The Strategy Outline
Decentralized finance lending protocols are quietly amassing hundreds of millions of dollars in total value locked, and the numbers as of August 2019 tell a compelling story for yield-seeking investors. MakerDAO, the pioneer of collateralized debt positions on Ethereum, continues to command the lion’s share of DeFi lending, with its outstanding DAI supply representing over 76% of all value locked in decentralized lending markets. Compound Finance, the upstart challenger, is rapidly gaining ground by offering algorithmic interest rates that adjust in real-time based on supply and demand dynamics.
The strategy for DeFi participants in mid-2019 revolves around a simple but powerful premise: deposit collateral, earn interest, and maintain a healthy collateralization ratio. For borrowers, this means locking ETH or BAT into a MakerDAO Vault to generate DAI, then using that DAI across other DeFi protocols for additional yield. For lenders on Compound, the approach is more straightforward — supply assets to liquidity pools and watch the interest accrue. The annual percentage yields on DAI lending through Compound have at times exceeded 8%, a remarkable return compared to traditional savings accounts yielding less than 2%.
What makes this strategy particularly attractive in August 2019 is the macro backdrop. With Bitcoin trading around $10,138 and Ethereum hovering near $186.84, the broader crypto market has settled into a consolidation phase after the mid-year volatility. This price stability is exactly what DeFi lending protocols need to flourish — less liquidation risk, more predictable yields, and greater confidence from institutional capital that is beginning to explore on-chain lending markets.
Smart Contract Architecture
Understanding how these lending protocols work under the hood is essential for anyone deploying capital into DeFi. MakerDAO operates through a system of smart contracts called Vaults (formerly CDPs), which are collateralized debt positions backed by ETH. When a user deposits ETH into a Vault, the protocol mints DAI against that collateral at a predetermined collateralization ratio, currently set at 150%. This means $150 worth of ETH is required to generate $100 of DAI, providing a substantial buffer against price volatility.
The MakerDAO system relies on a network of keeper bots — automated actors that monitor the health of Vaults and trigger liquidations when collateral ratios fall below the threshold. These keepers are incentivized through a penalty fee applied to the liquidated Vault, typically around 13%, which is then used to purchase MKR tokens and burn them, reducing the total supply. This liquidation mechanism has been tested through multiple ETH price drawdowns and has proven remarkably resilient, a critical factor for anyone trusting the protocol with significant capital.
Compound Finance takes a different architectural approach. Instead of individual debt positions, Compound pools all supplied assets into shared liquidity markets. Each market has its own interest rate model, a piecewise linear function that increases borrowing rates as utilization rises. When utilization exceeds a threshold — typically around 80% — the interest rate curve steepens dramatically, incentivizing new lenders to supply liquidity and existing borrowers to repay loans. This self-balancing mechanism ensures that lenders can withdraw their funds at any time, provided the market isn’t fully utilized.
Both protocols are built on Ethereum, which means they inherit the security guarantees of the world’s largest smart contract platform. However, this also means they are subject to Ethereum’s scalability limitations. Gas costs for opening and closing Vaults or supplying and withdrawing from Compound can range from a few cents to several dollars depending on network congestion, a factor that eats into yields for smaller depositors.
Risk vs. Reward
The risk profile of DeFi lending in mid-2019 is a complex tapestry. On the reward side, the yields are undeniably attractive. Compound’s DAI supply rate has oscillated between 4% and 12% annualized over the past several months, while the cost of borrowing DAI through MakerDAO is set by the Stability Fee, currently at 8.5%. For sophisticated users, the spread between borrowing cheaply and lending at higher rates on other platforms creates arbitrage opportunities that can generate consistent returns.
The risks, however, are equally real and multifaceted. Smart contract risk remains the most existential threat. While both MakerDAO and Compound have undergone extensive audits — MakerDAO’s system has been live since December 2017 and has processed billions of dollars in transactions — the possibility of a critical vulnerability can never be entirely eliminated. The DAO hack of 2016 serves as a permanent reminder that even well-audited code can contain exploitable flaws.
