In one year, the total value of ether (ETH) locked on the DeFi markets increased from $ 317 million to more than $ 1 billion. With the increase in the level of activity in the market sector, the next logical progression seems to focus on the generalization of DeFi solutions.
However, like other decentralized applications, DeFi protocols still have usability problems for everyday users. Factors such as liquidity and governance could also have serious implications for the introduction of DeFi products in the broader financial market.
With loan products occupying the majority of the current DeFi ecosystem, DApp developers must take into account real-world problems such as loan repayments and defaults. In addition, the volatility of the prices of cryptocurrencies that act as collateral can put significant pressure on the market.
Currently, solutions such as multi-collateral and non-collateralized loans appear to be gaining popularity in the market. However, these systems may still require more robust stress tests to assess their effectiveness in dealing with internal and external stressors.
In addition to managing price volatility, a larger DeFi market could mean more in-depth regulatory scrutiny and more competition with existing funding systems. The crypto market as a whole continues to be subject to even higher regulatory standards, with the fight against money laundering being a priority for governments around the world.
DeFi market growth crosses billion dollar mark
As previously reported by Cointelegraph, the total value of ETHs blocked on the DeFi market has crossed the billion dollar mark. Data from the analysis platform Defipulse.com reveals that the current market value represents an increase of almost 300% compared to 12 months ago.
In an email to Cointelegraph, a spokesperson for the Maker Foundation highlighted the growth rate of the DeFi market, saying the pace is exciting, adding, “I think it fits the shared human desire for more control over critical elements of our lives, such as our financial future and our opportunities. Akiva Lai, product manager at Maxonrow, the blockchain governance and audit platform, highlighted the significant growth in the DeFi market for Cointelegraph. According to Lai:
“It’s pretty amazing, to be honest. A billion dollars in locked DeFi value may seem tiny compared to legacy funding, but we have to look at it for what it could be – not what it is right now. Associated with the meteoric growth of foreign exchange products, from derivatives to staking services, and it is natural that more users exploit DeFi products in the endless search for yield in an uncertain economic context of negative interest rates and slow growth. “
According to Defipulse data, loan DApps have the largest share of the DeFi market, and MarketWatch predicts that the loan market will reach a valuation of $ 8 trillion over the next two years. For Jonathan Loi, founder of the Level01 derivative trading platform, the DeFi market is on track to continue growing. In a private note to Cointelegraph, Loi said the pace of growth was a vote of confidence, adding:
“The majority of the value is put into play in loan protocols: due to the collateral and transparent nature of these protocols with an upward dividend potential, it becomes attractive to investors, which accelerates its adoption. Other sectors such as financial trading are also gaining ground, as evidenced by the growing interest in direct P2P trading platforms which facilitates transparent and autonomous settlement for trading in option contracts. “
Credit holds the lion’s share
Indeed, MakerDAO’s stablecoin DAI represents more than 60% of the DeFi market. Loans therefore control the vast majority of ETH-based decentralized financing activities. Other major loan products include Compound, InstaDApp and dYdX.
The popularity of lending in the DeFi market space comes as no surprise, given that the total crypto lending industry currently stands at around $ 4.7 billion. As previously reported by Cointelegraph, the presence of higher interest rates in the sector is stimulating adoption.
Robust growth in the crypto lending sector occurs despite the bear market conditions that characterized the crypto scene in 2018 and 2019. Even with the nearly 90% drop in the underlying collateral (typically ETH), loan products have shown some robustness.
Supporters of DeFi loans hope that this resilience will be essential to attract greater institutional interest in the market. Lai of Maxonrow believes that DeFi-based loan products could be major drivers for the market as a whole, telling Cointelegraph:
“The main areas of impact are likely to continue to be borrowing / lending, as debt is an integral part of a growing economy. However, secured loans still keep many poor people out of the financial system without providing collateral, so developments that can lower the barrier in terms of friendly rates and perhaps unsecured crypto loans are important. “
With greater penetration of DeFi loans, certain market realities such as bad debts and defaults could materialize. Developers and entrepreneurs in the industry will face the effects of these stressors not only on their products, but on the entire crypto market when they have to liquidate the collateral supporting the bad debt.
