Written in the front: This article is a analysis of the benefits of Compound, Uniswap Pools, TokenSets, and simply holding Ethereum and Bitcoin. The author of this article is ZFion CEO Evgeny Yurtaev for DeFi, so there may be conflicts of interest when analyzing and comparing the two benefits; in addition, the analysis of this paper is limited to a certain period of time, and can not make an absolute judgment. This analysis is for informational purposes only and does not constitute investment advice.
In addition, DeFi and Hodling can be the best investment postures, as long as they are used properly. The most important thing is rational investment, don't blindly follow the trend.
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In the past year, decentralized financial ecology has become one of the most active ecosystems in Ethereum. Compound, Uniswap, and TokenSets are some of the most popular investment options, and we're here to do an in-depth analysis. Ether (ETH), the native cryptocurrency of the Ethereum blockchain, is the primary collateral for these financial applications. More than 3 million ETH assets (worth more than $500 million) are currently locked into various DeFi applications.
This article compares the performance of Compound cDAI, Uniswap's DAI-ETH pool and TokenSets' ETH MACO with ETH and BTC over the past 11 months.
We analyzed DAI lending from Compound from December 3, 2018 to October 31, 2019, providing liquidity to the Uniswap DAI-ETH pool, or investing in TokenSets' ETH 20-day and 50-day moving average crossover strategy (Moving Average Crossover) Strategies). We also show the return of Ethereum and Bitcoin buying and holding strategies in the same period. The analysis process does not take into account transaction costs, small fluctuations or fluctuations in the price of the stable currency.
Compound is a money market agreement that allows users to pool assets and then borrow them after providing collateral. Interest rates are variable and depend on supply and demand factors.
For Compound, we showcased the performance of the 10,000 DAI portfolio and weekly annualization. In addition to Compound, DeFi projects such as dYdX v2, Dharma, bZx, and Nuo have provided similar benefits to DAI, but were excluded from this analysis because they were launched in 2019.
From December 2018 to the end of October 2019, Compound's return was 7.1%. Most notably, interest rates began to rise in March 2019 after MakerDAO raised its stability fee. The lower interest rates of other mortgage agreements attract users to change positions to obtain more favorable interest rates. We did not consider the price change of DAI, but during this time DAI's dollar price ranged from 0.95 to 1.02. In December last year, the Compound agreement stopped for a few hours because the team was solving a bug in the liquidation process, but it did not have a negative impact on users.
(Compound DAI rate of return, image source: Medium )
Uniswap pool revenue
Uniswap is a chain exchange where users can trade tokens. Transactions are matched by asset reserves provided by liquidity providers, who can get a return on transaction costs.
We invested $10,000 in the DAI-ETH pool at Uniswap to observe the final performance. In effect, this means that investors have provided $5,000 worth of ETH and $5,000 worth of DAI for this pool of funds. The final data comes from the investment situation between December 4, 2018 and October 31, 2019. The difference in prices between ETH/DAI transactions and the investors who invest in funds at different times will vary. During this period, the rate of return for the Uniswap DAI-ETH pool was 18.15%.
Uniswap's earnings depend on three factors: 1) the price of the asset at the time of supply and withdrawal, 2) the size of the flow pool, and 3) the volume of the transaction. The high volatility of cryptocurrency prices has led to large changes in Uniswap's earnings, so future earnings may differ significantly from the reference data.
In the image below, the green bar is the weekly cumulative transaction fee and the red bar is the weekly temporary loss due to price fluctuations. Interestingly, during the period when ETH prices fluctuated significantly, the fees charged for increased trading activity significantly reduced the temporary loss of portfolio value. Another factor contributing to this result is that the size of the flow cell is relatively small compared to the volume of transactions, which allows liquidity providers to obtain a significant portion of the cost. If the flow pool is larger, the transaction volume is lower, or both, then in the days when ETH prices fluctuate significantly, investors will suffer greater (net) losses by charging less fee income. In the end, the strategy was only slightly below its initial value in 5 weeks.
(Uniswap DAI-ETH income, image source: Medium )
TokenSets: ETH 20-Day and 50-Day Moving Average Crossover Strategy (MACO)
TokenSets is a token trading strategy, the strategy is executed automatically, and the user does not have to do anything.
