- Ethereum’s DeFi ecosystem heavily influenced 2020’s crypto market.
- During H1 2020, the amount of DeFi’s TVL went through 4 major stages.
- DeFi tokens showed strong rallies throughout 2020.
- Compound, Maker, Aave, and Synthetix have seen a substantial increase in investors since mid-June.
- Yield farming took the DeFi ecosystem into a further bullish position.
- Ethereum’s transaction volumes reached an all-time high of $12 billion.
- Two of the killer use cases of DeFi include high-yield savings accounts and access to credit.
- TRON is trying to go head-to-head with Ethereum in the DeFi category.
- DeFi solutions are yet to be accepted in the mainstream.
The decentralized finance (DeFi) sector has emerged as an exciting and seemingly promising contributor to the growth of the blockchain and cryptocurrency industries.
Despite the little to no interest in DeFi during 2018, this all-digital environment has shown a positive upward trajectory during 2019. Unsurprisingly, 2020 has been the year when DeFi has been put into the hot seat of the crypto community’s public eye.
Despite the first half of 2020 being negatively impacted by the global COVID-19 outbreak, decentralized applications and relatively new protocols powering decentralized exchanges, lending platforms, stablecoins, and more, have slowly established themselves.
According to TokenInsight, the historic crash of the crypto market during the ‘Black Thursday’ had a domino effect and yet despite this, the total value locked (TVL) in USD within the DeFi ecosystem has recovered and surged by $1 billion (147% increase) during this year’s period.
The DeFi market has seen huge growth from May to June as the sector’s TVL now observed to grow by half a billion ($500 million) per week, sitting at $6.4 billion at the time of writing.
From a TVL of just around $30 million in 2017 and roughly $190 million by 2018, the DeFi market continues to surge further. As the year almost reaches Q4, let us take a look at the prominent trends that make DeFi one of the most sought-after crypto investments of today.
DeFi Market Overview
The number of DeFi users has immensely grown from around 100,000 users in January to roughly 200,000 users by May-end. Over the span of 2020, it is edging towards 600,000, according to Ethereum’s analytics platform Dune Analytics.
The increase in users is in parallel with the number of new DeFi assets being added in the market. As shared by Zerion Founder Evgeny Yurtaev Twitter, over 1,000 assets were added during the month of May. This number almost doubled from the previous month.
1/ Number of newly deployed DeFi assets per month. Looks exponential to me 🤔
— evgeny.eth 🚜 (@evgeth_) June 12, 2020
Evgeny further commented that this growth “looks exponential to me”. For the first time in the DeFi market, these many assets were introduced with Uniswap Protocol accounting for approximately 75% of them.
For the proponents of various DeFi projects, their common goal is to enable a faster, more inclusive, and more transparent financial system. With the progressive number of investors believing in the potential of DeFi, since June 2020, the TVL in Ethereum-powered DeFi has risen 300% from $1 billion to $4 billion, according to DeFi Pulse.
In fact, in two months’ time, the total bitcoin locked in DeFi more than quadrupled from 4,975 to 20,610 BTC while the total ether locked in DeFi has grown 60%, from 2.6 million to 4.2 million ETH.
Crypto market analytics firm Messari reported that the total market capitalization of the DeFi sector is equal to only 1.5% of the entire crypto market. As of August 2020, DeFi market’s value has exploded to $11 billion while the overall market is worth $360 billion.
During H1 2020, the amount of DeFi’s TVL went through 4 major stages:
|Stage 1: This is the growth phase from January to February. TVL experienced a strong growth increase from $680 million at the beginning of the year and reached its local peak at $1.2 billion.|
Stage 2: Due to the crypto Black Thursday’s market plunge, TVL fell off a cliff. From $1 billion, it dropped to its local low of $550 million.
Stage 3: The TVL value regained its position as the overall crypto market recovered from the Black Thursday. The figures adjusted from a low of $500 million to roughly $900 million.
Stage 4: Yield farming is the course in June combined with a high lending interest rate. TVL grew from $950 million to more than $1.68 billion, an increase of 77.6%.
DeFi Tokens Outperform BTC in 2020
DeFi tokens showed strong rallies throughout 2020. On average, values have surged +237% since the beginning of the year. Investors received high returns as they diversify their investments on various DeFi projects.
