The world of Distributed Ledger Technology (DLT) and Blockchain have been around for little more than a decade. At that time, we saw the first major bull run in price when from 2012 to 2013 the BTC price went from 100 USD to 1000. This catapulted the first generation of cryptocurrencies and we saw projects such as Litecoin, Dash coin, Dogecoin, etc. become overnight successes. In this article we discuss Decentralized Finance and its Popularity.
Then it came the Initial Coin Offering (ICO) boom of 2017 to 2018. Ethereum had enabled crowdfunding at a massive scale through the introduction of tokens. These are customizable unique digital assets that can be created and distributed through the blockchain. The impact was massive and pushed the Ether price to the record level of 4000 USD per ETH. Again a massive bull trend formed and pushed the entire market to a peak that has never been achieved since. Of course, and very famously, it crashed.
So, what is the common denominator in both of these cases? The fact is, that is the two occasions a bull market was created by pure speculation. In the first case, cryptocurrencies became popular and people bought expecting to become rich by holding the assets. In the second case, investors bought tokens not because of the use case, but because of mania, hoping to become rich by accumulating without an underlying reason. Both instances were fueled by irrational behavior.
The Decentralized Finance (DeFi) wave has the potential to be different. This is because, at its core, DeFi projects have use cases that are valuable to the people. Hundreds of thousands already use these services and the market is expanding organically. This time DeFi has the potential to increase adoption and avoid becoming just another short-lived trend created by irrational speculation. DeFi could easily be the killer application of Blockchain.
What is DeFi?
Source: Blockchain news
Before going further into the differences Decentralized Finance(DeFi) has with previous Blockchain trends, let's back up a little and discuss what is Decentralized Finance. In short, DeFi refers to an ecosystem of projects and financial applications built on top of Distributed Ledger Technology. Right now, most of this development is being created on the Ethereum Blockchain. This is why many believe that DeFi is something only possible on a blockchain, but there are different protocols, not blockchain-based such as IOTA or Holo Chain that also have a DeFi world.
But Decentralized Finance(DeFi) is not only about replicating the old financial world in DLT. Open source public blockchains have the potential of transforming finance. Since transactions are public on the blockchain, more transparency and easier to audit would be possible. In this way, it would become harder to hide money or use morally questionable tactics to profit from the public.
Blockchain and DLT are already global.
This has the potential of bringing more people from developing nations into the financial system. Expanding the pool of users to level previously impossible with the old technologies. This has catapulted DeFi as the great promise of blockchain and has led to explosive growth, as shown in the following chart.
Source: DeFiPulse
In just ninety days the total value locked went from 2.5 Billion to 12 Billion. Then, as we can see, the September market crash has stopped the growth, but it remains above its previous level. Also of note is that DeFi Pulse only tracks the Ethereum and Bitcoin blockchain. There are several other protocols such as Bitcoin Cash, EOS, Algorand, Tron, and many others that also have DeFi applications with their locked funds. The final figure is higher than what this chart shows.
In the end, the DeFi application can be the game-changer of Blockchain. As discussed before, previous bull markets were driven by pure irrational speculation. DeFi is an actual beneficial use case that can bring mass adoption because it creates an organic market. People around the globe use DeFi.
In places with high inflation such as Venezuela and Argentina, citizens save using stable coins and then deposit their money to gain interest in money markets such as Compound. It is DeFi that has enabled things like Decentralized Exchanges to emerge and now Uniswap has larger volumes than Coinbase. DeFi has existed since 2018 and already the world has been changed by it. The future is bright for this technology.
Some popular examples -
Now that we understand the potential of DeFi let's review some popular projects out there.
Source: aave.com
The current king of DeFi by total funds lock is Aave Protocol. This is a decentralized lending platform built on top of Ethereum. The way it works is that people holding crypto deposit their assets in the Aave pool. In exchange for a line of credit that allows the depositor to borrow other crypto assets using the initial amount as collateral.
All of this is accomplished without the need to go through Know Your Customer (KYC) procedures and in a completely decentralized way. There is no middle man involved, all transactions are peer-to-peer supported by the blockchain.
Currently, Aave has 17 possible assets that are supported in the platform. These are Dai stablecoin (DAI), USD coin (USDC), True USD (TUSD), Tether (USDT), Synthetix USD (sUSD), Binance USD (BUSD), Ethereum (ETH), ETHlend (LEND), Basic Attention Token (BAT), Kyber Network (KNC), Chainlink (LINK), Decentraland (MANA), Maker (MKR), Augur (REP), Synthetix Network (SNX), Wrapped Bitcoin (wBTC), and 0x (ZRX).
Source: Compound
Compound
Compound is also a decentralized lending platform. People deposit crypto-assets into the platform and in return are given a variable annual interest that is determined by the demand on the asset. The interest rate varies daily following the market.
On the other side of the market. People borrow assets from the platform and have to pay interest on their loans. The thing that sets Compound apart is that on top of the interest made, users receive Compound (COMP) tokens. Both borrowers and depositors get these tokens by just using the platform.
The COMP token is a governance asset that allows people to vote and introduce proposals. Only people holding a certain amount of these assets can participate. This has created a market for such tokens and currently, one COMP token goes for 137 USD
For more uses of DeFi read How is DeFi Transforming B2C Financial Services? 10 Examples
As we can see DeFi is reshaping the market. In its short existence, it has already brought new people onto DLT and revolutionized the Blockchain world. It has the potential to be the killer application and finally bring mass adoption to the world.
