Update: Read our 2019 DeFi Market Report for a full year analysis of DeFi growth in 2019.

Decentralized Finance (DeFi) creates a new paradigm for an accessible financial system. Anyone with a smartphone can now take out a loan, access leverage, or invest in derivatives.

Over the past year, the DeFi space has grown tremendously due to the increased number of new applications, primitives and protocols. The building blocks for the future financial system are being created as we speak, and is beginning to take on a surge of interest from the crypto community.

In the past year alone the DeFi space has essentially gone from zero to over $513 million in total locked value (TVL). Many DeFi projects require users to lock up an asset in order to take out a loan, create liquidity in a market, or mint a new asset. These assets locked as collateral have created a measure for valuing these applications, called total locked value (TVL). With this in mind, we’ve seen nearly 2.83M Ether (2.64% of the total supply) locked up in DeFi applications at its peak – showing that many crypto investors are taking advantage of these newly accessible financial products.

Graph via DeFi Pulse

DeFi Growth

As we mentioned above, existing applications for DeFi fall into one of several buckets. These buckets commonly include: Lending, Assets, Decentralized Exchanges (DEXs) and Derivatives. For the most part, all of these sectors have experienced “hockey stick” growth and we expect it to continue over the next decade as the industry continues to mature.

Graph via The Block

Lending

Generally speaking, the lending space has captured the majority of the market. With $426M currently locked as of writing, lending accounts for 83% of TVL in DeFi. Moreover, Maker is the dominant leader as it’s responsible for nearly 51% of the value locked within this sector. This could largely be due to the notion that Maker doubles as a way to leverage on trade. In other words, investors can lock up ETH as collateral in a Maker CDP, mint Dai to their wallet, and then purchase additional ETH. Now any positive price action allows investors to pay back the CDP in Dai for less ETH as Dai remains stable. The end result leaves any remaining ETH as profit.

Graph via DeFi Pulse

The other rising star in the lending space is Compound. Since June, Compound’s TVL has more than exploded to upwards of $117M in value. Ultimately, Compound’s ability to expand into other crypto assets for lending and borrowing shows promise within the DeFi space.

Assets

The asset space is largely underrepresented, especially with newer releases such as Set Protocol and WBTC just beginning to break out. Set Protocol allows anyone to access smart assets which can represent a diversified portfolio in a single ERC20 token. The token is able to automatically re-balances itself to a given set of parameters established upon creation. In other words, Set Protocol allows users to hold an autonomous portfolio which requires no management from the investor. In order to create a set, users must provide 100% collateralization in the underlying portfolio. Given that Set Protocol just launched in April, the TVL is still not widely known. However, the traction it has received within the crypto community is rather profound with close to 1000 Telegram members and three different types of sets already in existence.

One asset which investors could use in creating a token set could be Wrapped Bitcoin (WBTC). Wrapped Bitcoin creates a mechanism for Bitcoin to function on the Ethereum blockchain as an ERC20 token. The proliferation of WBTC can bring a new influx of liquidity from the Bitcoin ecosystem and provides a new avenue for Ethereum investors to gain exposure to the largest asset by market cap – all with the comfort of storing it in a traditional Ethereum wallet.

WBTC was recently inaugurated into the DeFi space in April 2019 and has already captured over $5.9m in TLV. An interesting aspect about the rise in WBTC is its contention with Lightning Network as an alternative solution for Bitcoin transactions. Given that Ethereum has a higher throughput and lower transaction fees (at the cost of security), WBTC could prove to be a viable alternative in the future.

Graphs via DeFi Pulse

DEXs

The Decentralized Exchange space is vital to the success of Ethereum and building a globally inclusive financial system. Over the past few years, we’ve seen multiple attempts to create permissionless exchanges which allow anyone to buy and sell any asset. However, most of these projects have largely failed to gain traction in some respect (be it decentralization, security, or usability).

The most prominent exchange in the DeFi space as of writing is Uniswap. Uniswap has lead the charge this year in the exchange sector in TVL through its unique mechanism of locking up assets to create liquidity pools. Other notable projects within the decentralized exchange space are Kyber and Bancor.

Graph via DeFi Pulse

Uniswap allows anyone who supplies ERC20 or ETH to a liquidity pools to earn a small 0.3% fee. The initial release of the exchange was back in November 2018 and has shown promising growth rates relative to the other competitors in the space. In less than a year, Uniswap has aggregated nearly $17.2M in TVL and therefore, $17.2M in liquidity.

Graph via DeFi Pulse

Derivatives

The traditional derivatives space is absolutely massive. We’re talking hundreds of trillions or even quadrillions of dollars in market size. DeFi-based derivatives are nowhere near this size and given the potential size in the existing market, there is a substantial amount of room for this sector to grow. As such, derivatives from projects such as Synthetix and Augur have only aggregated $49M in TVL as of writing in September 2019.

Graph via DeFi Pulse

Synthetix is the clear leader in this space as it holds 95.41% dominance in the derivatives space with $46.8M in TVL. Derivatives TVL has grown significantly over the past three months and is well on its way to grow significantly more as improvements are made to existing protocols and others begin to emerge.

Future Growth

The existing market size for traditional financial products is colossal. However, existing markets still fail to address billions of individuals in developing countries who are currently omitted from traditional banking services. When including the unbanked, the addressable market for DeFi in the coming decade could be viewed in the hundreds of trillions of dollars in capital. Additionally, the existing systems have yet to embrace the additional value add from implementing new disrupting technology, likely pushing this number even higher. The future potential of DeFi is immense and it remains to be seen if this growth continues and if it continues to happen exclusively on Ethereum.

Conclusion

The proliferation of DeFi is nothing to take lightly. We can assume that over the next decade, the world will transition from a closed banking system to open protocols which allow virtually anyone to interact with financial products.The future is bright for DeFi and for Ethereum as we continue to progress forward towards the next wave of innovation in financial technology.

In the coming weeks, we’ll continue to explore the most innovate progress within this sector in an attempt to highlight how it might benefit you or your business.

Resources

https://defipulse.com/

https://www.theblockcrypto.com/

https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp