Decentralized finance (DeFi) is positioned to unite fragmented ecosystems and unlock billions of dollars in idle potential, ushering in another era of crypto innovation.
The Promises of the Revolution
Blockchain and cryptocurrencies brought promises of a new, decentralized, utopian world free from central banks, government, and censorship. Enthusiasts envisioned a world in which power and control shifted from the few to enfranchise the many.
However, the reality is, blockchain itself will not do anything. Blockchain technology on its own is nothing more than a glorified database. It is the application of blockchain — and how we use it — that will ultimately bring about and shape the changes so badly sought after by the believers.
And this is why blockchain and dApp developers around the world are so busy trying to find the biggest problems that can benefit from blockchain. This is also why crypto investors spend countless hours researching, interviewing and, conducting due diligence on budding crypto startups in search of blockchain’s killer application.
Similarly, crypto fund managers and their analysts spend months debating on their fund strategy and investment thesis, speculating on where these killer applications might lie and how they might come to fruition.
Blockchains as Money
Prior to 2017, the narrative of blockchain’s killer application was “money.”
Bitcoin and other early cryptocurrencies proposed new forms of money that were censorship resistant, unencumbered with inflation, and free of political and sovereign economic interests.
This new money would allow its holders to exclusively and truly have control over their money, as embodied by the crypto expression, “not your [private] keys not your coins.”
However, one of the key functions of money as we know it is to serve as a “medium of exchange,” something that’s widely accepted in exchange for goods and services.
The instability and volatility of cryptos make this narrative vulnerable to skepticism. And, few places accept Bitcoin or cryptocurrency as payment, though that number is rapidly growing.
Ethereum Changes the Game
Then, in 2017 the game changed when Ethereum gave rise to the ICO boom. Blockchain’s killer application shifted towards ICOs: fundraising, tokenization, and asset issuance free of regulation and government intervention.
In short, Ethereum allowed anybody to take part in early-stage startups anywhere in the world — a right previously reserved for a subset of the financial elite, prominent venture capital investors.
However, regulators stepped in and stopped ICOs in their tracks, and once again the narrative began to shift among crypto pundits.
In 2018, the ICO bubble deflated and millions of crypto investors watched the value of their crypto assets fall by over 85%. Meanwhile, the next killer application for blockchain already began to gain momentum.
DeFi as Blockchain’s Killer Application
Decentralized Finance (DeFi) has been a growing trend over the last two years. This sub-sector of the crypto industry is growing exponentially, and the trend is expected to continue into the foreseeable future.
DeFi promises to disrupt traditional banking by removing costly intermediaries and other rent seekers. But, banking has existed for centuries, and isn’t going to be dislodged easily. Crypto adoption won’t happen overnight, nor will the rise of DeFi.
Nevertheless, the fact is there are now tens of millions of crypto investors around the world collectively holding over $200 billion in assets. And, none of these assets are being put to work.
Imagine having $200 billion idly sitting in a savings account, not earning interest. Many of these assets aren’t even usable to buy a cup of coffee.
This is essentially where the market is, and why the case for DeFi is so strong.
Although the market is relatively young, the capital locked up in DeFi smart contracts has grown from $0 to nearly $700 million in just over 24 months.
Drivers Behind DeFi
Maker DAO, a platform that allows for investors holding Ethereum and other ERC-20 assets to get loans using their crypto as collateral. These loans mint dollar-pegged stablecoins, solving the problems of volatility. Now, Maker has locked-up over $370 million in loans and boasts a market cap of nearly $500 million.
Synthetix, a platform that allows people to trade synthetic fiat currencies, cryptocurrencies, and commodities issued on the Ethereum blockchain pegged to real assets, now has $124 million locked up.
Synthetix’s token went from $0.03 in Jan. 2019 to $0.92 the following year, gains of over 2,900%.
Compound, a decentralized lending platform that allows people to loan out Ethereum and ERC-20 tokens for interest, currently has $89.4 million in crypto assets locked up.
What’s Coming Next
While a healthy DeFi ecosystem is already starting to form, the biggest problem is that the majority of current platforms in the ecosystem only cater to the Ethereum blockchain. All other blockchains on the market today, even Bitcoin, do not have healthy ecosystems of applications to provide these much-needed services.
In the near future, an application will unite the fragmented crypto markets and unlock billions of dollars of potential. From there on, cryptocurrency and blockchain will continue its calling to transform finance.
SIMETRI gives you the same privileged look into the markets that insiders have. We’ve systematically evaluated hundreds of coins, and we’re connected to the builders and projects shaping this industry. And, we’re here to share that information with you.
Our next report is on a major up and coming DeFi project. We’ll reveal the details of this promising cryptocurrency to all SIMETRI members Tuesday, Jan. 14. Learn more today.