September 19, 2021

The DeFi Perspective: What's Next for the Decentralized Finance Market?

The DeFi Perspective: What's Next for the Decentralized Finance Market?

Decentralized Finance (DeFi) is one of the fastest growing and most innovative sectors in the crypto market. WITH At the beginning of the year, the volume of user funds blocked in DeFi protocols increased from $ 21.34 billion to almost $ 180 billion.

Moreover, in 2021, the tokens of successfulDeFi projects have become one of the most profitable assets on the crypto market - their holders have increased their capital tens and even hundreds of times. But all this does not yet lead to a significant increase in the participants in this market, and even more so does not apply to mass users.

We figured out whether DeFi will be able to revolutionize and squeeze out the traditional financial market or whether it remains a closed niche for professionals and speculators.

DeFi Sector Potential

The DeFi market goes far beyond cryptocurrencies andsimple translations. It provides access to decentralized exchanges (DEX) and liquidity pools, lending, loan and escrow protocols, insurance, derivatives trading, and a host of other financial services. In theory, this sector offers a complete alternative to the traditional financial market, but works without intermediaries, on the blockchain and using smart contracts.

Crypto enthusiasts believe DeFi is more than justhigh profitability and speculation. This sector is capable of squeezing out the traditional financial market, replacing banks and fintech companies for hundreds of millions and even several billion people. First of all, we are talking about that part of the population that does not have access to the services of the traditional financial market.

This opinion is based on the fact thatdecentralization and smart contracts allow DeFi protocols to make transactions faster and cheaper than traditional financial service providers. At the same time, such transactions are carried out without minimum transfer amounts, paperwork and in full transparency. To get access to DeFi services, you do not need to provide documents to anyone, go through KYC / AML checks, conclude contracts - a smartphone and a blockchain wallet are enough.

It is speculated that this could induce a huge number of people to ditch the services of traditional banks and brokers in favor of DeFi protocols.

The DeFi Sector Is Far From Mass Adoption

However, the real picture of the adoption of the DeFi sectoris still far from its theoretical perspectives. Although the sector is growing at a fantastic rate, the number of users and transactions, as well as the volume of liquidity, are not impressive.

According to the analytical agency DuneAnalytics, the total number of unique DeFi addresses is 3.31 million, which is a little compared to the total number of cryptocurrency owners, estimated at over 220 million.

The DeFi Perspective: What's Next for the Decentralized Finance Market?

Growth graph of the number of unique DeFi wallets

Average monthly DEX trading volume in 2021amounted to about $ 75 - $ 80 billion per month, although in May this figure exceeded $ 173 billion (in August - $ 94.5 billion). For comparison, the daily trading volume on only one centralized crypto exchange Binance exceeded $ 28 billion.

The DeFi Perspective: What's Next for the Decentralized Finance Market?

DEX Monthly Trading Volume

According to an August report from Chainalysis, which publishes the Global Cryptocurrency Adoption Index, the highest activity in DeFi comes from those players who conduct large transactions.

So, in the second quarter of 2021 on operationsmore than $ 10 million accounted for more than 60% of transactions in the sector. On the crypto market as a whole, the share of such transactions amounted to 50% over the same period. Chainalysis experts note that the main players in the DeFi sector are professional traders and speculators, as well as large and institutional investors.

The DeFi Perspective: What's Next for the Decentralized Finance Market?


Chainalysis also compiled a ranking of countries whosecitizens use decentralized finance most often. So, the five leaders in the implementation of DeFi included the United States, Vietnam, Thailand, China and the UK. Ukraine was in 9th place, and Russia - in 15th. The countries in this ranking are ranked according to three categories: the volume of funds blocked in DeFi per capita, the total volume of assets in DeFi, and the number of transactions.

The DeFi Perspective: What's Next for the Decentralized Finance Market?

Ranking of Countries for DeFi Adoption Based on Multiple Metrics by Chainalysis

Analyzing web traffic on DeFi platforms alsoshowed that North Americans showed the greatest interest in the DeFi sector. At the same time, from September 2019, traffic from Western Europe began to increase sharply, and from June 2020 from other regions, especially from Central and South Asia.

Interestingly, although China has become one of theof the largest countries in terms of DeFi transactions, the country's share of web traffic on DeFi platforms in East Asia remains low compared to its share of traffic on centralized crypto services.

