Decentralized finance (DeFi) may be one of crypto’s foremost use cases, but as it stands it has seen limited adoption.
According to data site Defipulse.com, there is now $951 million worth of value (ETH, stablecoins, Bitcoin, etc.) locked in DeFi applications. This equates to approximately 0.35 percent of the entire cryptocurrency market, assuming Bitcoin and all altcoins are cumulatively worth $270 billion.
Further still, leading applications in this sector are only actively used by a few thousand individuals. DappRadar reports that over the past week, decentralized trading and stablecoin platform Synthetix has transacted with 2,000 individual wallets, while that same figure is just 984 for MakerDAO.
Despite this, top investors and analysts in the space see much potential in DeFi. So much potential that some have dubbed this part of the cryptocurrency world a “black hole” for digital asset liquidity and value.
As they say, “slowly at first, then all at once.”
Ethereum DeFi on track to become a “liquidity black hole”
While DeFi has been subject to a number of hacks and vulnerabilities over the years, the faith innovators and investors have in this crypto sub-sector has continued to grow. For instance, one prominent Ethereum-focused investor, recently wrote:
“The more time I spent in DeFi space, the more I think DeFi will end up becoming a liquidity blackhole that sucks in all idle assets sitting around doing nothing. There are many ways to farm market neutral yield if you don’t want to take on the market risk of holding BTC and ETH.”
This is a comment that is eerily reminiscent of one made by MakerDAO founder Rune Christensen.
The DeFi pioneer explained that the recent growth in his protocol really “showcases the latent demand for non-ETH assets, and it’s the beginning of a broader trend of DeFi acting as an economic vacuum that will eventually attract almost all value to the Ethereum blockchain.”
The idea goes that due to Ethereum’s systems of smart contracts, which effectively allows anyone to code anything into the blockchain, the network has “infinite use cases.” This market opportunity gives Ethereum the chance to capture upwards of $80 trillion in value, according to Andrew Keys, managing partner of Digital Asset Risk Management Advisors and a former ConsenSys executive.
The absorption of value has begun
Data shows that the absorption of crypto assets into DeFi, mostly Ethereum-based applications, has already begun.
Cryptocurrency lending platform Nexo last month minted four million DAI tokens with Wrapped Bitcoin — an Ethereum-based asset that is created by depositing BTC through a custodial account. That’s to say, WBTC is a tokenized representation of BTC on Ethereum, allowing it to be used within smart contracts.
Adding to this, stablecoins have begun to rapidly populate the Ethereum network.
Ryan Watkins, an analyst at crypto research firm Messari, found that there is now around $7 billion worth of stablecoins, such as Tether’s USDT or Coinbase and Circle’s USD Coin, based on the blockchain.
“Over the past two years there has been a complete transformation in how value is stored and transferred on the Ethereum blockchain,”Watkins commented on the growth in the value of stablecoins and ERC tokens.
The cumulative value of Ethereum-based stablecoins is up more than 200 percent since the start of the year alone.
ETH stands to benefit greatly
As reported by CryptoSlate previously, all smart contract blockchains have their own stake in the DeFi ecosystem — Tron has JUST, Bancor operates on EOS, and even Bitcoin acts as a transaction medium for crypto exchange and financial services company Abra.
But Ethereum, and ETH by extension, is likely to benefit the most from DeFi.
Ryan Selkis, chief executive of crypto researcher and data provider Messari, explained that the introduction of this use case gives ETH a “higher ceiling” than 2017/2018 to rally towards in the next crypto bull market. For reference, the asset reached $1,400 in 2018 and a BTC price of around 0.12.
Importantly, though, Ethereum is unlikely to succeed without the introduction of scaling improvements.
Transaction fees have quadrupled from the end of April to the middle of May, crowding out some applications and individuals from participating in the Ethereum ecosystem. This warrants the implementation of Ethereum 2.0, which will exponentially increase the throughput of the network while dropping fees.
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