Liquidation risk is the second major concern. ETH has experienced drawdowns of 30% or more within single days in the past. If a Vault holder’s collateralization ratio drops below 150%, the entire position is liquidated with a penalty. This means users must maintain conservative ratios — ideally above 200% — and monitor their positions actively. Automated tools like DeFi Saver have emerged to help manage this risk by enabling automatic collateral top-ups, but these tools introduce additional smart contract dependencies.
Platform risk, or the risk that a governance decision negatively impacts users, is also worth considering. MakerDAO recently increased its Stability Fee multiple times in 2019 to manage DAI’s peg to the US dollar, directly affecting borrowing costs for all Vault holders. Compound’s governance is currently more centralized, with a multi-sig wallet controlled by the team having the ability to update protocol parameters, a potential point of failure that the community is actively working to decentralize.
Step-by-Step Execution
For investors looking to deploy capital into DeFi lending, here is a practical execution framework. First, acquire ETH — the primary collateral asset. With ETH at $186.84, a minimum position of 5 ETH ($934) is recommended to make gas costs proportionally reasonable.
For MakerDAO: Navigate to the Oasis Borrow portal, connect a Web3 wallet like MetaMask, and create a Vault. Deposit ETH as collateral and generate DAI at a conservative ratio — no more than 50% of the maximum available. This means depositing 5 ETH ($934) and generating approximately $300 DAI. Use this DAI to supply liquidity on Compound, earning interest while your original ETH collateral appreciates or remains stable.
For Compound directly: Visit the Compound dashboard, supply DAI or ETH to the lending pool, and watch interest accrue in real-time. Each supply position is represented by cTokens — Compound’s interest-bearing tokens — which increase in value over time relative to the underlying asset. These cTokens can be transferred or used as collateral in other DeFi protocols, creating a composable stack of yield-generating positions.
The optimal strategy in August 2019’s market conditions is a hybrid approach: generate DAI through MakerDAO at a low cost, then supply that DAI to Compound where lending rates are higher. This interest rate spread, after accounting for the Stability Fee and gas costs, can yield 2-4% annually on the spread alone, with the potential for higher returns if Compound’s utilization rate increases.
Final Thoughts
DeFi lending in mid-2019 represents a genuine innovation in financial infrastructure. The total value locked across all lending protocols has surpassed $500 million, a figure that would have seemed implausible just two years ago. With DEX user counts peaking at nearly 49,000 monthly active users in August, the ecosystem is showing signs of genuine organic growth rather than pure speculation.
However, investors must approach with eyes wide open. The regulatory landscape remains uncertain — the IRS has begun sending CP2000 notices to crypto traders, and the SEC has yet to provide clear guidance on whether tokens used in DeFi protocols constitute securities. The technology is promising but not yet battle-tested at the scale that traditional finance demands. For those willing to accept the risks, the yields and the potential for being early to a transformative financial system make DeFi lending one of the most compelling opportunities in crypto today.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. DeFi protocols carry significant smart contract risk, liquidation risk, and regulatory uncertainty. Always conduct your own research and never invest more than you can afford to lose.
8% APY on DAI lending through compound was wild. back when defi yields were actually real
8% APY on DAI was real yield. not token emissions, not point farming. actual demand for borrowing. we may never see that again at scale
MakerDAO at 76% market share feels almost monopolistic. good thing compound was gaining ground fast
MakerDAO at 76% was concerning even then. Compound gaining ground was healthy competition. DeFi needs multiple lenders, not one dominant vault system
500M TVL sounds cute now but back then it was the entire defi universe. we were so early
got liquidated on a maker vault in 2019 because i didnt watch my collateral ratio. learned that lesson the hard way
cleared_out_ the maker vault liquidation in 2019 was a rite of passage. 150% collateralization ratio and ETH flash crashed. everyone learned about oracles that day