The DeFi Perspective: What's Next for the Decentralized Finance Market?

The total number of visits to DeFi platforms by country from April 19 to June 21 according to Chainalysis

Thus, it becomes obvious that the adoptionThe DeFi sector is growing fastest in high-income countries with already developed cryptocurrency markets, as well as the largest institutional and professional markets. They are the driving force behind the popularization of decentralized finance.

This is another difference between development trends.DeFi sectors from crypto market trends. According to the same Chainalysis, digital currencies are generally more popular among residents of developing countries - they are used for international transfers, inflation protection and access to the financial system. They are considered by Chainalysis experts to be the main driver of the distribution of cryptocurrencies.

“Now the DeFi market is focused oncrypto-insiders - people who have been in the industry for some time and have enough funds to experiment with new assets. In the long term, when gas prices fall on the Ethereum network, the DeFi sector will become available to more people, ”David Gogel, developer of the dYdX DeFi protocol, commented on the Chainalysis report.

The expert also highlighted the United States, China, Russia and several Western European countries with a high level of cryptocurrency adoption as key growth markets for DeFi.

Chainalysis analysts are asking:Will the DeFi sector repeat the general path of the crypto market, will it be in demand among a wider audience, and will it gain popularity in developing countries? Let's try to answer these questions.

DeFi growth prospects

In the future, DeFi is quite capable of growing 10 andmore times in terms of the amount of funds raised. For example, well-known crypto investor and billionaire Matthew Roszak believes that this could happen as early as 2022. There are several reasons for this rally: the massive adoption of cryptocurrencies, the global pursuit of high returns by investors, and the global rise in inflation.

The DeFi Perspective: What's Next for the Decentralized Finance Market?

Graph of growth in the volume of funds blocked in DeFi-protocols

Another driver of the sector's future growth is institutional investment. Now institutions cannot directly own cryptocurrencies and are forced to use custody services.

For example, the largest crypto fund Grayscaleplans to create investment funds for DeFi projects such as Aave and Uniswap. And cryptoasset manager Bitwise launched its own DeFi index earlier this year, tracking the tokens of the 10 most popular DeFi protocols. Aave Credit Protocol has been working on launching liquidity pools for institutional investors since May. The interest of institutions in the DeFi market is also noted by the largest American exchange Coinbase.

But it is also important to understand that gradually the paceDeFi sector growth will decline. For example, the high yields currently offered by DeFi protocols should decline significantly as the industry matures. But it will also reduce speculators' interest in DeFi.

What's Stopping Mass Adoption of DeFi?

Despite the potential for DeFito create an alternative financial system, now this sector is mainly used for speculation and is not popular with the mass audience and residents of developing countries. There are several reasons for this.

Lack of responsibility. Decentralization is the main advantage andthe main disadvantage at the same time. The absence of an intermediary means that no one is responsible for anything and does not take responsibility for the safety of users' funds. This is an understandable risk when investing, but a deterrent in other financial transactions, especially since most DeFi project teams remain anonymous.

Safety problems... Hackers regularly withdraw funds fromDeFi protocols by finding vulnerabilities in the code of projects. Developers' mistakes are the result of the haste with which new projects are launched. Investors' money constantly flows from one project to another - each new one takes off faster than the previous ones. Therefore, a long work on safety is simply unprofitable.

Difficulty to use. Understand how DeFi protocols or pools workliquidity is much more difficult than just buying cryptocurrencies on an exchange and keeping them in your wallet. The complex interface of many DeFi platforms also does not help in any way. It is rarely localized into national languages, confused and does not contain tips - you have to figure it out yourself or look for information on the Internet. All of this is geared towards advanced users who already know what they are doing. Therefore, only tech-savvy users enter the sector - hence the predominance of traders and large players.

Limited liquidity. DeFi protocols currently lack sufficientliquidity for a much larger audience. To reach a mass user, liquidity will need to grow hundreds of times. And the existing liquidity models are not ideal: for example, MakerDAO has a complex collateral mechanism, a gradual decrease in liquidity when the price of an asset changes in Uniswap, fragmentation of liquidity between different networks.

