Is the crash continuing?
If you are not a HOLDer and panic out easily, the above question is probably the never-ending dilemma in your mind right now…
Instead of making an emotionally driven decision, I am trying to take a more scientific approach to my crypto investments this year. So I decided to stop checking prices everyday.
I am also trying to break down the industry into big buckets. One of my favorite areas of interest so far has been decentralized finance, otherwise known as DeFi.
The multitude of DeFi services popping up, the rate of adoption, and the overall volume of transactions in this space are clear signals of an inevitable secular change in our financial systems.
After looking at many reports and stats in the last 30 days, I decided to go deeper into DeFi, understand why they matter, and quantify their actual impact. First of all, I would like to thank Darren Lau (Lau, Lau) 👘 for sharing this (see below) great overview / map of the DeFi space, and for breaking down some of the core services and ecosystems.
Now let’s get back to the quantification exercise, and check some of the core metrics and numbers in the DeFi world and why I believe this is one of the most validated and inevitable revolutions of human history.
DeFi today accounts for around 1% of the global banks’ market cap. The total capital locked in DeFi services, a measure of liquidity, has grown by more than 1,700% over the past year to a whopping $247 billion.
Let’s now look at the banks with the largest market cap. The combined value of these banks is around $8 trillion, and the most valuable bank, JPMorgan Chase, has a market cap of $466.60 billion.
If we look at DeFi as an entity and consider its total liquid pool to measure its size, then DeFi today would be one of the top three banks in the world.
Monthly trading volumes on decentralized exchanges (DEXs) have surged by more than 1,500% over the past year—more than $300 billion each month.
One of the core building blocks of web3 and the leading reserve currency for most of the DEX and DeFi protocol is DAI.
In the last 24 months, one of the core trends in DeFi has been the proliferation of multiple stablecoins as well as the emergence of non-pegged stablecoins. This last evolution of stablecoins is creating new types of projects that are completely unplugged by their dependency on dollars or euros. Instead, they are fully governed by algorithms and have crypto native reserves.
One of the most successful examples is Olympus DAO:
DeFi protocol revenue
The annualized protocol revenue in all DeFi protocols is estimated at $5 billion. This, again, is a fraction against the $2.3 trillion global retail banking revenue—$2 trillion global cross-border payment revenue and $35 billion global stock exchange revenue.
To measure the users’ adoption, let’s take MetaMask as an indicator/signal:
Also, outstanding loans issued through DeFi lending protocols have increased at an annual rate of over 800% amounting to $23 billion.
While prices of coins are volatile and risk factors are by order of magnitude different, returns on saving accounts in crypto can be anywhere from 2% to 50,000%. Some of the best crypto interest rates can be found on https://www.coininterestrate.com/
It’s not all good, but it is still day one, right? Risks and losses:
DeFi users and investors have suffered more than $12 billion in losses due to theft and fraud.
These losses are accelerating, totaling $10.5 billion in 2021 to date, a massive surge from $1.5 billion in 2020.
Over the past year, DEX trading volumes have increased from $18 billion to more than $300 billion each month, becoming real competitors to their centralized counterparts.
As of November 2021, outstanding loans provided by these DApps total $23 billion—up from $2.5 billion in November 2020.
In 2021, a total value of $4 billion was locked in derivatives throughout DApps.
Whether you are looking at Bitcoin and other cryptos as an anti-inflationary asset or a speculative way to quickly become rich, today, it is very hard to deny the progress and consolidation of this industry.
After the 2017/2018 ICO craziness, the crypto world has emerged back with real products and better technologies. Even if we are still going to see many non-sense tokens emerging and dying, Elon Musk tweeting and manipulating Dogecoin, and all the funny memes, DeFi finance is here to stay and is one of the biggest evolutions of human history.
Regulators are starting to legitimize this space in the USA (and Europe), and given the high public/sovereign debt, it is a matter of time before governments starts considering adapting crypto. In the short term, however, I believe we will see more institutional investors looking at non-traditional assets, and eventually, an emergence of a central bank digital currency.
A lot of the next phase of development in web3 will be around—bringing more people to crypto (NFTs, Play to Earn, etc…), multi-chain infrastructures, but in my book, the most interesting and fun experimentation will continue to happening around DeFi, and we will soon see a completely new financial system emerging.
“Opinions expressed are solely my own and do not express the views or opinions of my employer.”
Multiple sources have been used—some are mentioned but a couple could be lost since this article summarizes random notes I took while researching about DeFi. Feel free to reach out to me on Twitter for comments: https://twitter.com/LuigiCongedo
Reference links and stats are from: