DeFi has become one of the critical growth areas for Ethereum

DeFi (Decentralized Finance) has become one of the most important areas for Ethereum, with over 100 projects and teams building applications and protocols in 2019. Reports focus on Decentralized Finance (DeFi Series) discuss recent developments and important stories in the DeFi space, focusing primarily on Ethereum. Most of the data used in this report is provided by DApp.Review, one of the new members in the Binance ecosystem.

1. The growing importance of DeFi in Ethereum

DeFi includes exchange services and financial applications such as borrowing and lending markets, asset management services, and payment solutions. In 2019, the price of Ether fluctuates in the range of $ 100- $ 350, with an average price of $ 173. Regardless of its price, most decentralized financial ecosystems, so far, have been built on Ethereum. In 2019, there is a significant difference between the number of users for financial applications and exchange services.

The number of unique monthly users is 34,244 users for decentralized exchanges and 4,649 for financial applications in January 2019.

Sources: DApp Review, Binance Research.

DeFi is the main developer of Ethereum in 2019, from a user perspective. In short, Ethereum and DeFi have become a two-headed monster, each leading to the next development of development.

2. Exploring the inners of Ethereum DeFi

There are 8 platforms used in Defi such as Kyber, Compound, Uniswap, MakerDAO, Synthetix, dYdX, Oasis, Nuo Network, Fulcrum. In particular, Kyber is the most used project in DeFi, with a total of 35,570 unique users in 2019. Compound is the second most popular project in DeFi and the leader in the “finance” sub-category.

2.1 USDC: DAI’s nemesis

At DeFi, DAI, decentralized stablecoin minted in MakerDAO protocol, historically at the heart of DeFi. However, in 2019, USD Coin (USDC), a fiat mortgage stablecoin issued by the Center consortium, became its enemy.

Reflecting the growth of the total market capitalization of USDC, the use of USDC as collateral also increased steadily in 2019. More than 30 million USDC has been provided for the Compound protocol, accounting for more than 25% of the value. of all DAI / FALSE in circulation, as of December 31.

Finally, casting DAI requires a variable cost of payment (MKR holders), while minted USDC does not require a significantly smaller fee (from the Center).

2.2 MakerDAO was challenged by the multi-digit growth in Compound and Synthetix

As DAI’s supply continues to grow, Maker itself also shows a positive growth in the value of collateral. The total value of collateral in MakerDAO increased in the first half of 2019, due to the corresponding increase in ETH’s price. Similarly, it dropped in the second half of 2019.

Sources: DApp Review, Binance Research.

The total value of Synthetix’s collateral has moved from $ 1.6 million on March 1 to over $ 160 million, thanks to the rapid increase in the SNX price, the Synthetic Network token. So far, the main assets minted in the Synthesis ecosystem are sUSD (USD aggregated), largely backed by the SNX token.

However, the total value of collateral in other small DeFi platforms also increased significantly in 2019 despite the ETH price falling in fiat terms. For example, Fulcrum shows moderate but stable growth in the total value of locked collateral on the platform. Similarly, Nuo Network, a decentralized margin trading platform, experienced rapid growth in total collateral in the first six months.2.3 High volatility and spreads in DeFi interest rate markets

Stable currencies like DAI and USDC show the largest borrowing and lending rates. An insured interest rate approach indicates that ETH and other cryptocurrencies can be undervalued. On the other hand, sometimes it can be cheaper to implement specific trading strategies for ETH and BTC than many centralized exchanges. However, the liquidity on centralized exchanges is still much higher than in decentralized exchanges.

Lending interest rates on USDC have been declining since June 2019. While the spread between Compound and dYdX fluctuates in larger terms, the dYdX USDC lending rate displayed, once again, higher volatility than Compound’s.

This stable premium can be explained in a number of ways. Firstly, the stable charge rate will increase for a periodic vote, while interest on Compounds and dYdX always live and reflect real-time market dynamics. Therefore, users must value according to the level of volatility they may encounter on open lending groups.

Also, as smart contract insurance platforms like Nexus Mutual and derivative protocols like UMA Protocol evolve, users may have more options to price in this risk in the future accurately. However, as the launch of the Multi-Collateral DAI (MCD) varied, the stability fee quickly dipped below the open rates on Compound and dYdX.

Although DeFi increases its scope, its market size is still small and therefore, DeFi’s interest rate dynamics depend heavily on specific factors of the platform.

