Understanding DeFi blue chips

Looking from a more macro perspective, DeFi's value proposition is continuing to increase. As the crypto space gets more accessible, reliable and cheaper, it opens the path for new on-chain business models, bringing a wide range of applications to decentralised finance (DeFi).

Decentralisation is a wonderful concept; it is what enables the average joe to manage his finances easily without the fear that he will be rejected by a 'middle man' such as the bank or that he will have to continue paying high fees for intermediary services.

With the rise of DeFi, it soon became evident that decentralised projects are often better managed and have enhanced long-term prospects than their centralised counterparts. However, to many investors the traditional world and real-world assets still seem more secure.

DeFi has borrowed many terms associated with traditional finance and financial institutions. Even though DeFi aims to create an improved, decentralised financial system based on blockchain technology and smart contracts, it is still finance governed by the very same principles as traditional finance. After all, crypto exchanges are similar to stock trading platforms.

If you want to learn more about the incorporation of traditional economics theory within the crypto space, why not read this article:'How do popular theories in economics shape crypto?'.

DeFi blue chips can be explained as tokens associated with well-established DeFi projects that have managed to gain widespread recognition and trust within the crypto community due to providing innovation, utility and security.  

DeFi blue chip project earned such a status by demonstrating a high market capitalization, mass adoption and trust, either by the community or institutional investors. Generally, a blue chip status means that the project in question includes a large number of user utilities and an established track record of success on the crypto market.

Three tiers of financial safety

Before further examining blue chips, we need to identify three layers of stability and safety of projects within the crypto market – Degen, Blue Chip and SAFU. 

Degen projects refer to the lowest level of financial safety because they typically involve new and experimental crypto projects. These projects encompass high-risk and high-reward possibilities; their focus is on providing the highest yield instead of consistent resilience. Therefore, they attract so-called ‘DeFi Degens’ or speculative investors with a high-risk tolerance. 

On the other end, we have blue chip projects that include the highest level of investment security. DeFi blue chips refer to resilient, reputable and stable projects. Such protocols aim for sustainability and involve good risk management strategies and frequent audits. 

Finally, SAFU refers to crypto projects that carry significantly lower risk than Degen projects; these can be new projects as well as older businesses that haven’t obtained the blue chip status yet. In contrast to Degen projects, SAFU typically involves stable investment possibilities with consistent returns.

From blue chip stocks to blue chip cryptos

In traditional finance, the term ‘blue chip’ refers to a company widely recognised as a high-performer on the market over a longer period. In fact, it presents an analogy to when poker chips were blue, white, and red, with blue chips being the most valuable. 

Blue chip stocks are leaders across a variety of industries. Some examples of blue chip companies include Google, IBM, Amazon and Disney. These companies are highly respected, liquid, reliable and stable, along with having a relatively high market cap.

All of this makes companies with a blue chip status safe investments, especially in a bear market. Their inherent profitability mechanisms have turned out to be financially sound business models in all challenging economic circumstances.

Although volatility is a never-changing part of any investment strategy, blue chip stocks as assets of financially stable companies are considered less volatile. Blue chips have stood the test of time and successfully survived bear markets and market downturns. 

The crypto industry uses the same terminology to describe reliable cryptocurrencies. With more and more users jumping on the crypto bandwagon, it is logical that some of these projects are deemed as more reliable than others.

For example, technical indicators within trading of financial assets are generally classified as being leading, lagging or macro. If these terms confuse you, we suggest reading this article: 'Leading & Lagging Indicators'.

Blue chip cryptos v DeFi blue chips

Even though they are both part of the crypto world based on blockchain technology, we are going to make a distinction between blue chip cryptos and DeFi's blue chips.

Blue chip cryptocurrencies refer to the maturation of the crypto market, providing stable, credible and durable crypto assets. Their successful track record, wide-scale adoption and potential to growth, along with first mover advantage, enabled them to redefine traditional investment practices.

Popular blue chip crypto assets include Bitcoin and Ethereum, but they are not the only ones. The crypto community frequently refers to a number of other digital assets as being blue chip such as Chainlink and Solana.

How did Bitcoin and Ethereum gain a blue chip status? The answer is simple – recognised as the pioneer of cryptocurrencies, Bitcoin is a clear example of a blue chip crypto due to its large market cap, a wide user base, and resilience to bad market conditions. It stood the test of time since its inception in 2009.  

On the other hand, Ethereum is known as the second-largest cryptocurrency by market capitalization. Along with a wide user base, Ethereum has revolutionised the blockchain industry with smart contract functionality. 

The main point is that blue chip cryptos refer to assets that have been around for an extended period of time, have solid reputations, and due to their continuous market performance, they are considered more stable than other crypto coins. When the bear market comes, investors turn to blue chip cryptos to secure their investments.

On the other hand, the investor community looking for reliable digital assets amidst the volatile crypto market started to turn to DeFi blue chips. Backed by DeFi protocols with established track records, blue chips as long-term investments are considered stable investments even during market downturns.

DeFi platforms emerged from the decentralised blockchain landscape with a vision of transforming the global financial ecosystem to a permissionless infrastructure without intermediaries.  

The difference lies in the fact that mainstream cryptos such as Bitcoin were meant to provide an exchange of value, while the DeFi ecosystem is based on mimicking traditional banking services in a decentralised and transparent manner. 

Taking into account the difference between ordinary and DeFi coins, there is a possibility that DeFi blue chips could overshadow the former being more than stores of value.

