Is It Too Late to Join the Ethereum DeFi Growth?

By January 11, 2020 DApps
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Key highlights:

  • DeFi services allow you to buy, sell, borrow and lend directly to and from other individuals
  • All of this can be done directly through your wallet and not via a custodian wallet
  • The leading platform in the DeFi market is MakerDAO
  • DAI and SAI are the first stablecoins issued through a decentralized system and are not controlled by a single entity

We've been looking at the Smith & Crown report on how to efficiently measure growth of the DeFi ecosystem, or more specifically, the Ethereum DeFi ecosystem, since most Decentralized Finance DApps are based on the Ethereum blockchain.

At the same time, I had some time to personally engage with DeFi services such as MakerDAO, Oasis, Radar Relay, dYdX and others.

I call this a wallet to wallet process as previously-established peer-to-peer platforms such as LocalBitcoins and Paxful act as intermediary custodians who would keep your crypto and/or fiat until they ensure that the terms of the trade are fulfilled by both sides.

Furthermore, traditional peer-to-peer crypto marketplaces would also charge you with a utility fee on each transaction similar to typical cryptocurrency exchange markets such as Binance.

On the other hand, a decentralized finance-powered wallet-to-wallet exchange would trade your crypto directly from your wallet to another wallet without the custody processes of LocalBitcoins and analogous services, and only minimal network fees in terms of gwei apply as in any other Ethereum transaction.

So, let's take a deep dive into the world of DeFi, and see why it is a game-changer in the broader cryptocurrency scene and how can we monitor its growth, utility, and overall success based on current available metrics and data.

Explaining DeFi to your mother

One could argue that Bitcoin and other popular cryptocurrencies are part of the DeFi ecosystem due to their decentralized architecture, but you should rather think of DeFi as 'Open Finance' protocols that enable the exchange of digital assets as well as borrowing, lending, and saving (with interest) all in a wallet-to-wallet architecture.

Sure, Bitcoin is decentralized, but how you exchange Bitcoins? You either need a peer-to-peer vendor like Paxful, but it also gets a cut for the match and acts as custodian for a short period until the trade is confirmed from both sides.

Another option would be a cryptocurrency exchange market such as Binance, where you basically sell and buy your Bitcoins to Binance, who re-sells them to buyers, while taking its cut along the way.

You can definitely borrow, lend, and save your crypto with centralized exchanges and vendors, but you are actually borrowing directly from them, selling directly to them, and keeping your cryptocurrency in their vaults.

Now, Decentralized Finance introduces the ability to achieve all of the above, except by interacting with other netizens directly. You can buy,sell, borrow and lend directly to and from other individuals, and of course, it's done through your own cryptocurrency wallet.

Key players in the DeFi ecosystem

The leading platform in the DeFi market is undeniably MakerDAO, for the sole reason that it is the first decentralized service that allowed users to post their cryptocurrency as collateral and receive a loan in return. When users lock up their crypto in the Maker protocol, they receive a loan in the form of the Dai stablecoin, which is pegged to the US Dollar.

Unlike USDT, which is pegged to US dollar's price based on the company's USD holdings, multi-collateral DAI is backed with ETH and various ERC-20 tokens, while single-collateral SAI is backed solely by Ether. However, the cryptocurrency that backs DAI and SAI can be provided by literally anyone. So basically, DAI and SAI are the first stablecoins backed by the crypto community and not by a single entity.

At the same time, MakerDAO offers a savings feature which allows users to earn interest on their Dai, a wallet-to-wallet lending and borrowing platform, as well as a DEX called Oasis, which is again a wallet-to-wallet decentralized crypto exchange.

There are also other popular DeFI decentralized exchanges such as Uniswap, dydx, and Radar Relay, while projects like Synthetix and Compound offer derivatives and lending services in a decentralized fashion.

Measuring DeFi growth

There are many different aspects to look for when trying to get a complete understanding of the performance of the growing DeFi market. There are multiple aggregators specifically focused on tracking and measuring DeFi projects. One of the most popular would be DeFi Pulse, where you can see the total value locked (TVL) in DeFi, expressed in USD.

Similar to BTC's dominance in the broader public cryptocurrency market, MakerDAO currently has a 50.52% dominance in the DeFi sector. The sector can be categorized into 5 main classes:

  • Lending services (Maker, Compound, InstaDapp)
  • Decentralized exchanges (Uniswap, Bancor, Kyber Network)
  • Derivatives (Synthetix, Nexus, Augur)
  • Payments (Lightning Network, xDAI, Connext)
  • Assets (WBTC, Set Protocol, Melon, etc.)

The overall market value of the DeFi scene is currently around $674.6mn and it simply looks like it's growing by the minute.

DeFi services allow you to buy, sell, borrow and lend directly to and from other individuals

All of this can be done directly through your wallet […]

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