Defi Market Surpasses $1 Billion – But There’s a Catch

The total value locked (TVL) in decentralized finance applications has surpassed $1 billion, prompting celebrations from the Ethereum community. Not everyone has been swift to toast the milestone, however, with suggestions that the true value locked into defi protocols is materially lower. Meanwhile, creeping competition from centralized lenders shows that defi will have to innovate if it is to retain its value proposition.

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A Big Day for Defi

The moment decentralized finance advocates had been awaiting for weeks arrived on February 6, when the TVL of all assets in defi protocols exceeded $1 billion. At press time, that figure has receded slightly and is sitting at $997M. Defipulse.com, which tracks ecosystem growth, records Maker’s dominance to be 60%. The crypto collateralized stablecoin network is to defi what bitcoin is to the crypto market, its shadow looming large over proceedings.

Many of the decentralized lending, derivatives, and trading protocols draw their liquidity from Maker’s sai and dai stablecoins, which in turn draw theirs from ethereum. In a short blog post toasting the achievement, Defi Pulse proclaimed “$1 billion marks an important milestone for Defi to be celebrated. It illustrates the progress we’ve made towards our community’s vision of decentralized finance and the future of the world at large.” One year ago, the defi market was valued at less than $280M. Today, lending alone accounts for $766.5M.

Such is the growth in decentralized finance over the past 12 months, that entire blockchains have been spawned geared around supporting the nascent defi ecosystem. This includes projects like Genesis Network, which claims to provide a high throughput blockchain of 15,000 tps and a wallet that can support an array of defi dapps.

Centralized Lenders Eye Defi’s Market Share

Just as centralized exchanges have commercialized staking, squeezing out dedicated masternode and staking services, there is a risk of crypto lending following suit. Lending is at the heart of decentralized finance, accounting for five of the top 10 dapps (Maker, Compound, Instadapp, Dydx, and Bzx). Centralized finance (cefi) lenders are making inroads into this lucrative vertical, however.

This week, Binance rolled out the 13th phase of its lending products, offering rates of 6% on USDT, 8% on BUSD, and 15% on ERD. Then there are cefi lenders like Cred and Squilla Loans to factor in, whose business model requires zero knowledge of decentralized finance protocols, and boasts a superior UX. In the case of Squilla, for instance, borrowers and lenders can simply enter the amount they are seeking and the desired loan period to receive an instant quotation. Decentralized finance applications are improving, but they will struggle to match the user experience and rates offered by centralized crypto companies.

Is defi’s $1 billion TLV the first milestone of many, or will observers look back on this moment as its apotheosis, the high water point before value flowed into centralized crypto competitors? Speaking of the $1 billion figure, not everyone is convinced that the numbers add up…

Picking Apart the $1 Billion Valuation

“Defi Pulse monitors each protocol’s underlying smart contracts on the Ethereum blockchain,” explains the website whose defi valuation is referenced by the entire industry. “Every hour, we refresh our charts by pulling the total balance of Ether (ETH) and ERC20 tokens held by these smart contracts. TVL(USD) is calculated by taking these balances and multiplying them by their price in USD.”

It’s a methodology which mimics the way in which the market cap of cryptocurrencies is calculated. However, market cap has long been regarded as an imperfect reckoner, and the same accusation has been levied against defi. “What percent of the “$1 billion dollars” that’s “locked up” … is: 1) made up of ICO tokens (illiquid?) 2) not fluffed by Consensys or Ethereum foundation/Ethereum founders?” protested one bitcoiner.

“$1B isn’t locked up in Defi,” weighed in crypto legal commenter Preston Byrne. “At least $300mm of that is in ether that early investors don’t want to sell and thereby incur the tax hit, if Dai proponents are to be believed. It’s the difference between saying “Jeff Bezos is worth $100bn” and saying “Jeff Bezos has $100bn in cash.” Defi doesn’t have $100BN locked in it, it has ether that early holders didn’t want to sell, the value of which is appreciating in the middle of a nascent bull market.”

Others demurred, however, with Ethereum advocate Nathaniel Whittemore calling the feat “one hell of a milestone.”

Do you think the defi market can keep growing? Let us know in the comments section below.

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