We show the performance of two trend trading strategies: the 20-day moving average crossing (MACO) and the 50-day moving average crossing. Both strategies are simple momentum strategies designed to capture returns from ongoing trends and adjust the rebalancing to get cash when the trend reverses.
TokenSets released their trend trading strategy in July 2019, and we used daily price data from October 2018 to estimate the return on these strategies. It is worth noting that our analysis did not consider small fluctuations in fees and prices, but recently TokenSets has adjusted the funding mix to have caused a volatility of 0.5% or more, which may affect the actual performance of this strategy depending on the frequency of adjustments.
When the price of ETH is higher than the moving average, the moving average cross strategy will buy and hold ETH; when the price of ETH is lower than the moving average, the moving average cross strategy sells ETH and holds the stable currency. Adjust the fund portfolio on the day of the price crossing, provided that the last adjustment has passed 4 days.
The 20-day MACO strategy performed better than the strategy of buying and holding ETH, yielding a 78.7% return.
We noticed that these two strategies basically avoided the decline of ETH in July 2019 by timely converting to stable currency. However, the September decline was too sudden, and the strategy of converting into stable currency was too late. The 20-day MACO strategy generated a return of 78.7%, which exceeded the ETH buy-and-hold strategy, but the 50-day strategy had a significantly lower return than ETH, which was 22.5%. The blue lines represent the daily gains.
(Picture: ETH price and 20-day MACO holding period; Below: 20-day MACO income, image source: Medium )
(Top: ETH price and 50-day MACO holding period; Below: 50-day MACO income, image source: Medium )
Ethereum and Bitcoin revenue
Before the recovery of Bitcoin in July 2019, the prices of Ethereum and Bitcoin were always strongly correlated, and the performance of the two was basically the same. After July, although bitcoin prices picked up, Ethereum began a continuous downward trend. However, Bitcoin also experienced a sharp decline in September 2019. During this time, the value of both assets exceeded the original 200%. The price of Ethereum fell by about 50% from the highest point, while the price of Bitcoin fell by about 34%. At the end of this period, Ethereum's buy-and-hold strategy achieved a return of 69.3%, and Bitcoin achieved a return of 131.4%.
The orange line represents an investment performance of $10,000, and the blue line represents daily returns, which are calculated based on daily price data.
(above: Ethereum revenue; below: Bitcoin revenue, image source: Medium )
to sum up
ETH's 20-day strategy is superior to other DeFi applications and buy and hold strategies in the text. This is because the strategy avoids the fall of ETH in most cases and generates a return during the upswing. The 50-day strategy also seized the upward trend in March and re-adjusted the position to stable currency in July, but experienced a sharp decline in September, which greatly reduced the final return of the strategy. If these strategies can adjust positions more quickly, the 50-day strategy will return more than 50%, while the 20-day strategy will return more than 130%.
We also noticed that the risk of holding ETH, BTC or TokenSets is higher because their prices fluctuate more. By the same token, Uniswap's DAI-ETH pool liquidity providers hold half of the total assets, which also reduces the volatility of their portfolios.
Another interesting development of DeFi is the tokenization of investment positions. For example, Compound's cTokens represent deposits and their accrued interest, but exist as separate tokens. This means that the Compound deposit can be transferred and deposited into other smart contracts, such as Uniswap (there is a cDAI-ETH pool). Therefore, the cDAI-ETH liquidity provider earns both the Compound's DAI rate and the transaction fee from the flow pool. Similarly, TokenSets can be re-adjusted to cToken stable currencies, such as cDAI or cUSDC, so investors can earn interest from their cash positions.
As our analysis shows, the DeFi space gives investors the opportunity to accept different risks and returns. Due to the openness and decentralization of DeFi, the field may continue to introduce exciting new financial products, and it is worth paying attention to its latest developments.
DeFi is still in the early stages of development, and all smart contract systems should be considered an experiment with high risks and the potential for lost funds.
In summary, investors are better off diversifying their lending and other activities into different smart contracts, rather than pursuing the highest returns.
Again, this article does not constitute investment advice. Investment is risky and admission is cautious.