2.4 The growth of “2.0 decentralized exchanges”

In 2019, many decentralized exchanges showed rapid growth in daily volume. Kyber has seen its volume increase and it has also experienced rapid growth in the value of total locked collateral. The combined trading volume of DEXs based on 0XProtocol has increased since the beginning of 2019. In 2019, they display the average daily volume totaling $ 702k. Uniswap also experienced impressive growth in the value of the total locked-in collateral worth ~ $ 28 million.

Although Ethereum is the main platform for DeFi builders, non-Ethereum blockchain developers, have also worked on DeFi applications and protocols.

3. Alternative DeFi (Alt-DeFi): heterogeneous but mostly lagging

Alt-DeFi applications run on a variety of blockchains such as EOS, Binance Chain, Bitcoin, Cosmos and others. Solutions have been developed to improve Bitcoin’s scalability for small payments. The most prominent example of these is the Lightning Network, which acts as a second layer for Bitcoin.

So far, only a significant exchange (Bitfinex) has applied the Lightning Network to Bitcoin deposits and withdrawals. On the other hand, EOS also displays some concerns from market participants.

First of all, EOSREX, the platform for lending and borrowing computing resources in the EOS ecosystem, was launched in April. Since its inception, this application has shown significant growth in the resources provided to the platform. However, there is a significant imbalance in supply/demand dynamics because more resources have been provided than borrowed.

Moreover, while the Kyber Network is extremely popular in Ethereum, its team has also worked on several Ethereum-based KyberSwap implementations on other blockchains:

EOS: YoloSwap
TomoChain: TomoSwap
ETH / EOS cross-chain: Waterloo

Similarly, the success of both MakerDAO and Compound in the Ethereum space has also led to the creation of similar platforms on competing blockchains. Acueos is an implementation of the Compound protocol. Unfortunately, it is not as widely used as Compounds. Cosmos also owns a similar project, focusing on cryptocurrency-backed stablecoins: Kava. NEO also has a similar project like its MakerDAO Alchemint, where SDUSD is summed up by mortgage NEO. The PEG network has also launched MakerDAO-style mortgage loan smart contracts, allowing users to print USDB against Bancor Token deposits. In addition, it is worth noting that many traditional decentralized exchanges exist on multiple blockchains such as Binance Chain, NEO, EOS, and Tron.

4. The paradox of DeFi and 2020’s views

4.1 DeFi: a small but dynamic ecosystem

While DeFi represents a small segment of the cryptocurrency industry, it is one of its most vibrant areas. The number of active projects, defined as projects with more than 50 daily users, nearly doubled compared to 2019. However, this number is still small, with the absolute number, because it has not come yet. 20 projects are in use. Also, in the cryptocurrency space itself, DeFi is still small.

4.2 The growth of staking

Unlike lending, staking is done at the protocol level, where users lock money to secure the network and then earn staking rewards. This is discussed in depth in our report on the Rise of Stakes.

We also expect consolidation for the large betting services offered by both cryptocurrency exchanges, such as Binance, Coinbase and KuCoin’s staking services and specialized providers. However, as illustrated in our recent institutional report, stakes are not yet one of the key growth drivers for the cryptocurrency industry, according to large traders and institutional investors.

4.3 Ethereum’s DeFi

In 2020, we expect several trends related to DeFi based on Ethereum:

  • The end of the Maker’s dominance
  • Maker’s DSR integration
  • The nascency of under- or even less-collateralized solutions
  • The launch of DeFi derivatives on Ethereum mainnet
  • USD Tether
  • The growth of “one-stop” solutions

4.4 Expansion of the Alt-DeFi

Regarding non-Ethereum DeFi space, we expect some development from the standpoint of other blockchains such as:
Bitcoin is likely to play a more important part of DeFi, both on Ethereum and as a standalone solution.

  • BTC as collateral
  • BTC side-chains

Binance Chain: owing to BEP-3, DeFi on the Binance Chain is likely to draw attention from cryptocurrency participants. Greater synergies of EOS with Ethereum will occur. NEO has SDUSD, which is summarized in the Alchemint ecosystem and the Switcheo exchange works on both ETH and NEO blockchains. Cosmos: Kava is expected to launch in 2020, possibly marking the birth of Cosmos’ first decentralized crypto-backed stablecoin. Tezos: DeFi was specifically added in September 2019 for the new RFP for ecosystem grants by the Tezos platform. Algorand, a statement which specifically mentions its interest in the De DeFi movement. TomoChain may be able to see new projects being developed. Decentralized exchanges are one of the largest DeFi applications on Tron. Waves: Its recent annual event focuses almost entirely on DeFi applications. Ontology aims to develop DeFi use cases on its chain.

Although the Alt-DeFi space is likely to grow by 2020, it remains to be seen whether a significant number of users will be willing to use these services.

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