Cryptocurrencies have grown to become quite a popular mode of investment. As interest rises, more and more investors have been flocking into the crypto market. To keep up with the rising demands from a variety of investors, many new investment vehicles have surfaced. The DeFi space has been acting as one such head-turner over the past few months.
The DeFi space includes stablecoins, derivatives, decentralized exchanges, and lending services. Over the years, the total value locked in DeFi contracts on Ethereum has surpassed $1 billion. DeFi plays an important role in banking the unbanked and making the money market more efficient.
Discussing the future of DeFi, crypto analyst Kain.eth (@Kaiynne), CEO of payments company Blueshyft, compared the modern-day DeFi sector with the Internet back in 1977. He argues that while things are still ‘slow and ugly and unusable,’ the market is set to boom. He wrote:
DeFi’s advocates maintain that the initial implementation of these applications will be rough. There have also been allegations that projects stack on excessive criticism of DeFi out of self-interest since Ethereum established it. Despite these naysayers, the developing DeFi ecosystem continues to make big gaits even amid this anxious period for global markets.
The DeFi space is built around a lot of popular projects that have been the key players in the industry’s growth. For instance, Synthetix went from less than $2 million to over $150 million in total locked value in the project back in December 2019, to become the second-largest player in the market.
The Maker Foundation, one of the earliest Ethereum projects and the dominant leader responsible for nearly 51% of the value locked within the lending sector, has seen a lot of progress in the last few years with its debt ceilings doubling consecutively for two years pushing it up to 120 million Dai. 2020 saw the total value locked in Maker spike as high as $764 million, making the Maker foundation the leading DeFi project.
Ethereum has been leading the experimentation and exploration of new use cases in this space. The network has almost 4 times more developers than Bitcoin, which could be explained by the friendly and supportive community and the capabilities of the smart contracts that allow developers and innovators to create new use cases for blockchain.
Despite the growing popularity, the DeFi market was heavily impacted by Bitcoin’s crash last week as the lack of liquidity in the market has resulted in severe problems for the DeFi space, especially for Maker. The massive losses sustained by the market on Thursday have resulted in losses close to $5 million for the project.
Due to the high congestion in the Ethereum network, some liquidators were able to win the auction offering a 0 DAI bid, due to a total lack of competition. This resulted in $4 million in collateralized debt. Despite considering an emergency shutdown, the maker foundation has decided not to proceed, and as a result, the total bad debt has gone up to $5.5 million.
Besides this, the DeFi industry lost more than $900,000 to two consecutive hacks on the popular decentralized lending protocol bZx.
The DeFi or Open Finance movement has the potential to become a global, open alternative to every financial service we use today like savings, loans, trading, insurance and more, accessible to anyone in the world with a smartphone and internet connection. This is now a reality on the Ethereum blockchain.