The vast majority of TVL is done through MakerDAO’s Collateralized Debt Position (CDP) system. It reached the $1 billion dollar mark in funds borrowed from its protocol on June 13. This involved the top three markets of DAI and USDC stablecoins followed by Ether (ETH).
Additionally, Compound has gained significant traction with ETH and other Ethereum-based assets ‘locked’ in loans. Notably, over 2% of the outstanding ETH supply is locked in DeFi. Stablecoins are prominent in Compound due to its COMP reward mechanism which gives users COMP tokens based on the dollar value of the borrowed amount.
mStable, an Ethereum-based DeFi protocol (ETH), launched its token Meta (MTA) on July 18. The hype surrounding the release was huge. Within the same day, the token traded at 16 times its original value ($0.15). This resulted in an ROI of 1,000% to early MTA investors.
On the other hand, YFI token of the Yearn.Finance protocol also registered a 2,000% gain in less than 24 hours from its launch. According to the project creators, the YFI token had no initial value and no pre-mined supply. At the time of writing, the price of the YFI was trading at $6,820.72 with a 110.1% gain within the last 14 days (July’s month-end until the first week of August).
Another high-performing asset is the LEND token of the Aave protocol. As seen in the graph below, the token has earned over 10542.7% this year, making it one of the best investments of 2020.
One of the top DeFi asset gainers as well is Chainlink (LINK) which is the biggest cryptocurrency on the Aave protocol following the LEND token itself.
During August, Bitcoin trader Linksaka tweeted that LINK’s trading volume on Coinbase had surpassed Bitcoin’s — standing at $145 million that time against BTC’s $95 million.
— Hsaka (@HsakaTrades) August 9, 2020
LINK has been verging on 167% in 2020 and remains one of the top performers in the crypto. Remarkably, this is not the first time as in 2019, the altcoin leveraged by 1,481% and according to CoinMarketCap, the ROI for those who purchased at the first listed price has exceeded 5,000%.
Chainlink’s on-chain activity remains active. An increasing number of nodes point to a healthy growth in the network while other forces may be at play.
The superior performance of LEND and the other DeFi tokens mentioned above goes hand-in-hand with the exponential growth of Ethereum’s DeFi sector.
In support of this claim, DeFi Rate’s data also revealed that DeFi tokens were able to surpass the value of ETH and BTC by almost 300%.
Bitcoin Into the DeFi Ecosystem
In May, the amount of BTC on Ethereum (represented by tokenized BTC such as WBTC) surpassed the amount of BTC on the Lightning Network.
Observing cross-chain operability, manifested efforts injected Bitcoin into the DeFi ecosystem. These “Bitcoin-pegs” attempt to bridge Bitcoin and Ethereum together. They aim to combine Bitcoin’s superior liquidity, trading volume, and user base with Ethereum’s composability and ecosystem of open-source DApps and protocols.
A few of the projects bringing Bitcoin to DeFi include WBTC (Wrapped Bitcoin), imBTC (TokenIon), tBTC (Keep Network), sBTC (Synthetix), renBTC (Ren), and pBTC (ptokens).
WBTC has surged as the MakerDAO community voted to add the token as a form of collateral in the Maker system. MakerDAO’s Dai — the largest decentralized stablecoin pegged to USD — accepts various crypto assets as collateral, starting with ETH and later adding BAT, USDC, and WBTC.
The inclusion of WBTC caused WBTC to surge, attaining $345 million in cumulative on-chain value.
Despite WBTC’s recent success, MakerDAO’s inclusion of centralized tokens WBTC and USDC received criticism. Since WBTC and USDC rely on third-party custodians to hold the underlying value, the risk of being hacked or coerced by regulatory pressures exist.
Most Popular DeFi Protocols
Popular protocols, like Compound, Maker, Aave, and Synthetix have seen a substantial increase in investors since mid-June.
MakerDAO, another decentralized lending system supported by various stablecoins such as Dai, has the largest market cap among all. There’s more than $1.4 billion in value locked into MakerDAO, accounting for about 30% of the total value allocated to DeFi markets (at the time of writing).
Maker is for DeFi what Bitcoin is for the crypto industry.