According to the Maker Foundation, it is the responsibility of regulated lenders to exercise due diligence while providing services to clients. As part of his e-mail to Cointelegraph, a spokesperson for the foundation explained:
“Maker provides the basics as well as the built-in checks and balances for regulated organizations to deliver financial products like loans. Therefore, a regulated loan originator would integrate Maker’s architecture to issue loans for which it is ultimately responsible. The initiators would do this knowing full well that Maker uses a collection of smart contracts to ensure that the system on the backend remains secure and robust. “
Michael Gasiorek, responsible for the growth of the stable platform TrustToken, believes that oversized loans will give way to unsecured loans as market risks are better understood. In writing to Cointelegraph, Gasiorek explained that they will need to be supported by something more than crypto, such as reputation from transaction / loan history, Know Your Customer or AML information, or lead to the creation of a credit score system:
“These opportunities will only become common when the mechanisms, returns and risks are well understood and very likely to occur slowly as institutions (the real mainstream in lending in incredible amounts) look at sophisticated crypto consumers test the market and technology. “
DeFi is moving towards widespread adoption
The question for DeFi as it heads towards mainstream adoption is whether the emerging market will seek to dislodge existing systems or perhaps even work in collaboration with traditional finance. For Lai, the latter seems the most likely:
“Crypto and DeFi will not overturn conventional finance, it will coexist – with certain hybrid components shared between the two. Who knows, maybe in the future, banks will rely on DeFi lending platforms to manage repayment, guarantee and debt swaps while building the security mechanisms in case of default and regulatory components (for example, KYC) on their back-end. “
A mature DeFi market offers the possibility of more flexible options for retail investors, with some products likely having useful trade-offs compared to existing systems. For Alex Melikhov, CEO of the stable platform Equilibrium, DeFi’s journey towards greater global adoption follows two paths. Writing to Cointelegraph, Melikhov foresees two scenarios:
“The first is a long-awaited mass adoption that goes beyond the retail approach. This scenario requires that DeFi developers and entrepreneurs have more usability, wider community education, UX simplification, etc. At some point, we will see ordinary households investing in liquidity pools on the compound. “
According to Melikhov, the second way is more sophisticated and implies that the developers widen their field of action, from the creation of financial primitives to offers based on DeFi more advanced, like the multiple Dai extensions already proposed.
But, to achieve widespread adoption, DeFi may also need to undergo a simplification of most of the products available. To this end, developers may need to consider ramps that facilitate the transition from fiat-based systems to more digitized markets.
Pain points for decentralized finance
As developers and entrepreneurs strive to improve penetration of the DeFi market, these DApps still require some work to make them more suitable for everyday users. Several commentators agree that improvements to the in-app user interface remain a key factor not only for DeFi products but for blockchain DApps in general.
Regarding the problem, Lai told Cointelegraph: “The problem with DeFi at the moment is that it is only really used by crypto enthusiasts in developed countries.” Likewise, Gasiorek identified UI issues as one of the four pain points for DeFi:
“The user experience must improve considerably in order to be usable by the non-crypto layman both from the user interface and at the level of” basic knowledge required “.”
For Gasiorek, overcoming the usability barrier will allow stakeholders to focus on issues such as liquidity, which becomes even more important as scalability increases. Next comes the need to properly assess the risks associated with the market and the creation of solid regulatory provisions to prevent the emergence of problems such as a crypto guarantee loan bubble.
The growth of the DeFi market has marked one of the main developments in the cryptography market for 2019. The objective for 2020 seems to be that of consolidation and more gains that could put the industry in the spotlight of financial regulators , given the increased level of attention being paid to the crypto space.