Until Bitcoin’s end of the year price increase, DeFi (short for Decentralized Finance) was the hottest thing in crypto throughout the past year. The DeFi market was worth less than $700 million in December 2019. By February, it had hit $1 billion. The DeFi market at the time of writing sits at more than $13 billion.
With these apps, people can lend, borrow, trade, and take out insurance directly in a peer-to-peer fashion sans banks. DeFi apps run on open infrastructure, with algorithms that set rates in real-time based on supply and demand. Some of the key offerings include earning interest on cryptocurrency (Compound, Dharma, Celsius); Converting ETH to tokens with DEXs like Uniswap; hedging crypto assets with decentralized derivatives trading platforms (dydX); insuring against smart contracts (Nexus Mutual, Whiteheartl), and storing funds in crypto-backed stablecoins during times of extreme market volatility (Maker’s DAI).
The $13 billion committed to DeFi ranges from simple loans to complex derivatives mostly on the Ethereum blockchain. When the DeFi space passed $1 billion, the industry saw it as cause for celebration. “$1 Billion marks an important milestone for DeFi to be celebrated,” DeFi Pulse wrote on its blog in February. “Additionally, $1B feels like an early birthday present for DeFi Pulse which was launched in February 2019.”
When Compound issued in June the so-called “governance token” $COMP to everyone who used its platform, the industry took notice. COMP allows users to have a say in the future direction of Compound’s governance protocols. People instead speculated on the future worth of Compound and began using it for yield farming, a way to generate rewards with cryptocurrency holdings. Having taken notice, other protocols like Aave and Yearn.finance launched their own governance tokens. Yearn.finance’s YFI soared to highs of around $40,000 and a market cap at the time of $1,298, 248,546.
Although Ethereum dominates DeFi, Tezos entered the DeFi space in April with a tokenized version of bitcoin on the Tezos blockchain, tzBTC, each of which is minted under the new FA1.2 Tezos token standard and represents one bitcoin.
“The tzBTC brings the brand and liquidity of Bitcoin to the Tezos blockchain and gains the potential for rich functionality made possible by Tezos smart contracts,” Bitcoin Association Switzerland President Lucas Betschart said in a statement.
DeFi on Ethereum, in particular, skyrocketed throughout the year, establishing a vibrant community of applications and users. With it came scalability issues, which is not uncommon during crypto’s euphoric phases. Network congestion drove fees to new highs as the market turned to high leverage and collateralized lending. When prices swung dramatically, users were forced to liquidate because they could not post collateral or exit their positions.
Since DeFi activity took place mostly on Layer 1, the Ethereum network became congested. With plans of launching over time various phases of Ethereum 2.0, such issues could be alleviated, but for now Ethereum has not proven scalable for DeFi.
Regulators Take Notice
As DeFi total value locked increased past $1 billion in early 2020, authorities took notice globally. For instance, South Korea’s financial authorities introduced the Online Investment-Linked Finance Act, also known as the “P2P Law” with a view to adopting it by the third quarter of 2020. Starting in August, citizens there would not be able to use crypto as collateral for loans and investment products without a license from the FSC. “We are prohibiting linked investment products that use crypto assets and derivatives as collateral, which are difficult for investors to understand the risks of,” said FSC.
In an attempt to gain a better grasp of DeFi, The Commodity Futures Trading Commission’s Technology Advisory Committee hosted a presentation called “The Growth and Regulatory Challenges of Decentralized Finance” by law professor Aaron Wright and attorney Gary DeWaal.
The December presentation served as a briefing on decentralized platforms. Wright noted that DeFi could provide services for lower cost to a greater number of people thanks to the automation of a number of the processes involved. “Another interesting benefit of decentralized financial projects is that they’re composable and interactible,” said Wright. “Developers often describe them as financial Lego blocks.”
Wright lamented, however, that DeFi developers don’t often think about legal considerations first. “These contracts are alegal. That doesn’t mean that they are illegal. It means they are designed at a technical level, not necessarily with regulatory compliance in mind.”
The CFTC briefing outlined a concern with “DeFi” platforms that are de facto tied to centralized entities, as well as platforms with little or no registration requirements for users. Who might authorities prosecute?
“Generally, in the United States, software development is a protected activity under the first amendment,” said DeWaal. “As Aaron has eloquently shown, there’s many, many use cases for DeFi. But the First Amendment is not a universal bar.”
Wright mentioned a potential safe harbor “could ensure responsible development to protect consumers’ interests without limited innovation.”
Heath Tarbert, chairman and chief executive of the U.S. Commodity Futures Trading Commission, commented also on DeFi during 2020.
“DeFi is a growing global trend and its emergence highlights how innovation continues to reinvent the financial services space. By combining multiple technologies to provide financial services in new ways, DeFi could potentially provide a way to expand financial market access to a broader range of individuals and entities. It is a new way to look at finance that leverages and reflects the new ways we all interact.
We cannot be thinking only of the prior way of going to a bank or a broker that you know for years, particularly if you are looking to expand access to financial markets and financial services. Historically, innovation has driven our markets forward and been the lynchpin of their success.
I think, as a regulator, we should expect DeFi to evolve and grow. Each regulator will need to work to identify how DeFi touches their own jurisdiction. In the absence of regulation, the industry will need to figure out how to ensure there is market integrity and consumer protection — all areas that regulators will be focused on in the future.”
A Year of DeFi Hacks
DeFi was not immune from hacks. A long list of hacks cast a shadow on the rise of Defi. Those hacks include:
bZx — February 18 ($1 million)
dForce, April 19 ($25 million)
Harvest Finance, October 26 ($34 million)
Cheese Bank, November 6 ($7 million)
Akropolis, November 12 ($2 million)
Value DeFi, November 14 ($7 million)
Origin Protocol, November 17 ($7 million)
Pickle Finance, November 21 ($20 million)
Warp Finance, December 17 ($8 million)
DeFi Star Fades As Bitcoin Price Spikes
As the regulators foresee DeFi evolving and growing, so too do blockchain proponents.
On January 1, 2020, the total value locked in DeFi was $686 million, according to DeFi Pulse. At the time of writing, on December 27, the total value locked in the market was $13.3 billion. In 2019 the value of ETH locked in DeFi protocols grew by just 130 percent over the course of the year, from $293 million to over $687 million.The leaders in total locked value at the end of 2020 were as follows: Maker, Compound, Aave, Uniswap, Synthetix.
By year’s end, nonetheless, Bitcoin had retaken the headlines. Volumes at Decentralized exchanges such as Uniswap were telling as the first cryptocurrency began a monumental price rise. DEX volumes, which had been $8 billion per week at the end of August, fell to $6 billion in September, and then fell by more than 40% in October to just under $3 billion.
ChartEx Year In Review
At the end of the day on 29th December 2020, ChartEx had served 24,059,431 charts. Our most popular charts included CORE (772k), KP3R (294k), BID (223k), POLS (206k), and UNI (201k).
There are 2,385 wallets connected to ChartEx — though not all hold a balance — and 26 million Chart held across those wallets, which is 38% of circulating supply. 2,500 alerts have been created on Telegram with visitors from 199 countries.
Thank you everyone for a great 2020. We have big plans for 2021 (more on that later).
Happy New Year!
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