Investing in DeFi blue chips is not all roses

Even though we use the blue chip concept within the crypto and DeFi space, there are two issues regarding value and growth. Even though investing is never a bulletproof activity, many DeFi projects, including blue chips, have failed to accrue value during the last year due to the hesitation of newcomers to join the space and challenging market conditions.  

While DeFi kickstarted the 2020 bull market, two years later a downturn was reported by Glassnode, a blockchain data company. According to the report, the downturn happened due to Ethereum’s novel staking feature, providing returns of up to 4% Annual Percentage Rate (APR).

Consequently, the market cap of DeFi projects, even those with a blue chip status, shrivelled as they are being incentivised to compete with Ethereum’s new feature.  

Until DeFi projects deliver something that can compete with Ethereum in this field, many investors can only see that DeFi assets have been underperforming the mainnet token.  

The DeFi community can overcome this problem by putting a focus on innovation, user experience and risk mitigation.

How to become a DeFi blue chip?

To gain the blue chip status, DeFi projects need to be widely recognised as a well-established business and low-risk investment. Similar to their traditional counterparts, DeFi blue chips need to encompass several traits.  

Long-term operation

Either we are talking about DeFi protocols, mainstream cryptocurrencies or traditional stocks, blue chips are not new kids on the relevant market. As mentioned in the beginning of this article, these businesses have to be tested over time.  

Once they have demonstrated their resilience and establishing themselves as credible market participants, they are one step closer to gaining the blue chip status.

Founders' reputation

In the traditional landscape, blue chip refers to a credible business that is recognised among investors as safe. Therefore, blue chips traditionally managed to build up a solid reputation for providing products and services of high quality.

The same can be applied within the world of cryptocurrencies and DeFi protocols since a few of them managed to gain a strong reputation among the investor community.

Brand recognition

It is not a secret that blue chip businesses are recognised by mainstream audiences because of their branding activities, large communities and media coverage. A high level of brand recognition facilitates trust and provides legitimacy within the whole crypto community. 

Substantial market capitalization

When it comes to stocks, they need to reach the threshold of $5 billion to obtain blue-chip status. While it is not a requirement crypto businesses need to meet on the crypto market, a large market cap demonstrates massive adoption and investor confidence. 

Digital assets with large market caps act as a reliable store of value and provide a hedge against inflation and market uncertainties, making them attractive long-term investments.

Highly interchangeable

When a novel financial system is in the process of rising, it is obvious that it needs to provide high interchangeability of assets. Users transfer crypto assets from one wallet to another, and the quality of sending and receiving crypto plays a significant role.  

To increase adoption, crypto assets need to be seamlessly interchangeable with one other.

Sufficient liquidity

This feature is vital for DeFi blue chips; liquidity is the underlying feature of the whole DeFy space. The main point of DeFi is to remove the intermediaries involved and lower the barriers to liquidity.  

Low levels of liquidity within the DeFi ecosystem lead to slippage, an event in which the price received is less than the price determined at the beginning of a trade.  

Additionally, low liquidity might lead to higher price volatility. Even though Automated Market Makers (AMMs) are put in place to establish how many tokens are being purchased from the liquidity pool, and adjust the price accordingly for broad trades, substantial levels of liquidity always equal lower volatility.

Decentralisation level

At its core, crypto and DeFi are all about decentralisation. While some assets are considered more decentralised than others, blue chip cryptos and DeFi tokens with a high degree of decentralisation embody the democratic ideals of independence, transparency and equality. 

Low volatility

Volatility and the crypto market frequently go hand in hand. The crypto market experienced several downturns and challenging events which demonstrated that some digital assets are more volatile than others.  

Those that are less volatile obtained the status of more stable investments. We are finishing this list with the low volatility feature since it includes all previous traits. 

To gain a blue chip status, DeFi projects need to have a long-term operation, large market cap, substantial levels of liquidity, interchangeability, and decentralisation – if all of these requirements are fulfilled, the DeFi project should experience fewer fluctuations in the crypto market.

Popular DeFi blue chips in 2023

In addition to encompassing the listed features, a DeFi blue chip needs to do three things to achieve success – find a market fit for its products and services, create value and capture value. Most DeFi blue chips managed to do that, even within financial verticals with existing business models. 

Without further ado, let’s take a look at a few examples of DeFi blue chip projects.

Uniswap (UNI)

One of DeFi’s largest decentralised exchanges (DEX) with over $3.2 billion in TVL was launched back in 2018. This project introduced a basic AMM model and concentrated liquidity pools. 

Beyond the scaling of its main business, Uniswap has adopted a horizontal approach by launching a wallet and UniswapX to leverage off-chain orders. 

Uniswap has utilised its early mover advantage and managed to maintain a resilient status on the market. Its trading volumes trended upwards for the first half of 2023 and managed to remain steady since June. 

Maker DAO (MKR)

Ethereum’s first protocol enabling users to mint a decentralised stablecoin against ETH collateral is also one of the largest DeFi protocols by TVL with approximately $5 billion. 

Launched back in 2017, MakerDAO gained popularity and the status of a promising DeFi protocol. This DeFi project has also spread more broadly into the lending market to level up provided financial services.  

This DeFi protocol gained a blue chip status by managing to successfully adapt to challenging market conditions and the DeFi landscape over the years. 

Synthetix (SNX)

The DeFi-native liquidity layer Synthetix provides services to on-chain trading products. Accommodated on the Ethereum and Optimism blockchain, this blue chip project serves as a liquidity backend for many protocols.  

Synthetix stands out on the market due to its innovations that provide better risk management for stakers, along with greater modularity and generalisation. 

The trading volume of Synthetix has been in a slight uptrend throughout this year, amounting to its blue chip status.