Critics disparage digital currency and believers praise it. Right now, the bears may seem clairvoyant, but investors who focus on the price of bitcoin may be missing three opportunities.

By Ran Grace

Some celebrate praise cryptocurrency as the most transformative tech since the invention of the internet, while others condemn it as a gigantic and even dangerous bubble. Its eye-watering volatility means both the skeptics and adherents will be right some of the time.

For now, let’s chalk one up for the bears. After its recent peak-to-trough drawdown of about 70%, crypto as an asset class is neither an inflation hedge nor a store of value—at least in the short term. 

So, if the narrative du jour doesn’t fit the recent price action or vice versa, what is it? What’s crypto good for?

According to one view, crypto is simply a long-duration, high-beta technology investment. It’s not immune to business cycles, macroeconomics or rising interest rates.

As a result, it has embedded asymmetry with the potential to disrupt industries. That doesn’t mean, however, that all crypto use cases will succeed—or even the vast majority. 

Nobody knows for certain where crypto is headed, nor when it is headed there. As with all nascent technologies, it’s impossible to predict developmental trajectories. 

But that’s no reason not to review some of today’s applications that could offer a glimpse into what’s next for crypto. 

Decentralized exchange: Uniswap

A decentralized exchange, or DEX, is a mechanism used to trade or swap cryptocurrency. DEXs don’t require the limit order books employed by traditional financial intermediaries.

In DEXs, automated market makers facilitate buying and selling. These “smart contracts” are essentially algorithms that use formulas to price assets and conduct trading activity. After connecting a crypto wallet to a DEX exchange, a user can trade cryptocurrency pairs on a peer-to-peer basis 24/7.

The exchange in turn charges a small fee. All transactions are settled transparently on the underlying blockchain. 

Today, the largest DEX is called Uniswap, and it runs on the Ethereum blockchain. 

Uniswap was launched in 2018 and has become the first decentralized financial application to generate over $1 billion in total transactional revenue. It also consistently rivals the trading volumes of well-known centralized crypto exchange platforms such as Coinbase. 

Beyond trading, users can also generate income on DEXs by providing liquidity. Anyone can become a liquidity provider on Uniswap by depositing cryptocurrencies into what’s known as a liquidity pool. These pools of assets are then used to facilitate trading on the exchange. 

When investors swap one token or cryptocurrency for another, the amount of the asset they’re buying is removed from the pool, and the asset they are selling is added to the pool. Prices on the exchange are then adjusted to reflect the shifting balance of the pool. As trades occur, the fees charged by the exchange are distributed to the liquidity providers within the pool, in proportion to the amount of liquidity provided. 

DEXs could very well usher in a paradigm shift in how assets are traded. Besides providing liquidity for all token pairs, the technology effectively lets anyone generate revenue on crypto by becoming a “mini market maker.” 

It’s not much of a stretch to envision how DEXs could impact the status quo of the current financial system, particularly if more securities begin trading in tokenized forms.

Options vaults: Ribbon Finance

Options vaults replicate derivatives trading strategies without the need for users to have a deep understanding of how derivatives actually work. Instead of navigating the complexities of manually structuring positions and trading options, investors simply deposit crypto into a vault. Then, via a smart contract, the vault automatically deploys the trading strategy.

Ribbon Finance is the largest protocol available for users to participate in these products. Currently, only two options strategies are available on Ribbon: covered calls and secured put selling.

With Ribbon, investors can’t customize options trading strategies. Instead, the platform employs “centralized” managers to pick and choose the expiration and strike prices of contracts using a combination of decentralized options protocols and over-the-counter market makers. They’re similar to options-based exchange-traded funds.

Borrowing and lending: Aave 

When you borrow money from a bank, you pay interest; when you lend money, you earn interest. This traditional banking process, however, is neither transparent nor democratized.

Centralized banking is also weighed down with paperwork and requires long waiting periods. Anyone who has ever taken out a loan or applied for a mortgage can testify to that. 

On the other hand, Aave, an instantaneous smart contract-based cryptocurrency borrowing and lending platform, is available to all. There’s no “credit check” or waiting period. Instead, loans are over-collateralized to mitigate risk, and anyone who has crypto to pledge as collateral can borrow.

Like Uniswap, Aave uses “pools” to create liquidity. Lenders deposit money into the pools and receive interest, while borrowers take out loans and pay interest. 

The spreads on the rates for borrowers and lenders are much tighter in decentralized finance, or DeFi, than in centralized finance. At a bank, savers may receive 0.5% interest from deposits, while borrowers might pay 3.5% interest. At Aave, they can deposit a
U.S. dollar stable coin, which is pegged to the U.S. dollar, and earn 0.41% or borrow at 1.53%. 

Price isn’t everything

Some contend crypto has no intrinsic value, but the examples of Uniswap, Ribbon Finance and Aave represent compelling use cases.

Not every crypto-based business plan will survive, but the technology is apparently here to stay. No one knows where crypto is going, but it seems unlikely to go away.

These use cases not only present real financial utility provided by DeFi applications but are also opportunities for users to generate income when participating in these protocols. Users can generate yield by providing liquidity to decentralized exchanges, selling options premium through options vaults, and by lending crypto to borrowers at variable interest rates.  

Ryan Grace heads digital assets at IG North America. @tastytraderyan