Ethereum is Leading the DeFi Ecosystem


Key Takeaways

  • The total value locked in DeFi has grown from $206 million to more than $660 million in 1 year
  • About 2.5% of ETH’s total supply (2.7 million ETH) is locked in DeFi platforms
  • If continues to grow at the same pace as this year, the total value locked could exceed $1.5 billion by the end of 2020

It’s nothing new that blockchain technology has the potential to disrupt several industries and create new ones, but one thing is to acknowledge it another thing is to fully understand and explore it. We are still in the early days of this technology but we are seeing a lot of interesting use cases gaining some traction.

In over 3000 cryptocurrencies, Ethereum is definitely leading the experimentation and exploration of new use cases. The number 2 cryptocurrency by market cap 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.

Average Monthly Active Open-Source Crypto Developers (Source)

One of the most promising real-world use cases for blockchain is decentralized finance applications, often know as DeFi. These new open protocols enable the access of anyone in the world with an internet connection to censorship-resistant financial services.

A good way to measure the growth of this new ecosystem is to track the value locked in fiat. At the moment there are over $660 million locked in DeFi applications, a 3.2x increase of the same time last year ($206 million).

Total Value Locked (USD) in the top 20 major DeFi Projects (Source)

Taking into considering that most of the projects and protocols are fairly new and still in development, these numbers are quite impressive.

If it continues to grow at the same speed as this year, the total value locked could exceed $1.5 billion by the end of 2020.

ETH Locked in DeFi Projects (Source)

Until December 6, over 2.7 million ETH has been locked up in DeFi platforms, which makes almost 2.5% of total ETH supply. A bullish scenario for Ethereum because it removes supply from circulation and the more it grows, the demand for ETH increases and supply decreases.

The current DeFi space is presented in 5 different categories:


Earn passive income by lending tokens is a perfect scenario for long term holders. The lack of risk management measures like credit scoring and insurance, loans are secured with more collateral than the borrowed value (at least 150%).

Derivatives and Prediction Markets

A derivative is a contract between two or more parties that derives his value from the underlying asset. Because of the modular nature of smart contracts, we can assume almost any asset could be traded in the blockchain using synthetic pricing. Prediction markets allow users to create predictions and bet against other users in any type of event.

Decentralized Exchanges

Decentralized Exchanges allow peer-to-peer trading of cryptocurrencies or tokens using smart contracts. Unlike a centralized exchange, there’s no need to deposit funds to be able to sell, buy and trade.


Asset management and tokenization allow the creation of digital tokens backed by real-world assets, which brings a world of opportunities and utility to the blockchain.

Payment channels

Payment channels are designed to facilitate fast and cheaper payments. Since layer 1 networks like Bitcoin and Ethereum are not scalable enough to handle small payments, these second layers provide a practical solution for frequent payments without compromising much the security and decentralization of the main network.

DeFi Category Distribution by Total Value Locked (USD) (Data Source)

The Lending category is the most dominant with over ~58% market share, followed by Derivatives (~24%) and Dexes (~5%). At the moment the value is flowing into lending protocols, motivated by the demand to borrow stablecoins like DAI and high interests around 7–8% annual percentage yield (APY) for the lenders. Compared with the traditional markets, for example, US 10 year bonds (1.76%) and Vanguard Real Estate Index Fund ETF Shares (3.12%), these rates are very attractive and have the advantage to be available to everyone in the world without any restriction.

In October the lending market had 80% market share and derivatives ~10%. Since then, Synthetix has attracted so much attention and value that the lending market now only sits at 58% and derivates 24%.

Among the top 20 projects, Maker gathers the most value locked, with over 46% market dominance, followed by Synthetix (~28%) and Compound (~14%). Maker dominance was over 90% December last year but since then has been dropping significantly with new projects entering the market.

Comparison of Total Value Locked (USD) in the Top 20 DeFi Protocols (Data Source)

Next steps for Decentralized Finance

There is still a lot of risks involved in this new technology, risks that could potentially make users lose all their funds and consequently ruin the trust in these new protocols. It’s very important to strengthen the current protocols as they already built some trust and reputation, this can be achieved by improving the security of the smart contracts, oracles and the custody of funds. It’s also important to develop risk management elements like insurance and credit scoring to hedge against the loss of funds.

In terms of mass adoption, there is still a lack of knowledge and awareness of the average user. Right now the ecosystem, like the whole cryptocurrency industry, fails to attract attention to non-crypto users but with the growth of financial disasters and censorship from countries like Argentina, Venezuela and China we may see a high demand in this new decentralized financial system. In order to bring non-crypto people into the ecosystem, we need 
frictionless applications with clean and simple UI/UX, however we are seeing an influx of designers entering the space to solve this.

The future of DeFi looks bright taking into consideration the growth this last year but building a completely new financial system takes time. One thing is certain — the amount of experimentation and cooperation inside this ecosystem is contagious. Every project helps each other towards the ultimate goal: build a financial system open to everyone in the world without any central authority to control or take advantage of it.

Joao Leite
João has experience in online business and a strong academic background in technical fields such as network and security. Fascinated by the potential of blockchain technology, João has dedicated the last 2 and a half years helping and advising different crypto projects. He currently holds the role of Lead Analyst of Blockfyre.

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