The amount of the collateral. There are no credit ratings and scoring services in DeFi protocols, so projects need to be collateralized from 150% of the loan amount. This option is not suitable for those who really have no funds.

No direct exchange for fiat. Stablecoins do not replace the simple exchange of digital assets for fiat money, which is required by the mass user.

Scalability. Although there are over 40 blockchain networks in DeFi now, most of the protocols run on the slow and inefficient Ethereum blockchain - it really simply isn't possible with it.

Regulatory barriers. Although regulators are still more busy with ICO projectsand large centralized exchanges, they are already starting to pay attention to the rapidly growing sector. For example, Gary Gensler, chairman of the US Securities and Exchange Commission (SEC), believes the DeFi protocols pose "a number of problems" for investors and regulators, and hinted that the sector could top its list of priorities. The SEC itself is investigating the activities of Uniswap Labs, the developer of the Uniswap decentralized exchange. At the same time, do not forget that the tokens of DeFi projects have shown impressive growth over the past two years - the regulator may well classify them as securities.

DeFi problems can be solved

All of the above problems are solvable and shouldgradually fade away as the sector develops and matures. Thus, security problems will be noticeably reduced if developers conduct more stringent audits.

The quality of interfaces, support functionality andthe usability is improving a little too. Ethereum has begun the transition to version 2.0, which should solve scaling problems and make it possible for tens and hundreds of millions of people to participate in the sector. And Ethereum is gradually losing its share in the sector, yielding to other, faster and more efficient networks.

A huge impetus to popularize the DeFi sectorwill set the desire for at least minimal regulation. DeFi protocols will need to mitigate the risks of fraud and money laundering, otherwise regulators could get serious about them.

Is DeFi going to be massively adopted?

DeFi is definitely not a substitute for traditionalfinancial system: we will not see mortgages or benefit payments in this sector. But the fate of ICOs, whose sector burst a year after the boom, will not be shared by DeFi either - decentralized financing is with us for a long time, if not forever.

Probably the technologies and principles of DeFi in one way or anotherto another degree, they will move to traditional fintech companies: we will see p2p products based on smart contracts, but with regulation and a central governing body. This will make the financial system fairer, more transparent, and more accessible.

In the coming years, DeFi will remain a niche forprofessionals, but if the industry gets regulation and attracts more institutions, we may see a gradual popularization of decentralized finance among the mainstream users.

For DeFi to go mainstream, the sector needssolve security problems, implement minimal regulation, for sites - improve the interface and user experience, as well as increase scalability and attract liquidity. Then the benefits of decentralization will become more apparent to the widest possible audience.

Where is it more profitable to buy cryptocurrency? TOP-5 exchanges

For a safe and convenient purchase of cryptocurrencies with a minimum commission, we have prepared a rating of the most reliable and popular cryptocurrency exchanges that support deposit and withdrawal of funds in rubles, hryvnias, dollars and euros.

Site reliability is primarily determined bytrading volume and number of users. By all key metrics, Binance is the largest cryptocurrency exchange in the world. Binance is also the most popular cryptocurrency exchange in Russia and the CIS, since it has the largest turnover of funds and supports transfers in rubles from bank cards Visa / MasterCard and payment systems QIWI, Advcash, Payeer.

Especially for beginners, we have prepared a detailed guide: How to buy bitcoin on a crypto exchange for rubles?

Rating of cryptocurrency exchanges:

# Exchange: Website: Rating:
1 Binance (Editor's Choice) 9.7
2 Huobi 7.4
3 Exmo 6.9
4 OKEx 6.5
5 Bybit 6.3

The criteria by which the rating is set in our rating of crypto-exchanges:

  • Work reliability - stability of access to all platform functions, including uninterrupted trading, deposit and withdrawal of funds, as well as the period of work on the market and the daily trading volume.
  • Commissions - the size of the commission for trading operations within the site and the withdrawal of assets.
  • Additional features and services - futures, options, staking, NFT marketplace.
  • Feedback and support - we analyze user reviews and the quality of technical support.
  • Convenience of the interface - we evaluate the functionality and intuitiveness of the interface, possible errors and failures when working with the exchange.
  • final grade - the average number of points for all indicators, determines the place in the rating.

The DeFi Perspective: What's Next for the Decentralized Finance Market?


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