As the oldest one, Maker is the most recognizable name on the list. It is also the first DeFi protocol to hit $1 billion in TVL.
Overall, the biggest contributors to the DeFi market were Compound, Aave, and Curve in July 2020. They generated 48%, 14%, and 14% of transaction volumes, respectively.
So far, Dai remains the most actively used “product” in the decentralized finance space, recording over 387,000 holders to date. This shows the stablecoin’s first-mover advantage.
Aave achieved the milestone of being the second DeFi protocol to hit $1 billion in TVL. Its comeback began after rebranding from EthLend in January 2020. Since then, the emerging money market protocol has climbed to $543 million in total market size in just 6 months.
Aavengers (users of this protocol) were motivated to invest as the project recently announced the version two of its protocol. This will include new features such as undercollateralized loans/credit delegation, improved borrow rates, and debt trading.
1/ Today we are excited to introduce the Aave Protocol v2, the new Money Market Protocol ready to push DeFi even further ! 👀👀👀https://t.co/yUHE1ShA2g
— Aave (@AaveAave) August 14, 2020
Joining the DeFi’s billion-dollar club was Curve Finance. Its highly anticipated token, CRV, was launched by an anonymous developer rather than its core team during August 14, 2020, which resulted in a TVL growth of $200 million to $1.1 billion in just five days.
In line with the unexpected token launching, early risk-takers managed to grab 80,000 tokens before the Curve team claimed that it was their official token, upsetting many users. As of the time of writing, Curve has slightly decreased its value to $984.5 million.
The runner-up Synthetix is the holder of $847 million out of the total TVL. So far, Synthetix has been holding on strong as it deals in tracking the value of real-world assets. It currently supports over 30 Synths, which represent fiat currencies, crypto, commodities, stocks, etc.
Initially established as a stablecoin project called Havven, Synthetix is on the verge of being a DeFi unicorn. It has $850 million of collateral locked in its ecosystem.
By comparison, Compound, another decentralized lender, just had a TVL of $27 million during its six-month mark in March 2019. It has gone to increase its TVL by 25-fold to $684 million, becoming one of the largest lending protocols in the industry.
It is the second-largest DeFi based on the amount it has locked away, which currently sits at $721 million. Compound lets users earn money by lending their assets.
One of the hottest topics in relation to DeFi in 2020 is yield farming aka liquidity mining. This works similar to a passive income as users stake their resources in pools to earn extra tokens. Ideally, this incentive design delivers 10-200% daily APY on average.
Post-market crash, the TVL shot up significantly due to the Compound governance token incentivizing liquidity mining initiatives. In mid-June, they released COMP to the public.
Borrowers and lenders on the Compound platform receive tokens as daily rewards. To maximize their COMP yield, DeFi mechanisms are being utilized to unlock capital and before proceeding to lend/borrow on Compound.
Yield farming took the DeFi ecosystem into a further bullish position in the last two weeks of the quarter. Crucial metrics like ETH locked and daily active users soared after being fairly sluggish earlier in the quarter.
Moreover, COMP’s value has consistently been well over $200 since it started distributing on June 15. The main catch is that investors with fairly deep pockets can make a strong gain maximizing their daily returns in COMP.
Biggest Catalyst of the ETH Uptrend
Perhaps the biggest catalyst of the Ether uptrend in 2020 has been the outburst of the DeFi market. Since May, the TVL in DeFi protocols has increased nearly five-fold to over $4.5 billion.
In just one year, the total value of Ether (ETH) locked in DeFi markets has increased from $317 million to over $1 billion. It is important to consider that Ethereum has surged by 199.2% since Crypto Black Thursday’s low of $107 — an undeniable impact of the new DeFi bubble.
ETH price reached its highest value in August 2020, peaking at around $411. Yet, this is far from
hitting its all-time-high value of $1,400 back in 2017. However, throughout July 2020, ETH has nearly doubled in value — rising from a price point of around $200 to $400.
In parallel with this, DApp Radar data shows that Ethereum’s transaction volumes reached an all-time high of $12 billion in July driven by the Ethereum DeFi category. But, as transaction volumes surge, a decrease in daily active wallets due to high Ethereum gas prices was found.
Alongside the $4 billion in assets deposited into DeFi, a 227% year-on-year (YoY) increase in ETH locked in DeFi has been observed since January 1.
