Another crypto sector has a rocket under it, but this time it’s not Bitcoin and, according to experts, has actual revenue attached.

Decentralised finance, or defi in the crypto lingo, is an almost $US1bn ($1.5bn) industry; it cracked the billion mark when markets generally were peaking in February.

It’s an example of how crypto assets are continuing to mature into investable products that are attractive to more than just the sector’s evangelists, says Apollo Capital chief investment officer Henrik Andersson.

“When we look at the value of these assets, there is certainly value in Bitcoin as digital gold but beyond that the rise of defi is very exciting,” he told Stockhead.

“We believe it’s an attractive area for investors because of the ability to do simple cash flow analysis such as net profit valuation or price to earnings.”

Since the great crypto crash of late 2017 when Bitcoin fell from almost $US20,000 to just over $US3000 by the end of the year, investors exposed to the hype then have been highly cynical about new moves around cryptocurrencies.

Yet institutional investors have been moving slowly ahead with plans for entry.

Andersson says where institutional custodial and insurance products herald crypto’s acceptance by the biggest end of town as a real investment, entities that produce actual revenue and profits (or losses) are a further step-change.


Defi-s expectations

Decentralised finance is a digital take on financial products, based mainly, but not entirely, on the Ethereum platform.

Ethereum is a Blockchain-based platform that allows people and companies to build products that use “smart contracts” to cut out middlemen and create peer-to-peer systems uncontrolled by a central authority.

“This technology is mostly suitable for financial contracts. It’s very powerful when you apply it to finance and I think this might be the main use case of blockchain technology because financial contracts are well defined,” Andersson said.

It comes with new concepts that investors and adherents are using to give an idea of value.

‘Locked value’ is one, which measures the amount of currency, be it dollars, Bitcoin or another cryptocurrency, currently held in smart contracts on a particular platform. The higher the value of money held, the better the platform is doing, adherents say.

Total locked value (TLV) in the decentralised finance sector topped $US1.2bn in February, up from nothing in late 2017. It has since come back to $US965m after the crash in March.

About half of these assets belong to Maker, a platform which offers credit. It has ‘locked up’ $US509m, 2.2 million Ether, and 54,200 Bitcoin, according to Defi Pulse, a website that tracks in almost-real time total TLV levels.

Maker is forecast to make $111,082 this year, and has a price to earnings ratio (P/E) of 5,545.85, according to decentralised finance earnings tracker Token Terminal.

Decentralised exchanges are another section of the decentralised finance sector which is growing quickly. These are platforms on which traders buy, sell and short crypto assets using smart contracts rather than bid through a centralised authority.

Individuals can lend money or take out margin loans from each other, rather than through a Commsec-like institution.

These differ to centralised exchanges such as Binance and Coinbase, which operate more like an ASX, and which handle significantly more trades — up to $US6bn worth a day.

In contrast, earnings for decentralised exchanges that use the Ethereum platform are forecast to hit $US12m this year and a little over $US3bn has been traded since the start of 2020, compared to $US2.4bn in 2019, according to Token Terminal data.

Exchanges include dYdX, which wrote $US700m in margin loans in February and March to traders wanting to exploit markets, and the Kyber Network which is forecast to make $US2.1m in revenue this year and has a 111.45 P/E.

Uniswap is the largest, seeing almost $US755m in trading volume in the year to June.


Big kids are playing in the sandbox

Institutional acceptance of digital assets has been rising over the last two years, with trading volumes in CME Bitcoin futures rising significantly this year, indicating the presence of large traders.

The New York Stock Exchange (NYSE) launched its Bakkt exchange, a secure marketplace for institutions to trade in Bitcoin derivatives, in September.

Fidelity Digital Assets, the crypto arm of the global fund manager, began actively operating late in 2019 and this year moved to offer custodial services for European institutional and sophisticated investors in Bitcoin as well as digital assets backed by metals.

Nomura, a Tokyo-based management consultancy and research firm, received approval in November to use its custody and depositary services for cryptocurrencies.

Coinbase competitor Gemini just hired former investment banker Jeremy Ng to head its Asia Pacific operations.

And Deutsche Börse just launched its first centrally cleared Bitcoin exchange traded fund.

“Traded on regulated markets, investors can buy and sell the ETC in the same way they would when trading conventional shares or ETPs, with the identical regulatory protections in place,” the sales pitch goes.

Singapore is a poster child regionally for regulating digital assets, enacting legislation in January 2019 to regulate the operations of crypto companies.

Other countries in the Asia Pacific region fall somewhere between Singapore and complete bans on digital assets.

However, China has embraced the concept to develop its on centrally-controlled cryptocurrency called Digital Currency Electronic Payment (DCEP), which could be launched this year.

Fintech Chain (ASX:FTC) chair Chris Ryan said last year the Chinese government was supportive of transactions it could track, such as Alipay Money which is effectively a digital currency.

The company is building its payment system to be able to handle digital currencies.

Ecuador was the first country to launch a cryptocurrency, in 2015, while Venezuela issued the Petro in 2018 in a bid to offer an alternative to its own, valueless currency.

Even the Australian Reserve Bank thought about it, telling a Senate select committee in January that it had run a trial to see whether a wholesale settlement system allowing financial institutions to settle customer payments between each other could work on an Ethereum network.

It said such a system could potentially lower costs and speeds of transactions, if set up under the right conditions.