Bonded.Finance: DeFi Diversification to Combat Hyper-Inflation & Volatility

July 16, 2021

Decentralized finance (DeFi) is growing at an unprecedented rate, pushing the financial services industry into an era of reinvention and adapting to modern trends. However, DeFi is still in its incredibly early stages, and significant problems are hindering the sector’s continued growth.

This includes scams and market manipulation from whales, but the two most significant issues that need to be tackled are hyper-inflation and volatility. In the traditional monetary system, inflation diminishes the purchasing power of a currency as its circulating supply increases. However, in decentralized economies, inflation is what incentivizes network participants, producing all of its rewards from staking to liquidity mining.

Almost all DeFi platforms use their own native token, gradually releasing its supply into circulation. This is often issued as a reward for providing liquidity, and is an incentive for more users to participate in the platform’s ecosystem. Inflation is an essential part of any decentralized system, but without properly understanding how it works and the effects it can have, inflation can quickly become a network’s fatal flaw.

As the space continues to grow, more and more protocols are cropping up each day, issuing more tokens into the market. This diverts capital from existing DeFi tokens, shedding the value of the tokens already in circulation, ultimately leading to a market dump. For instance, if a new platform sets a high reward rate to attract users and liquidity providers, the low demand and high inflation create a hyperinflationary model, which causes these tokens to crash.

Additionally, an inflationary network going through a bearish market trend or decline in market demand can also lead to hyperinflation, which was evident during the 2018 crash, where most tokens failed to recover. This occurred again in October last year, where many hyperinflationary tokens fell by around 60%.

A Diverse Approach

Diversification is key to any successful investment portfolio, and this applies to cryptocurrencies too. Most investors, particularly those newer to the space, tend to hold only one or two cryptocurrencies (mainly Bitcoin and Ethereum) since they are the most widely used platforms with the deepest liquidity.

However, this approach is deeply flawed, especially since capital tends to shift between Bitcoin and altcoins erratically. Diversification helps prevent a single token’s depreciation from affecting your overall portfolio, reducing investor exposure to the extreme volatility levels often found in digital asset markets.

Though diversification is essential, the illiquidity of lesser-known tokens can prove to be a major hindrance. In DeFi, innovation flows like water, but it’s also a risky space to invest in. When assets are deposited into a liquidity pool for staking, participants are rewarded in the form of both a portion of the trading fees as well as staking rewards. This is because liquidity providers take on asset risks by supply tokens to the pool, since price swings can lead to impermanent loss.

However, staking also improves the market’s liquidity, and so locking up tokens actually helps minimize price volatility as a whole. Illiquidity prevents traders from swapping in and out of their positions, and at times, this can be even more dangerous than holding a single asset.

However, there’s a lot more to decentralized finance than chasing the token with the highest gains. Though DeFi exploded seemingly overnight last year, its roots in blockchain are far more profound, and only a handful of projects have stood the test of time. To invest in DeFi is to tap into a trillion-dollar market, discover markets with unexplored liquidity, and unlock blockchain technology’s true potential. With Bonded Finance, all this is neatly packaged into a single token.

Bonding Markets Together

Bonded Finance is the innovator DeFi didn’t know it needed. Building the next generation of financial tools, Bonded aggregates the liquidity of thousands of idle crypto-assets in the DeFi space, creating a multi-billion dollar market of untapped liquidity.

Using smart contracts, Bonded Finance is solving some of the most prominent obstacles restricting players from diversifying their holdings, classifying the highest yield digital assets into a single basket. The platform’s main objective is to tap the capital sealed inside illiquid altcoins by delegating it to something more productive and profitable.

Currently, the cryptocurrency lending ecosystem caters to a few select assets, and while this is slowly changing, change is slow. The volatile and unpolished altcoin space remains fertile ground for both opportunity and amelioration, and Bonded Finance has a few ways of taking advantage of that.

Through its unique Accelerated Crypto Loan (ACL) instrument, Bonded Finance lets market participants contribute to liquidity pools where users can deposit assets to earn rewards and also borrow funds by depositing their assets as collateral. ACL is ideal for the holders of assets with low liquidity and high volatility, allowing them to profit from yield and other platform rewards against these assets.

Additionally, its aggressive loan-to-value ratios help safeguard investor interest rates against volatility, and using its Straight Staking reward program, Bonded also helps investors protect their assets against inflation. This initiative allows users to diversify their portfolios and incentivizes them to provide liquidity on popular DEX’s like Uniswap in exchange for its native BOND tokens.

Bonded Finance represents one of the most convenient and lucrative investment vehicles to exist in the DeFi sector, with the project’s BOND tokens enabling market players to maintain a diverse portfolio of digital assets.

Bonded Finance aims to create an ecosystem that blends the concepts of a well-managed portfolio and a basket of volatile assets, helping the entire industry to share resources better and generate long-term, sustainable growth.

Tags: , ,