Coinbase Joins DeFi Trend With 2M USDC Investment
Decentralized finance, or DeFi, is getting hotter as more projects aim to generate returns in crypto-only financial schemes.
The DeFi trend is accelerating and gaining acceptance, with Coinbase joining the fray. The leading brokerage has created the Coinbase Bootstrap Fund, to boost DeFi projects. Coinbase will invest in two projects, the Compound crypto lending scheme, and the dy/dx crypto derivative exchange.
Each project will receive 1 million USDC, a dollar-pegged stablecoin issued in partnership with Circle, Inc.
Decentralized Finance, or DeFi, has been a term that confuses many. More and more schemes of high annualized returns are cropping up, offering variations of lending or staking digital coins. As Ethereum (ETH) and altcoins weakened their market returns in 2019, they are now accepted as collateral in lending schemes.
Among the largest entities are Maker DAO (MKR), as well as Compound, with new offerings appearing almost every day. Compound, for instance, takes up the DAI stablecoin as collateral, as well as ETH, Tether (USDT), and several other tokens, lending the crypto assets for high returns.
There are several problems with DeFi lending, according to skeptics. One side of the problem is purely technical, related to the smart contracts that contain the funds. Compound is a custodial service, with audited smart contracts, but there are still risks of locked coins or unpredictable events.
The other risk is that the smooth working of DeFi and lending schemes requires an inflow of new users, and a slow rate of withdrawals. This, in a way, resembles a Ponzi scheme, which works well while it is being funded. A bank run of everyone demanding to withdraw their collateral would break the scheme.
Usually, DeFi lending offers relatively low interest rates compared to Ponzi schemes, and can survive longer. But there is still risk as adjustments must be made for various levels of user participation.
In any case, DeFi remains a strong trend in 2019, and even NASDAQ created an index to track some of the biggest crypto lending entities. The NASDAQ exchange operator recently added another crypto-based index, tracking a basket of DeFi projects. The DeFix index will track Augur (REP), Amoveo (VEO), Gnosis (GNO), Maker (MKR), Numeraire (NMR), and 0x (ZRX).
In the past months, multiple projects have pivoted to DeFi forms of lending, including Crypto.com and Binance.