The Ethereum community erupted into celebration on February 6th, when late in the evening the total value locked in the smart contract platform’s top decentralized finance apps crossed the $1 billion USD mark for the first time.
The feat marked a major milestone for Ethereum, particularly as the “world computer” is still just shy of 5 years old.
For Ethereum to now be supporting over $1 billion worth of DeFi activity is thus legitimizing, being clear proof that its young and evolving ecosystem is already producing real value and innovation.
When these kinds of big milestones are reached, it’s worth looking back to consider how far things have come.
Conversely, it’s also really helpful to look ahead and study what might be coming on the horizon. What could the future of DeFi look like accordingly? What does it mean for us users? In this vein, below are some key questions that DeFi stakeholders can mull to better wrap their heads around what the months and years ahead might have in store.
1) How Will DeFi’s Top 3 Look This Time Next Year?
At the moment, the Maker Dominance Rate — the proportion of value that’s locked up in MakerDAO smart contracts compared to the value that’s locked in other DeFi apps — is right at 60 percent.
Can the Maker project extend its #1 position atop the DeFi charts for another year? It seems likely.
According to tracker site DeFi Pulse, the Maker lending dApp currently comes in first place on the DeFi capitalization leaderboard with over $600 million worth value, mostly comprised of ETH, in its smart contracts.
The gap between Maker and its nearest contenders, Synthetix and Compound Finance, isn’t close right now: the Synthetix project has just over $140 million in its contracts at the moment, while that number is $125 million for Compound.
So while it seems that Compound and Synthetix might trade places over this coming year, potentially back and forth, Maker looks safe in first, their DeFi clout unmatched for now in being the stewards of the popular Maker Vaults automated lending system and DeFi’s darling stablecoin, the Dai.
Perhaps projects like InstaDApp and Uniswap are darkhorse candidates to crack into DeFi’s top three projects by size, but Maker looks like a lock at the top for at least the next year or two.
Big, round psychological numbers always gets peoples’ attention when it comes to the cryptoeconomy. It’s why breaking $1 billion in DeFi was celebrated, and it’s why stakeholders are now turning their eyes to the next shiny number, $10 billion.
Simply put, hitting $10 billion in DeFi will take further community strides toward creating apps that people need, want to use, and can leverage with relative ease. The user experience factor has certainly improved around the Ethereum ecosystem in recent years, and that’s a trend that’s set to continue.
If more UX strides can be made quickly, and lots of things are moving around Ethereum quickly, then $10 billion in DeFi may be possible within the next two years.
Just got a @Zer0Collateral loan with….zero collateral.
Took out a year loan at 12%.
— evan.ethereum.eth (@evan_van_ness) February 7, 2020
3) The Economic Bandwidth Question
Will the growth of DeFi make Ethereum’s native asset, ether, more valuable? That’s the idea, according to some analysts.
For instance, the value of stablecoin transfers conducted atop Ethereum just overtook the value of ETH transfers on Ethereum for the first time ever. This stablecoin activity, much of it centered around DeFi, generates interest in and demand for ETH as the gas that powers transactions on the Ethereum network.
“They’re one of the biggest reasons to be bullish on ETH,” Bankless writer Ryan Sean Adams recently noted of Ethereum’s stablecoin boom. Adams later said “ETH is economic bandwidth for DeFi.” The suggestion? If DeFi grows, ETH grows.
4) How Will ETH 2.0 Factor In?
Big change is coming to the Ethereum ecosystem later this year when the “Serenity” upgrade starts and proof-of-stake consensus is activated in “Ethereum 2.0.”
The advent of Ethereum staking will likely bring in a new influx of yield seekers who want to capitalize on Ethereum’s new staking rewards model. New yield seekers means new users, and new users means more possible DeFi participants.
As such, look for the Ethereum 2.0 to potentially usher in a new wave of DeFi adopters.
5) Can Any Other Project Match DeFi?
It remains to be seen, but for now the race isn’t even close.
So-called Ethereum Killers haven’t been doing any killing to date, and there are plenty of next-gen competitors that are coming Soon™.
In the here and now, Ethereum is already fostering apps and levels of community engagement that just not matched by any other blockchain project, and its lead in the rat race becomes more advantageous with each passing day.
Look at the flurry of permissionless, highly composable building taking place constantly at the edges of Ethereum at present to understand just how difficult it will be for another project to catch up with this pace.
6) Will More DeFi Projects Release Tokens?
Some stakeholders in the Ethereum community have been predicting that more DeFi projects that don’t currently have native tokens will eventually embrace their own token launches.
We saw a wrinkle on that front this month from the Dharma lending dApp, whose team just announced the creation of the “dToken,” a wrapped version of Compound’s cTokens that will allow Dharma to monetize their infrastructure. Don’t be surprised if more projects consider similar models going forward.
1/ One question we frequently get at Dharma is “how do you make money?”
Today, we are pleased to introduce the dToken — infrastructure that enables Dharma to make money alongside our users and that sets the stage for exciting features to come.https://t.co/It1IcXznNL
— Dharma (@Dharma_HQ) February 6, 2020
7) How to Further Decentralize?
This month, Ethereum and DeFi YouTuber Chris published a video and a related spreadsheet in which he examined how many DeFi projects are not fully decentralized.
Blec found that only three major DeFi projects were essentially decentralized, as Camila Russo of The Defiant recently explained:
“Teams behind 10 out of 13 projects Blec reviewed, including Compound, TokenSets, Synthetix and dYdX, have the power to upgrade their contracts. Only Uniswap and InstaDApp are fully decentralized, while MakeDAO has a decentralized governance system which decides on changes, according to [Blec’s] spreadsheet.”
As such, it will be interesting to track how DeFi projects work to further decentralize their operations over time. Some will undoubtedly fare better than others in this regard, so ultimately these apps’ success will come down to how much centralization users are willing to stomach.
It’s not guaranteed that Ethereum and its apps will go mainstream. But it’s a possibility at this point, even if things still seem early for now.
Perhaps the mainstream will come sooner rather than later if progress continues to be made on Ethereum 2.0 and dApps. Moreover, black swan possibilities must be anticipated and defended against, e.g. Chris Blec’s recent work on figuring out how admin keys might be abused in the DeFi space. The DAO hack probably set Etheruem back a few years, and a major DeFi hack might do the same. Cautious optimism is certainly warranted.
Like we mentioned previously, another wrinkle to consider is making DeFi easier to use for regular folks. Taking an app like Ethereum’s no-loss lottery PoolTogether and creating a new front-end that abstracts away all the underlying crypto aspects could prove to be an early breakout use case for the smart contracts platform.
Of course, it’s possible that Ethereum ultimately withers and its DeFi ecosystem dissipates. But for now, one could be forgiven for concluding the opposite: Ethereum and DeFi seem locked on a trajectory toward mainstream adoption.