Ether benefits directly from the boom of DeFi since DApps require users to spend. Thus, requiring bits of Ether to process transactions. This assumes the Ethereum blockchain remains the dominant platform for smart contracts and DApps.
Decentralized finance has helped Ethereum hit a market cap of $40 billion, pumping its market cap to its highest level since August 2018.
It is still not clear how long we should expect this surge to last, but once the Ethereum 2.0 has been released, we might see even higher price jumps.
2020 DeFi Market’s Key Offerings
While growth in TVL is commonly cited as evidence of the broad growth of the entire DeFi sector, a closer examination of metrics within individual sectors of DeFi reveals a more diverse and comprehensive evolution within the space.
Two of the killer use cases of DeFi include high-yield savings accounts and access to credit. Interestingly, holders of ETH, DAI, USDC, and USDT, among others can lend out their assets and achieve high single-digit annual returns.
Earning interest in crypto asset holdings has become easier than ever. Thanks to the Compound protocol and DApps like Dharma and Celsius. Given that, decentralized derivatives trading platforms such as dYdX allow hedging of asset portfolios.
Lending DApps holds the spot of being the largest shareholder of the DeFi market. For this reason, MarketWatch forecasts that the lending market will reach a valuation of $8 trillion within the next two years.
Decentralized exchanges (DEX) such as Uniswap or IDEX convert ETH to other Ethereum tokens securely and privately.
In 2020, the DEX sector entered a stage of rapid development. More so, its first-quarter trading volume ($2.3 billion) almost equates to its 2019 total yearly trading volume. Its second-quarter volume jumped to a record high of $3.7 billion.
DEX tokens like Kyber, Loopring, and Bancor prices have also risen by double-digits.
Apart from this, betting on election results and sporting events can be done on prediction markets platforms like Augur.
The DeFi craze has fueled other submarkets within Ethereum. Nevertheless, considering alternative growth measures, DEXs, and prediction markets have struggled to gain adoption. Their positive returns seem somewhat less than those from lending and trading projects.
Tron Sets Foot Into DeFi
Aside from Ethereum, TRON is one of the go-to platforms for DApps and smart contract deployment. It is worth noting that it is very close to reaching a milestone of 1 billion smart contract triggers.
TRON Founder and CEO of BitTorrent Justin Sun has announced the launch of three new protocols in the DeFi category of TRON. The most interesting of which will be an alternative to Ethereum’s Uniswap, “JUSTswap”, that offers yield farming & oracles.
Looking at the progress of TRON, it can be seen that TRX was on a fairly bullish course. TRX had decreased to as low as $0.00681 during the COVID-19 crash. Nonetheless, it has recovered from the mid-March dip and provided over 3x returns for quick buyers.
TRON is trying to go head-to-head with Ethereum in the DeFi category. Yet, TRON’s current ratio for DeFi stands at 3%. If TRON is able to grow its DeFi ecosystem, it might catch up to Ethereum’s trading volume.
If that happens, TRX’s price may see a nice boost in price, as the tokens get locked on JUST. In spite of this, TRX’s small market cap and volatility may become an obstacle for its DeFi expansion.
Conclusion (DeFi Prediction for 2021)
DeFi-based tokens have been pumping strongly in 2020. This shows the strong potential of this market to progress further. Although some may argue that this bubble may burst at any time. Similarly to what happened during the Crypto Winter crash of 2017.
In a span of one year, the DeFi market’s TVL climbed up to the $5 billion dollar mark. With the increased level of activities, DeFi’s growing adoption is a great boost for DApps development. This involves the Ethereum network as well as other blockchain players.
DeFi solutions are yet to be accepted in the mainstream. As more people invest in these projects, scalability and network congestion must be addressed. Moreover, usability, liquidity, and governance must be constantly enhanced.
We anticipate the DeFi market cap to expand further than $10 billion dollars. The decentralized open finance league is looking good with its tremendous opportunities for global access to financial services and high promise of returns.
By 2021, as the industry matures, more exciting developments and projects will be introduced. Then, entrepreneurs, investors, and normal cryptocurrency users must keep their radars open as DeFi becomes an important cornerstone in the fintech landscape.