLA) currently has a P/E ratio of 302. The lower a P/E ratio, the more undervalued a company is considered to be.
Price vs P/E Ratio
Regardless if you are a fundamentals based investor or a chart based trader, this is a chart that should get you excited.
The Decentralized Money Market — AAVE
Price at time of analysis: $168
Market capitalization at time of analysis: $2.7 Billion
AAVE is one of the most innovative communities in the entire industry. They were arguably the first decentralized money market, in addition to being the inventors of flash loans, credit delegation and yield bearing NFTs.
Just recently they launched their innovation arm, called Newt, where they are building innovations like NFT Trading Cards, Tokenized Time, Optimized Gas Flash Liquidity and Debt-Bearing Flash Loans.
I have strong convictions that over the long term, AAVE will be critical backend infrastructure for the DeFi, NFT and Metaverse landscape as a whole.
If you want to learn more about AAVE, read here.
Daily Price vs Total Value Locked
Total Value Locked: $24 Billion
Fully Diluted Valuation (FDV) to Total Value Locked (TVL) Ratio: 0.11
While price has been in decline since February 2021, the protocol continues to see more use and Total Value Locked (TVL) as time passes.
Note: The below chart only shows Ethereum L1 TVL, but the data above accounts for all deployments of the AAVE Protocol.
Price vs Borrow Volume
Borrow Volume: $11.5 Billion
Borrowing demand from users saw a major spike in April 2021 and continues to consolidate, while prices trend down.
Note: The below chart only shows Ethereum L1 Borrow Volume, but the data above accounts for all deployments of the AAVE Protocol.
Price vs Revenue
Annualized Revenue: $565 Million
Price to Sales Ratio: 5
Note #1: The below chart only shows Ethereum L1 Revenues, but the data above accounts for all deployments of the AAVE Protocol.
AAVE is a two-sided marketplace, so not all of the revenues flow to AAVE token holders. Future token economic changes will likely substantially effect how earnings are distributed, which could see a boost in earnings paid to token holders.
Price vs P/S Ratio
While it’s hard to make much of this chart, it’s clear that it’s never been cheaper to buy AAVE based on a Price to Sales Ratio.
The Decentralized Yield Machine — Yearn Finance
Price at time of analysis: $20,200
Market Capitalization at time of analysis: $742 Million
Yearn Finance is one of the most interesting stories in crypto. It was the original fair launch project, meaning the founder Andre Cronje launched the protocol and gave away 100% of ownership to the users. This completely changed the industry and subsequently caused hundreds of copycat projects to launch and try similar tactics. Many have tried, but none will ever be able to replicate the WaiFu Magic.
If you want to learn more about Yearn Finance, click here.
Daily Price vs Total Value Locked
Total Value Locked: $5.2 Billion
Fully Diluted Valuation (FDV) to Total Value Locked (TVL) Ratio: 0.14
Users continue to pile into Yearn as they are desperate for yield on their assets. Users simply need to deposit, and the Decentralized Yield Machine (YFI) does all the hard work.
Price vs Revenue
Annualized Revenue: $216 Million
Price to Sales Ratio: 3.44
Price to Earnings Ratio: 7.56
Yearn Finance generates revenues based on a performance fee, similar to hedge funds. Due to their complex strategies, which are often changing, revenues can fluctuate. While prices are now currently lower than at the start of the year 2021, revenues have increased substantially.
Price vs P/E Ratio
A Yearn Price/Earnings ratio of 7.6 is the most attractive in the entire industry, when looking at protocols that are not offering short-term token incentives to promote use.
The Future: Pump It
I believe that 2021 has proven again that on short timeframes, crypto narratives are more powerful than fundamentals. It’s clear that just like in 2018, prices are down more than fundamentals. This is likely due to the general narrative around crypto having transitioned away from decentralized finance, and on to more fresh topics such as NFTs, the Metaverse and alt-L1’s.
I believe current market conditions benefit investors focused on longer term macro trends rooted in solid fundamental data. Many of the top DeFi protocols are now generating massive revenues with little/no overhead and over the longterm, these revenues will flow to token holders. This is not meant to be an exhaustive list of DeFi assets that may be an attractive investment but simply pointing out a few notable ones.
About the Author
Anthony Bertolino is dedicated to educating the world about Ethereum and the future of finance. He studied Blockchain Technology at U.C. Berkeley and currently lives in Las Vegas, Nevada. If you want to learn more or have any questions, reach out to him on Twitter.
Disclosure: I currently hold the assets mentioned in the above article. These statements are not a recommendation to purchase any token or invest any funds. This blog is simply used to document my investment thesis, which is backed by data. You should do your own thorough research before investing a single penny in any market. This is not financial advice, investment advice, or advice of any sort. Please consult your financial advisor before making investment decisions.
