DeFi ( Decentralized Finance ) has been one of the fastest growing sectors in crypto since 2017. Many people in the crypto space have heard of the term, but may not be familiar with the underlying infrastructure. We take a look at DeFi, in which we cover some of the industry basics and also assess the growth metrics since 2017.
DeFi ( Decentralized Finance ) Overview
DeFi is revolutionizing “open finance” like we never imagined. In today's society, everyday financial services we used are controlled by a central party. Whether we’re talking about lending, savings, investing, or insurance, the average person is leveraging these financial services through a central entity. Unfortunately, many people around the globe don’t have access to financial resources. We refer to this population as the “unbanked” , which research shows to be over 1.7 billion people globally. The transition into Decentralized finance is changing all of this. DeFi is creating a future where people with a smartphone and internet can leverage open finance through blockchain technologies. Unlike the centralized financial environment witnessed today, DeFi is built around decentralized apps ( DAPPS ) that offer sophisticated functionalities.
DeFi Thrives Off Ethereum
As mentioned above, DeFi cuts out the centralized party in finance and replaces it with a peer-to-peer ecosystem through “smart contracts.” DeFi is very popular in the Ethereum space, since the Ethereum blockchain gives people the ability to develop smart contracts on the blockchain. Smart contracts are extremely important because they are programs that can execute automatically if/when certain conditions are accomplished. DeFi has become most popular in Finance, since the Financial space is very “contract based.” If you think about traditional finance, a centralized party is the individual collecting your paperwork before a loan is issued. This is obviously a task that is being performed “manually” instead of being applied through code. The difference with DeFi is that a lending company for example becomes completely decentralized. Once a smart contract is deployed on the Ethereum blockchain, a lending application can run itself without central party intervention. The code being utilized by the application is also extremely transparent. Anybody can audit this code on the blockchain, and all transactions can be viewed by the public. Despite this mechanism creating mass amounts of transparency, transactions are pseudonymous for privacy purposes. Even though the transactions can be viewed by the public, transactions aren’t directly tied to an individual.
The growth of Decentralized Finance has taken off since 2017. According to DeFi Pulse, the value of DeFi markets currently hovers around $984 million. The way we can address market value is by looking at a metric called “total value locked in DeFi.” The total value locked into DeFi is measured in the amount of currency held in smart contracts. The total value accounts for any monies, whether it’s dollars, bitcoin, or other digital assets. According to DeFi Pulse, the total value locked into DeFi in 2017 was $4. With the value currently around $984 million, that represents a 24,599,999,900% gain in DeFi value. It’s worth noting that before the crypto sell-off in March, total value locked in DeFi was as high as $1.24 billion. On a year to date basis, total value locked in DeFi has grown +47% YTD ( soaring from $684 million in January to a currency value around $984 million ).
Popular DeFi Use Cases
DeFi Pulse also shows the projects with the most locked in value. As of recent, the top 10 protocols included:
- Maker - Stablecoin project affiliated with DAI
- Synthetix - Protocol that lets users exchange synthetic assets backed by collateral
- Compound - Blockchain based lending and borrowing decentralized application
- Aave - Protocol to earn interest and borrow
- WBTC - First ERC20 token backed 1:1 with Bitcoin
- dYdX - Trading platform for cryptocurrency assets
- InstaDApp - DeFi smart wallet
- Uniswap - Crypto exchange that is fueled by smart contracts
- Bancor - Decentralized liquidity network
- Set Protocol - Manage, create, or obtain tokenized assets
Of these top 10, the most popular area is the lending industry. 5 of the top 10 protocols are lending based. Even more importantly, MAKER is accounting for significant DeFi market share. With MAKER housing $511 million in locked value, this means that MAKER accounts for nearly 52% of DeFi markets. Investors have started to see the potential value in the MAKER protocol which offers credit. It was recently reported by Visionary Financial that MAKER was added to Coinbase Pro. This was a catalyst that was fueling the recent MKR rally.
It’s Still Early
Even with the exponential growth in DeFi the last few years, many believe the industry can get even larger. With the upcoming “ETH 2.0” release, the Ethereum Blockchain will see significant enhancements. According to cryptocurrency exchange OKex, ETH 2.0 could fuel transaction efficiency. Right now DeFi applications process a lot fewer transactions per second compared to traditional leaders like Visa. According to Okex:
“The ETH 2.0 upgrade allows developers to make scalability gains with technological implementations like sharding , which are expected to dramatically increase the number of transactions per second on the network. This could bring DeFi apps in line with traditional solutions.”
Even though DeFi is becoming quite popular, it’s always important to do your own research. Before engaging in any product or service, it’s crucial that you make sure the protocol is legit. Smart contracts always run the risk of malicious attacks and potential programming mistakes. With this being said, you want to make sure that you’re affiliating yourself with projects that have had a solid track record the last few years.
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