Money markets are one of the biggest sectors in traditional finance, and now they are quickly gaining traction in decentralized finance (DeFi) as well. The demand for cryptocurrency money markets is gradually increasing as more people are willing to borrow and lend cryptocurrencies. Borrowing and lending cryptocurrencies is considered to be the first venture most people take in the world of decentralized finance.
This article will look at the financial performance of three different cryptocurrency money markets’ underlying tokens and compare them. The three money markets and their respective tokens are Aave (AAVE), Compound (COMP), and Unilend (UFT). Aave and Compound are two of the most popular cryptocurrency money markets, whereas Unilend is a recently introduced entrant that has been rapidly gaining popularity. The aim behind comparing the recent financial performance of 2 established cryptocurrency money markets with a new arrival is to just see if there’s anything interesting going on in the market. Also, the comparison of these cryptocurrency money markets is not meant to be financial advice. This is merely to analyze how the 3 DeFi money markets have performed thus far.
Unilend has only been listed for less than a month, therefore the financial data collected for all three platforms is just from the 19 days between Oct 15, 2020 and November 2, 2020. All data was collected from coingecko, and you can find it here. This comparison is not financial advice, please remember to do your own research.
The Methods of Analysis
For the sake of this article two different methods will be used to evaluate the financial performance of the 3 platforms. The two methods are simple average daily return and historic volatility. It is true that average daily returns and volatility are generally conducted on a monthly or annual basis, but one of the tokens was listed very recently, so the amount of data available for all three tokens only permitted a 19 day analysis. A short term analysis can cause results to be slightly skewed, so it is advised to conduct your own research.
The simple average daily return is just meant to give everyone an overview of how a certain asset has been performing in a certain time range based on its price fluctuations. The method of finding the average daily return is really simple, it just involves finding the daily returns of a certain asset based on its day-day price movements, and taking an aggregate average of all those returns. Even though the average daily return is a really simple tactic to apply, it still provides valuable information about the financial performance of the underlying asset(s).
Historic volatility is the second method that will be utilized to evaluate the financial performance of the three tokens. Volatility is essentially meant to show how unpredictable the price of a certain asset is. Prices for higher volatility assets tend to be very unpredictable, whereas lower volatility assets are much more predictable.
Volatility can also show by how much, or to what extent the price of a certain asset tends to fluctuate. Historic volatility can be very advantageous because it shows the risk-reward dynamic of an asset. Higher volatility shows high risk and high reward, whilst low volatility shows low risk and low reward.
Aave’s native token, AAVE’s price depreciated at an average rate of -2% everyday during the 19 day period. A -2% average decrease in token price might scare many people, especially those that are new to the cryptocurrency markets, but it is not something uncommon in these markets.
Aave’s market cap dropped to $344 million USD from $479.1 million USD at the end of the 19 day period. This decline in market cap can be attributed to the decline in the token’s price.
In the 19 days AAVE scored 7% in regard to its daily volatility, and 111% annual volatility. An asset with 7% daily volatility can be considered extremely high especially when compared with blue chip stocks. However, it is not very rare to find such high volatilities in the cryptocurrency market. Cryptocurrency markets are still in their infancy, and even the more established platforms have only been in the market for 2 or 3 years. Therefore, most of these platforms can be considered startups, and as such have very high volatilities.
COMP, the native token of Compound depreciated at an average daily rate of -1% in the recent 19 day period. Even though COMP tokens were depreciating they still managed to outperform AAVE by depreciating at a slower rate than them.
An interesting note about Compound is that its market cap increased even though its token’s price decreased. Compound’s market cap went from $358.4 million USD up to $365.3 million USD. It is likely that an increase in the circulating supply of COMP caused the tokens’ price to plummet, whilst its market cap rose.
During the 19 day period COMP tokens had lower volatility in comparison to both AAVE and UFT tokens. COMP tokens scored an daily historic volatility of 5%, and annual historic volatility of 72%.
Unilend Finance’s native UFT tokens are the only tokens in this analysis that were appreciating in value. UFT tokens earned an average daily return of 3% in the recent 19 day period. By earning an average 3% daily return UFT tokens managed to outperform AAVE, and COMP tokens.
Unilend is a much newer project compared to COMP and AAVE, therefore its market cap is significantly smaller. UFT tokens started the recent 19 day period with a market cap of just $2.1 million USD. However, it went up by a very decent amount at the end of the 19 day period. A 3% increase in the average daily value of UFT tokens resulted in its market cap rising to $3.8 million USD.
UFT tokens were more volatile in comparison to both COMP and AAVE tokens during the 19 day period. The daily historic volatility for UFT tokens came out as 15%, and the annual volatility was 233%.