DeFi has managed to attract more than $100B in smart contracts within only eight months. These contracts have managed to express traditional financial tools alongside new financial instruments. The innovations provide opportunities for individuals to own their assets and participate in global coordination of capital and trade through decentralized exchanges while also utilizing lending and borrowing markets.
Defining Decentralized Finance (DeFi)
Decentralized Finance (DeFi) can be defined as a system through which financial products become available on a public decentralized blockchain network, which makes them open to anyone to use. DeFi system eliminates an often expensive intermediary between the peers, such as a bank or a brokerage, which is its primary intention.
The beauty of DeFi is the fact that proof of address isn’t a requirement for its usage. Instead, DeFi is a cryptocurrency trading software system on the blockchain, that makes it possible for buyers, lenders, borrowers, and sellers to interact within a peer-to-peer network or with a software-based intermediary rather than a company.
Decentralized Finance (DeFi) Evolution
You can look at DeFi from another perspective as well. You see, it’s not just a technology but can be interpreted as a movement of sorts where some of the brightest minds in the world have teamed up together, intending to reimagine financial services as we know them.
This space has managed to cross many milestones since its inception and has raised capital through multiple ICOs, NFT experiments such as CryptoPunks, Decentraland, and CryptoKitties, and initial DEX implementations, which first indicated that the future of finance is indeed decentralized.
The more we look at DeFi as a whole, the more we see the stream through which it innovated alongside the alignment of financial incentives.
Entire communities have become bootstrapped through incentivized participation within DeFi protocols, and incentives that drove users to products that have efficiently managed to both grow as well as retain the users as well as the capital.
If we look at the stats, the user-base grew 1.300% (Up to 2.1 million), and the total value locked in smart contracts grew 9.000% (113 Billion), with DEX volume growth of 8.500%(65 billion).
The History of Liquidity Mining
In 2019 the Synthetix managed to incentivize bootstrapping the sETH/ETH Uniswap pool, which inspired a wave of yield farming projects that would shape 2020 as we know it. After Compound Finance enabled liquidity mining of COMP tokens in the borrowing and lending markets, we saw the possibilities this had and the impact it would inevitably have on the DeFi sphere.
When it boils down to it, the launch of COMP incentives for lenders and borrowers to earn COMP popularized the protocol, and this was so impactful that its value actually jumped from $100M to $500M, and that’s an increase of 400% in the range of millions, it couldn’t be ignored, this was the future.
The innovation here was the social one, where the participants got rewarded the protocol’s governance tokens simply by providing liquidity and using the protocol. This in turn managed to attract new users and liquidity became the name for DeFi protocols here.
If we look at the stats, the user growth from 2020 to 2021 has 2.1 million unique addresses across 25 protocols with a total of $1 billion in liquidity.
The total value locked in smart contracts is estimated at $124 billion.
DeFi Adoption Detailed
We can look at the growth of DeFi in a multitude of ways. For example, in terms of the active users, the user growth since the early days of DeFi has exploded and has exceeded 2.1 million unique addresses that interacted with Ethereum DeFi in some way since 2018.
Now, this is the case if we actually end up believing that each and every Ethereum address is part of the total addressable market, and then we can say that DeFi has managed to penetrate less than 3% of the Ethereum addresses which have a non-zero balance. Then you have a metric known as Total Value Locked (TVL) which can describe the total assets deployed within a smart contract. These can be thought of as liquidity in exchanges, and as collateral within lending protocols.
If we look at the adoption by DeFi protocol types, you have borrowed and lending markets, which have exploded in interest as they gained attraction from a lot of users due to the fact that they could earn interest on their tokens, get access to leverage, and the ability to short on-chain, and access liquidity for other tokens without actually needing to sell their current holdings.
The first DeFi lending market was introduced by Maker, which allowed users to generate DAI against deposits of ETH, with additional types of collateral that became an availability over time.
Then you have Compound, which popularized broader asset lending and borrowing and offered a larger array of tokens to lend and borrow.
Each market had individual money markets with varying interest rates and utilization. Rates changed between these markets against utilization curves. As such, the markets grew steadily since their inception, with stablecoins markets boasting the most activity as well as utilization.
When we look at the stats, the amount of $ deposited in lending grew 300% in 2021, from $9 billion to $37 billion. When we look at the amount of borrowed USD, we can see an average of 40% in terms of utilization of all of the outstanding collateral, from $3.6 billion to 15.1 billion.
Decentralized Exchanges (DEXs)
The decentralized exchange platforms (DEX) actually exploded in use throughout the past year, and they command the most users by a large margin. Of the total 2.1 million users that have interacted with DeFi, 1.53M of them actually ended up using Uniswap at some point in time.
The liquidity providers deploy capital in order to earn a share of trading fees and liquidity rewards. As such, users are attracted to the platform through market depth as well as the availability of the tokens that pique their interest. This creates a positive feedback loop, where more users create more fees, and more fees then attract a higher level of liquidity.
Stablecoin usage actually became one of the core tenants of DeFi, with the centrally issued, reserve-backed tokens such as USDC and USDT dominating the market share. They have become the base currency in many DEX pairs as well as lending markets as a result. In fact, stablecoins have become the most adopted assets in DeFi.
In terms of stats, 1.53 million users have interacted with Uniswap, while 316k users have interacted with compounds.
The daily DEX volume is at 3.3 Billion, with a 12-month DEX volume of $420 billion.
Yield Aggregators
Next, we’ll need to discuss one of the most competitive sectors of DeFi. A yield aggregator is essentially this platform that manages a user’s capital with various strategies designed to maximize profits. They do this by moving pooled capital around various DeFi protocols with advantages of scale and ease of use. In many of them, investors can even copy the actions of other investors, and they have always showcased the best prices for each asset throughout different exchanges.
Users can essentially lock their assets in Yearn vaults, which will automatically allocate capital throughout various strategies.
Stay calm and DeFi
Summarizing Decentralized Finance (DeFi) from 2020 to 2021, it has gone from a tiny niche sector of crypto finance to a major financial product within a year. Throughout this time, it has managed to reach over 2 million users, over $120 billion in terms of total value locked across all DeFi smart contracts, stablecoin utilization on lending platforms on a regular basis, and a decentralized stablecoin (DAI) with over $3 billion circulating with stability across its soft peg.
As Openware’s Crypto Exchange Foundry CEO, the notorious fintech architect and entrepreneur Louis Bellet said — “…Blockchain and Crypto are here to stay. Stay calm and DeFi.”
Also, we have to remind you that crypto investing is natively risky, and cryptocurrency markets are highly volatile, with people making and losing wealth in a matter of minutes. Don’t invest what you cannot afford to lose.
Since the entirety of blockchain technology is about decentralizing the transactions between peers, the future of DeFi technology looks bright. What we experience is just the start, the first chapter, of one long, revolutionary book that has the potential to re-shape the financial world as we know it.
Thank you for reading
Make sure to visit www.openware.com to find out more about DeFi and Blockchain technologies, cryptocurrency exchange software solutions and open-source developer tools for launching next-generation Crypto & Blockchain projects.
California-based Openware Crypto Exchange Foundry is the software engineering leader of the open-source Blockchain ecosystem, designing and developing next-gen fintech trading platforms, cryptocurrency exchange software, NFT marketplaces, digital banking, crypto brokerage, crypto liquidity management solutions, and more.
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