Still in its early days Decentralized Finance (DeFi) has already reached 1 billion dollars in valuation in early 2020 but still “represents a tiny segment of the crypto-industry.” The majority of DeFi is being built on the Ethereum platform to complete financial transactions such as lending, borrowing, swaps, derivatives, tokenization, exchanges, insurance, margin trading, payments and stablecoins. The amount held in DeFi (currently at $951 million USD) hasn’t been enough to send Ethereum’s price higher yet but it is one of the most rapidly growing areas.

(DeFi valuation from DeFi Pulse)

Long-term appreciation requires creating a portfolio of DeFi tokens which will result in significant gains. My ideal DeFi portfolio would contain early front runners in the DeFi space that are displaying strong growth and transforming traditional finance by moving it to the blockchain.

My portfolio would contain Ethereum as the major hold along with minor positions in Chainlink (oracle function), Synthetix (derivative function), 0x (smart contract liquidity function), and Kyber Network (Decentralized Exchange support function). A small portion is allocated for tokens which could realize significant gains in the DeFi space.

One crypto token I have not included but is worthy to consider adding to any DeFi portfolio is Algorand (ALGO). Algorand is another oracle token but as I suggest holding Chainlink which has a much larger market capitalization it seems to be a better option of the two.

DeFi Dream Portfolio Holdings

Ethereum (ETH) Weighting: 50%

Ethereum would be the largest hold in the DeFi portfolio as it has the potential for a much higher price. In my opinion ETH is currently very undervalued. It has maintained its position as the second-largest cryptocurrency by market cap and it is the clear front-runner when it comes to smart contracts. Ethereum is supported by active developer communities and its platform has more dApps than any other. All the ETH Defi dApps transact using ETH and an increasing amount of ETH is locked up in some of the DeFi dApps. According to the data site DeFi Pulse that tracks major Ethereum-based lending protocols (including Maker) they estimate that nearly $1 Billion USD is now locked into the growing Ethereum-dominated Decentralized Finance (DeFi) Ecosystem. DeFi dApps continue to grow and the ability to stake with ETH 2.0 will be catalysts causing Ether to become relatively scarcer and as a result the price of ETH will increase.

Chainlink (LINK) Weighting: 25 %

Chainlink (LINK) is a decentralized oracle service, which aims to connect smart contracts with data from the real world. Since blockchains cannot access data outside their network, oracles are needed to function as data feeds in smart contracts. Oracles provide external data (e.g. temperature, weather or in the case of DeFi specific financial data updated in real time) that triggers smart contract executions upon the fulfillment of pre-defined conditions.

Synthetix Network Token (SNX) Weighting: 10%

In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the “underlying.”

The Synthetix Network platform enables the creation of on-chain synthetic assets (“synths”) that track the value of assets in the real world. DeFi Pulse reports there is currently almost $150 million worth of Ether (ETH), locked up into Synthetix, a cryptocurrency derivatives protocol.

Maker (MKR) Weighting: 5%

Maker protocol dominates nearly 75% of the lending space in DeFi. The application allows users to loan their ETH by locking it in a Collateralized Debt Position, which in turn, generates DAI. Since the beginning of this year, there was a total of $250 million ETH locked in the Maker ecosystem. Maker’s functionality is rather limited to generating DAI stablecoins and others can not develop on top of it.

Kyber Network (KNC) Weighting: 5%

Kyber Network tokens are used to pay token exchange fees where a portion of the KNC is burned and permanently removed from the circulating supply, the remainder is distributed to reserve managers who stake KNC. Kyber Network’s on-chain liquidity protocol allows decentralized token swaps to be integrated into any application, enabling value exchange to be performed seamlessly between all parties in the ecosystem. Tapping on the protocol, developers can build payment flows and financial apps, including instant token swap services, ERC20 payments, and financial dApps.

Other DeFi coins Weighting: 5%

Ren - a provider of inter-blockchain liquidity for all decentralized applications.

Loom Network - a DPOS layer 2 scaling solution that allows developers to run large-scale applications on top of Ethereum.

Nexus Mutual - a decentralized insurance platform.

Augur (REP) - a decentralized oracle and peer-to-peer protocol.

Aave - a non-custodial protocol to earn interest on deposits and borrow assets.

Uniswap - a fully decentralized on-chain protocol for token exchanges on Ethereum that uses liquidity pools instead of order books.

A list of DeFi projects can be found here.

Where You Can Buy DeFi Tokens?

Most of the DeFi tokens mentioned can be bought on Kucoin and Binance (or other exchanges like Coinbase, IDEX, Hotbit, Bitfinex, Gate.io). All are usually listed as trading pairs with ETH (and sometimes with BTC or USDT).

Summary

A diversified DeFi portfolio should include Ethereum and active, early movers targeting different DeFi areas (eg. oracles, inter-operability, lending, tokenization). Continued DeFi sector growth will see many ETH-based DeFi tokens return great multiples on early investments in the years to come.

Did I miss a DeFi gem that I should add to my portfolio? Let me know which token and why in the comments.

NOTE: At the time of writing this blog post the author holds none of the tokens listed but hopes to begin building his dream DeFi portfolio sometime in 2020.