2020 state of Ethereum DeFi: Definition, TVL, DAU and Transaction Volume
Key Highlights
- In 7 months since the start of 2020, DeFi tokens increased in price by 220% on average.
- $1.9 billion USD is locked in the 27 largest Ethereum DeFi protocols.
- Maker, Compound and Synthetix alone account for 66.8% of the total value locked.
- Total value locked in Balancer increased by 9.1 times since 1st of June reaching $144.6 million USD.
- Compound had 1102, Balancer 280 and Synthetix 687 DAU in July. In just one month,the DAU in these three protocols increased by 7.2, 2.05 and 2.02 times respectively thanks to ‘DeFi yield farming’ incentives.
- The DAU and transaction data shows that after an initial interest in ‘DeFi yield farming’, the speed of growth has declined. To maintain the same speed of growth protocols need to attract fresh capital and new users.
What is DeFi?
According to ConsenSys, DeFi (Decentralized Finance or sometimes also called Open finance) is a paradigm shift from today’s closed financial system towards an open financial economy based on open protocols that are interoperable, programmable, and composable:
1. Interoperability means openness of the DeFi system. The protocols are open-source and can interact with each other without any restrictions;
2. Programmability allows automated execution according to the rules encoded in the smart contract;
3. Composability is the key feature of DeFi enabling to connect separate DeFi protocols to provide different services, that could not be done as a standalone protocol. It is the Lego of decentralized finance.
DeFi is enabled by smart contracts that automatically execute, control, or document events and actions on the blockchain according to the terms of a contract. The benefits of having a smart contract running the protocol include eliminating dependence on a centralized institution, and increased democratization of finance, because smart contracts are inherently transparent and globally accessible.
Even though smart contracts are also available in EOS, Tron and other blockchains, Ethereum is dominating the DeFi space that is why this research is focused on Ethereum based DeFi applications.
DeFi on Ethereum in 2020 — industry in expansion
In almost 7 months since the start of 2020, DeFi tokens increased in price by 220% on average. The second best performing crypto sector was CeFi with an average price appreciation of 47% per token. Despite an impressive growth, most of DeFi tokens are still lower in market capitalization when compared to CeFi tokens and the industry itself is still very young.
DeFi was born in 2015 with the MakerDAO smart contract. The protocol enabled creation of the first synthetic stable asset pegged to the dollar — DAI. Backed by ETH with a 150% collateralization ratio, DAI is still the largest synthetic stable coin in DeFi with a market cap of $113,163,884 as of July 7.
84% of the total Ethereum volume was generated by ERC-20 DeFi tokens — Dapp Review
Since the emergence of MakerDAO, Defi has grown relatively slowly. Ox, Kyber and other decentralized exchanges (DEX) started to emerge in 2016, but the industry expansion accelerated in 2019 with the emergence of borrowing & lending, staking and derivatives decentralized exchanges.
According to the Dapp Review data, during the one year period since the Q1 of 2019, Ethereum-based DeFi projects were the main driver behind the transaction volume increase of 778% and reached $5.64 billion in Q1 2020. 84% of the total Ethereum volume was generated by ERC-20 DeFi tokens.
The total transaction volume across 13 blockchains reached $7.9 billion USD. In fact, over 99.1% of the total volume was recorded on the top 3 blockchains: Ethereum, TRON and EOS. However, only Ethereum blockchain experienced an increase in transaction volume, while EOS and TRON volume decreased during the 1-year period.
Ethereum finance Dapps volume increased by 1,743% and reached $2.95 billion — Dapp Review
EOS and TRON blockchains are dominated by gambling and casino Dapps. The volume of casino Dapps decreased by 64.6% while Ethereum finance Dapps volume increased by 1,743% and reached $2.95 billion. Transaction volume of decentralized exchanges increased by 430% and reached $2.34 billion as of Q1 2020.
July 2020 State of DeFi
Total value locked in DeFi
The size of the DeFi industry is measured by total value locked (TVL) in smart contract protocols. As of writing, $1.9 billion USD was locked in more than 27 largest Ethereum based protocols. The TVL broke its previous record of $1.24 billion USD locked on February 15, 2020. The TVL recovered rapidly from $525.6 million USD after the “Black Thursday” market crash.
Measuring market size in USD suffers from double-counting. For example, borrowing DAI from MakerDAO smart contract and depositing to Aave would double the amount of TVL in USD.
An alternative TVL in ETH is often used, however the TVL in USD has an advantage of showing the smart contract enabled composability and interoperability effects. In total, 3.1 million ETH was locked as of June 21, or $ 735 million USD, meaning that more than half of the total value of primary assets are locked again in a different (or same) smart contract.
More than half of the total value of primary assets are locked again in a different (or same) smart contract
The TVL is not distributed evenly and varies by the use case. Two largest categories are finance and exchange dapps, and the main use cases include:
1. Borrowing & lending (Compound, Aave, MakerDAO)
2. Exchange and trading (Uniswap, Kyber, Balancer)
3. Investing and allocation of capital (UMA, Synthetix, DyDx)
4. Staking (Staked Us, atlas)
5. Stablecoins (DAI, sUSD)
By far the most significant usages are:
- acquiring leverage by borrowing from MakerDAO, Compound or Aave;
- trading on decentralized exchanges like Uniswap, Kyber or dYdX;
- getting exposure to derivative assets on Synthetix or UMA.
Although the number of DeFi protocols is on the rise, the industry is still dominated by a few protocols with at least $20 million in TVL. Those are Compound, Maker, Synthetix, Balancer, Aave, InstaDapp, WBTC, Uniswap V1 & V2 protocols, Flexa, dYdX, RenVM and Bancor. Together they account for 98.3% of the total value locked.
Maker, Compound and Synthetix alone account for 66.8% of the total value locked.
In fact, the top 3 protocols alone account for 66.8% of the TVL. With a sudden rise in June, Compound alone dominates 33.28% of the total market.
From 1st of June until 6th of July, all 6 major protocols experienced an inflow of assets. In absolute values, Compound saw the largest inflow of $ 538 million USD, followed by Synthetix with $199 million USD. Balancer gained an extra $128 million USD and reached $144 million in total value locked as of 6th of July.
“The total value locked in Balancer increased by 9.1 times since 1st of June.”
Yet the largest increase when measured by multiplication of assets is seen in Balancer. The protocol expanded by a factor of 9.1 in one month and 7 days. During this period TVL in Compound increased by a factor of 6.4, and users entrusted 2.6 times more assets to the Synthetix protocol.
The increase is attributed to the so-called ‘DeFi yield farming’ when protocol provides usage incentives by granting extra rewards in their native governance tokens.
DeFi daily active users per protocol
Daily active user’s data gives an important and different insight on user behavior. According to a DeFi report by Alethio Analytics, before the ‘DeFi yield farming’ starting in June, DeFi protocols recorded the most daily active users during the “Black Thursday” crash in March 2020 reaching 9,267 DAUs.
The latest 6th of July data reported by dapp.com puts that number at 11 230 DAU — an increase by 48% from an average 7,682 DAU prior to June 15.
There were 11 230 daily DeFi active users in July. An increase of 48% since June 15 — Dapp.com
A closer look at the DAU data by protocol shows that the leaders in TVL do not enjoy the most active users. When compared by protocol, decentralized exchanges boast with a higher DAU to TVL ratio.
Despite having a relatively lower TVL of $ 6.6 million USD, Kyber network is an industry front runner with 1,379 DAUs as of writing, followed by Compound with 1,102 DAUs. Derivatives exchange Synthetix is in 3rd place with 687 DAUs and 1inch was 4th reaching 611 DAUs on 6th of July.
The data DAU data portrays clearly the importance of a well designed incentivization mechanism. Compound, Balancer and Synthetix started June with the modest number of DAU: 152, 136 and 340 respectively. As of writing Compound had 1102, Balancer 280 and Synthetix 687 DAUs. Compound’s increase in DAU of 7.25 times was the most impressive, yet the number of DAU started to decline after reaching the back at the second part of June.
The Compound DAU increased by 7.25 times since 1st of June.
Overall, the common trend of DeFi services’ adoption is clear from the DAU data. Although DeFi is still small in comparison to its centralized alternatives.
DeFi transaction volume per protocol
Transaction volume per protocol data calculated in ETH by monthly average once again gives a new perspective on the most popular DeFi protocols’ usage.
dYdx is 6th by TVL ($33.6 million) and the last by DAU (186), but is in 3rd place by transaction volume with 6278.5 ETH ($ 1,488,832 USD as of writing). The discrepancy can be explained by the nature of the protocol’s service. dYdX offers to open short or leveraged positions with leverage up to 10 times, so more risk prone and higher net worth professional individuals seem to be dYdX main users.
The data also confirms the importance of well-designed token economics to bring transaction volume. With 51307.1 ETH transacted on average in June ($12,180,281 USD as of writing) Compound dominated the DeFi leader board.
After an initial interest in ‘DeFi yield farming’ reached its peak in the middle of June, the growth seems to have slowed down.
Out of the ‘swap’ type decentralized exchanges, 1inch had the most value transacted of an 6308.2 ETH ($ 1,497,550 USD) in June, and it increased to 7436 ETH in July. Interestingly, Aave transacted volume has been stable throughout the year and reached 1729.9 ETH ($ 410,888 as of writing) in July.
Interestingly, the June transaction data confirms the insights from DAU results, showing a decreasing growth rate of all protocols. After an initial interest in ‘DeFi yield farming’ reached its peak in the middle of June, the growth seems to have slowed down.
Unfortunately, transaction volume data on Dapp Radar was not available for MakerDAO, Synthetix and Balancer somewhat invalidating the results, so an updated version of transaction volume for these protocols is needed to confirm the insight.
Conclusions
To sum up, the data proves that DeFi is growing fast, but the industry is still nascent. Total value locked in the 6 largest protocols increased by a factor of 3.28 on average. Compound enjoyed the biggest increase overtook MakerDAO by reaching $637 million USD TVL as of writing.
“Daily active user statistics is the clearest indication of DeFi nascence.”
Daily active user statistics is the clearest indication of DeFi nascency. Decentralized exchanges prove to be the playing ground for DeFi enthusiasts. The exclusivity of DeFi is additionally emphasized by the dYdX’s third highest transacted amount, but relatively low DAU, although further research is needed to include transaction volume data for MakerDAO and Synthetix.
Perhaps the most intriguing conclusion can be drawn from the DAU and transacted amount data. It shows that after an initial interest in ‘DeFi yield farming’, the flow of transacted amounts has been slowly going down.
Secondly, DAU started to decrease as well, perhaps pointing to the limits of current DeFi adoption. After the most early adopters of DeFi locked their assets in the protocols, the DAU started to decrease.
If the DeFi industry wants to continue the exponential growth it will either need to adopt new users or new protocols will need to introduce their own incentivization programs.
RESEARCH ANALYST : Ignas Tauras
BRAND QUALITY ASSURANCE : Hannah Kang
Disclaimer
All statements of fact, opinion, or analysis expressed in reports are those of the respective analysts’s view without external interference. The Information used in this report and statements of fact made are not guarantees, warranties or representations as to their completeness or accuracy. This report is not intended to induce investment. Hanbitco Research has no liability for any short term or long terms decision made by any clients based on analysis included in our reports.
