In his 1991 book, “Crossing the Chasm,” management consultant Geoffrey Moore defined a crucial gap between the early adopters of a new technology and the larger populations of users that come later. Decentralized finance (DeFi) may now be approaching a gap of its own.

This article focuses on DeFi services that allow deposits of ether (ETH), ethereum’s native asset, as collateral for loans issued in a dollar-pegged stablecoin, DAI. Lending is decentralized to the extent it is managed by an open network of participants, governed by rules and incentives established in a computer program. Borrowers may deposit these stablecoins to earn income, convert them to cash or use them to make leveraged investments in ETH and other crypto assets.

DeFi lending’s gains are impressive, but their relationship to the ETH price bears watching.

Demand for DeFi lending services built on ethereum shows a pattern of inverse relationship to the price of ETH. When ether prices are falling, the amount of ETH locked in DeFi tends to rise. Most recent data indicate the relationship operates the other way, too. (Data is from DeFi Pulse via Concourse Open.)

ETH deposits in DeFi lending and price, 2020 year to date (chart)

If this apparent relationship persists, it may indicate a circular user adoption of DeFi lending that could be limited to a small percentage of the number of existing ETH holders. That is, existing DeFi lending offerings may not be sufficiently attractive to cross the chasm and draw new users into ethereum.

The early adopter in this analysis is the long-term holder of ETH, motivated by conviction that ETH’s value will increase in the future. For such investors, DeFi lending offers a way to earn income or free up capital, as outlined above.

Some of these uses, such as income-earning deposits and cash conversions, may accelerate during dips in price, explaining the apparent inverse pattern between ETH price and ETH locked in DeFi lending. A declining price increases the cost of selling under duress.

Leveraged buying is a possible exception, and proponents of DeFi lending point this way. “What DeFi is creating is a virtuous cycle where investors who have higher risk tolerance are locking up ETH to generate Dai and leverage long ETH,” Mariano Conti, head of smart contracts at MakerDAO, told CoinDesk Research.

Currently, Maker, the largest DeFi lending operation by ETH deposits, has a minimum collateralization ratio of 150 percent, meaning $150 worth of ether is required as collateral to borrow $100 worth of DAI. The leverage implied by this ratio is 1.67X.

Liquid derivatives markets like BitMEX, Huobi and OKEx offer up to 100x leverage on crypto assets including ETH. With these options before them, how many long-ETH investors are likely to choose DeFi lending as a means to leveraged trading?

It’s also difficult to envision adoption among a wider market of borrowers not yet initiated into crypto investing. Would a Main Street borrower purchase ETH in order to obtain a cash loan worth less than said ETH? Perhaps, if DeFi lenders could accept non-crypto collateral. This would not be a trivial development.

“I see lots of startups playing with identity type solutions to reduce collateral requirements, but I think these are a long ways out from meaningfully impacting the market,” Kyle Samani, managing partner of Multicoin Capital, told CoinDesk Research. “There are a lot of hard, intertwined problems to make this work.”

(CoinDesk discussed the issue with Samani and Jordan Clifford of Scalar Capital in a live webinar on crypto lending, held in December. You can sign up to view it here.)