Formation Finance: Why We Invested
Framing the Problem
The cryptocurrency market, whilst full of opportunity, is intrinsically volatile with an implicitly high associated risk. As such, many users tend to trade cryptocurrency in a short term fashion, looking for projects likely to “moon” or that are “pumping”.
DeFi (Decentralised Finance) services are concepts often borrowed from traditional finance, transforming old financial products into transparent protocols on the blockchain. Such projects often promise much greater returns than those seen with traditional banking but have much more risk, and typically tokens staked aren’t guaranteed if things go sideways. However, with the DeFi sector recently peaking at a worth over $100B, and its user base growing 88x in the past year alone, it represents a reservoir of untapped potential.
To maximise profits, some users have turned to yield farming to maximise their returns, allowing them to stake their tokens in a sort of loan, through a DeFi platform.
This creates a conundrum not seen in traditional markets: typically, over time, the longer an asset or stock is held by any individual the chance of making a loss, and the risk associated with that trade, becomes lower and lower. Indeed, long-term, low-risk trading strategies are what most individuals and pension schemes rely on for stable returns (one has to only look at the popularity and market cap of stablecoins). This option is not something currently available within DeFi, until Formation Finance.
At GD10, we expect the exponential growth of cryptocurrency over the next few years. With more and more people looking for a piece of the crypto pie, long-term focussed products within the DeFi market will likely flourish. This is because, early crypto adopters aside, the majority of individuals investing in their future look for long-term, steady assets that don’t require active management (i.e. passive income). Furthermore, they tend to be risk-averse and the majority of their wealth is deposited in low-risk stocks and shares.
As an emerging field, cryptocurrency marketplaces tend to move much faster than their traditional counterparts. As more and more people move into the crypto space, greater demand for low-risk, long term trading solutions that are essentially passive is to be expected. In order to draw people in, however, gains must supersede those currently possible through traditional means.
We believe Formation Finance will address this emerging market demand, and demand will only grow in the next few years. In particular, we see it appealing to two types of customers:
The average joe: This person has little knowledge of the inner workings of cryptocurrency, and requires a simple user interface with little active input.
The seasoned investor: This person has sound knowledge of traditional markets, and requires lower-risk, guaranteed returns before they will dip their toes in the volatile crypto waters.
Through their unique take on yield farming, risk-mitigating and automated algorithmic trading solutions, Formation Finance is perfectly suited to welcome the growing interest from these types of people.
Yield Farming: Risky but worth it?
Currently, yield farming on alternative platforms is still high risk, typically only operating on a single chain (with the value of any APY earned strongly dependent on the ever-changing value of the base chain). The major benefit of yield farming tokens is that interest rates are often into double or triple digits, whereas traditional banking interest rates can be as low as 0.1%, much less than inflation, typically. Unlike traditional banking, if the farming pool fails, there is no safety net compensation.
The risks aside, diligent yield farmers in chase of returns often jump from farming pool to farming pool to achieve maximum yield but can consequently pay high gas fees; the active process is also quite laborious.
Yield Farming 2.0: Much less risky, definitely worth it
Therefore, Formation Finance dubs their platform as “the end of yield chasing”. Their one-liner of what they offer is “cross-chain risk parity smart farming 2.0”. Building a portfolio on Formation Finance utilises algorithmic trading strategies to amplify yield whilst minimising risk, and is tailored to the individual risk tolerance of the user. As yield is maximised over time, this lends itself to the long-term; making Formation Finance one of the first DeFi products to occupy this gap in the market.
The Formation.Fi difference: Risk Parity
At the core of this ability to minimise risk is the Risk Parity protocol, which is also covered in our previous First Look article. Inspired by the most successful hedge-fund of all time, this portfolio building strategy has been adapted for DeFi to determine balanced allocations across various components of an investment portfolio. Although when one major coin moves in a positive direction (ETH, BTC, BNB,) the rest tend to follow, this is not necessarily always the case (certainly not for individual tokens on that chain), and it was important for Formation Finance to develop a chain-agnostic strategy to balance assets across. This is especially true in the contemporary environment where we have seen a decoupling of crypto-asset prices to BTC. What’s more, part of the risk parity strategy involves pairing counter-assets, meaning if one asset is likely to depreciate, its counter-asset will likely appreciate. This balancing mechanism radically reduces the risk of any portfolio and has been shown to maximise results over a longer period.
The $FORM token, open governance and a move to DAO
The $FORM governance token itself is also an appealing characteristic of Formation Finance- promising to put its user base at the heart of the program- and shows ideological verve for an open, democratised DeFi ecosystem. There are several utilities of the $FORM token, but one of the most notable is its ability to facilitate progressive decentralisation, enabling a move towards a DAO structure as decisions are put evermore in the hands of $FORM token holders over time.
Key investors in Formation.Fi
These market-disrupting solutions are among the reasons why Formation Finance has gained our confidence at GD10, among other prominent DeFi investors including Polygon, AU21 Capital, Iconium, Moonwhale and Synthetix. This list is nowhere near exhaustive and a full list of backers is available on the formation.fi website. A strong initial round of funding of $3.3M in May alongside an impressive list of investors attests to the promise Formation Finance holds for the DeFi space.
Where, when and how much $FORM can I buy?
Much of Formation Finance’s token economics is subject to change, contingent on community voting from $FORM holders. Their initial market cap at TGE was $667,667. The initial maximum supply of $FORM is 1,000,000,000 $FORM with a 2% supply expansion per year after the 250,000,000th $FORM token has entered circulation. 30% of the total supply will be released to users as a reward when version one is released with cross-chain capabilities in the first 12 months. Again, this relates to rewarding the Formation Finance community at the heart of the project. The remaining 70% will be released algorithmically over the following five years. The proportion of different allocations are outlined in the chart below, and more information can be found in our previous article here. $FORM is currently listed on Gate.io, KuCoin, PancakeSwap and Uniswap.
A winning team
Formation Finance boasts a capable, varied team of investors with wide-ranging experience in traditional and DeFi markets. Further details can be found in our previous First Look at Formation Finance. One of the founders of Formation Finance, Krzysztof Gagacki, also frequently comments on the importance of high selectivity of investors, and this has led to a strong focus on bringing on board only those partners bringing the most to the growth and success of the project.
Finally, before we conclude, we found this great infographic via @PCryptoiz on Twitter summarizing some of the key aspects of Formation.Fi.
When it comes to cryptocurrency and DeFi, we look at the intrinsic value of an investment and the problem it solves in the market. Formation Finance is poised to occupy an untapped area of the DeFi marketplace: long term, low-risk yield farming. Like Formation Finance itself, we are thinking long-term. The strong fundamentals behind their chain-agnostic, algorithmic portfolio building platform have won our confidence: we believe it will become a dominant platform in DeFi.