The DeFi Projects Turning The Crash Into Cash

The DeFi Projects Turning The Crash Into Cash
Jonathan Hobbs

over 1 year ago5 mins

  • Uniswap is a decentralized exchange (DEX) where users can trade a range of tokens and earn trading fees by depositing tokens for other traders.

  • Aave is a DeFi lending and borrowing platform, where users can borrow and lend crypto without going through a centralized authority first.

  • Uniswap and Aave both look strong fundamentally and they’re leading the charge in their niche areas. But be aware: dollar-cost averaging is probably the wisest option while we’re in a bear market.

Uniswap is a decentralized exchange (DEX) where users can trade a range of tokens and earn trading fees by depositing tokens for other traders.

Aave is a DeFi lending and borrowing platform, where users can borrow and lend crypto without going through a centralized authority first.

Uniswap and Aave both look strong fundamentally and they’re leading the charge in their niche areas. But be aware: dollar-cost averaging is probably the wisest option while we’re in a bear market.

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This year's crypto sell-off might have spelled the end for many DeFi projects, but Aave and Uniswap saw it for what it was: a wake-up call to bolster their fundamentals. And their hard work seems to be paying off, with their tokens – AAVE and UNI – more than doubling in value since June. So here’s the lowdown on each, and why their shrewd positioning might still make them bargains in the long run.

Why buy UNI?

Uniswap was the first ever decentralized exchange (DEX) to use automated market making, which means anybody can deposit their own tokens into Uniswap trading pools and earn fees from anybody else who trades them. That’s different to centralized exchanges like Binance and Coinbase, where there’s a select handful of institutional market makers, and the exchange takes most of the fees.

Uniswap is one of the largest DEXs by total value locked (TVL) inside its smart contracts. According to DeFiLlama, $5.68 billion worth of trading liquidity is currently stored in the protocol, and it’s made up of all kinds of volatile digital assets. With the price of most of those assets down more than 80% this year, you’d expect that TVL figure to take an equally big knock. But that hasn't really happened: TVL is only down 30% this year when measured in US dollars, and it’s actually gone up by about 120% when measured in ether. In other words, the exchange is still gaining momentum, despite the bear market fears.

It’s a similar story with trading volume. At the start of this year, Uniswap processed around a third of the amount Coinbase did. But as of right now, they’re pretty much neck and neck, with the decentralized former steadily taking market share from the centralized latter.

Comparing trading volumes of Coinbase with Uniswap. Source: Kaiko.
Comparing trading volumes of Coinbase with Uniswap. Source: Kaiko.

Keep in mind, DEX trading volume overall is still less than 10% of the combined trading volume of Binance, FTX, and Coinbase, so there could be more room for DEXs to grow relative to their centralized counterparts. And since Uniswap accounts for almost 90% of all DEX trading volume, it could be a good way to play that narrative. Uniswap is also set to bring NFT trading to its platform, after announcing it bought Genie – an NFT marketplace aggregator – in June.

That suggests UNI could offer long-term value, especially since it’s down more than 60% so far this year, and 85% since its May 2021 peak. UNI also gives you the right to vote on any changes to how the exchange operates, kind of like how shareholders can vote in general shareholder meetings.

Why buy AAVE?

Aave is a giant in the DeFi lending and borrowing arena: you can borrow and lend a range of digital assets on Aave without going through a centralized middleman. Lenders earn interest for fronting capital that the platform can then lend out to its borrowers, while borrowers pay interest and put up more collateral than they’re borrowing. That keeps the lending and borrowing cycle from breaking down, and removes counterparty risk from dodgy borrowers. That’s important because there isn’t a financial institution in the middle to manage that risk.

Aave has just over $6 billion in TVL stored in its smart contracts right now – more than any other DeFi lending project. Its TVL trajectory hasn’t seen the same success as Uniswap this year – it’s down about 57% when measured in US dollars, and up 43% when measured in ether – but that’s not what makes Aave worth a closer look in any case.

That would be Aave Arc. See, JP Morgan’s head of digital assets says tokenizing traditional assets like US bonds or money market funds could bring “trillions of dollars of assets into DeFi.” Aave understands this, but knows full well that institutions are wary of DeFi’s lack of regulation. So they built Aave Arc with institutional crypto custodian Fireblocks as a means for the big guns to get in without setting off compliance alarm bells.

Unlike other DeFi platforms where pseudonymity reigns supreme, Aave Arc has know-your-customer and anti-money laundering checks for all its counterparties. And given Aave’s strong track record of DeFi innovation, it could be the first place institutions look if and when they start taking DeFi lending and borrowing seriously.

Aside from building a pipeline for institutional DeFi adoption, Aave also has two equally ambitious projects on the go. In February this year, it launched its own decentralized social media platform, Lens Protocol, in a bid to challenge centralized social media platforms like Twitter or Facebook – the selling point being that users aren’t products and get to own their own data.

Second, Aave announced plans earlier this month to launch its own algorithmic stablecoin called GHO. And despite what happened with Terra's recent stablecoin collapse, traders seemed bullish about the news, with the price of AAVE jumping about 25%. That means the token is now down around 65% so far this year, and 86% since its all-time-high in May last year.

What’s the opportunity here?

When the entire crypto market is on the ropes, it makes sense to stick with the strongest contenders in each sector. In that case, Uniswap and Aave certainly dominate the DEX and DeFi lending markets respectively. Look into MakerDAO (MKR, crypto borrowing) and Curve Finance (CRV, DEX) as other potential blue chip DeFi bets.

But keep in mind that we’re still in a crypto bear market until proven otherwise. So while the fundamentals look strong for Aave and Uniswap, prices can still go lower if the market decides to take another leg down. As with all volatile assets, dollar-cost averaging – spreading your total investment across multiple smaller investments over time to sand off the edges of volatility – is usually the best way to go about things.

The DeFi sector might also have a run in with regulators at some point, so that’s always something to be aware of. But so far this year, DeFi’s held up a lot better than major centralized (CeFi) lending and borrowing platforms like Celsius and Voyager, which have both filed for bankruptcy. After all, with DeFi, everything’s on the blockchain for everyone to see. With CeFi, nobody sees anything until it's too late.

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