DeFi or decentralized finance is the latest buzzword in the crypto world. DeFi was non-existent a few years back and today it is literally a revolution in making. Some defiant individuals with common mindset came up together in the search of a common identity and created a financial standard where no third party or centralized authority is involved. In the year of 2019, DeFi got proper investor attention and grew like hell! DeFi is a movement now. The smart contracts managing DeFi are the financial robots.
The programmable money
DeFi smart contracts are publicly auditable and thus provides immense transparence. These smart contracts are interoperable also. Different parts of DeFi can be amalgamated to create a new function. DeFi is dynamic and ever-evolving. DeFi’s trustless feature is attracting both individual and institutional investors nowadays. Its applications primarily came in the Ethereum platform. Financial dapps are Ethereum’s hottest use cases now. New opportunities are being created every day. If I break up DeFi, I can get different categories – lending & borrowing, DEX (Decentralized Exchanges), derivative, layer 2 payment networks (ex- Bitcoin lightning network, WBTC), tokenized assets and asset management (ex-WBTC, Set protocol).
Ethereum’s changed narrative
Vitalik Buterin initially published a whitepaper in 2013 to make decentralized applications. He wanted to develop applications in the Bitcoin platform. But Bitcoin never had a scripting language and the community consensus was not met to develop any such thing for Bitcoin. Then Vitalik created Ethereum along with some other co-founders to fulfil their dream. Ethereum blockchain became live in the year of 2015 after the successful crowdfunding in 2014. Many different tokens came into the Ethereum platform. Then came the ICO boom. Ethereum became the preferred method to raise fund from ICOs due to its smart contract compatibility. ICO boom was over within a few years and investors lost trust in ICOs. Demand of Ethereum also fell drastically. But the developers started to build different kind of dapps in the Ethereum blockchain. Different dapps and different applications. Then DeFi came. Ethereum found its new use case.
Charts are from defipulse
DeFi is Ethereum
$858.9M is locked in DeFi now across different platforms. MakerDao is the most dominant player in DeFi. Only Ethereum is 61% of total locked value in DeFi. Dai is a popular trustless stablecoin. People can generate Dai by locking crypto collateral in the MakerDao system. DAI is pegged to 1 USD. It is also an ERC20 token. Currently 31M DAI is locked in DeFi and the issuance rate is only growing day by day. DeFi needed liquidity. Ethereum alone wasn’t able to solve the problem. Bitcoin’s layer 2 solution lightning network is a failure and smart contracts don’t run on Bitcoin platform. Ether wrapped Bitcoin token can run on Etherum platform. WBTC is just that! Presently WBTC as a percentage of total locked Bitcoin in DeFi is approximate 72%. Ethereum, DAI & WBTC comprise of 67% of total locked volume in DeFI. I’ve not considered other ERC tokens. DeFi is unimaginable without Ethereum.
ErisX has recently launched physically settled Ethereum futures contracts. It is CFTC approved. The institutional investors will get proper exposure to Ethereum now due to this. This is really a great development as there will be a physical settlement of Ethereum contracts. Remember that CME’s cash-settled Bitcoin futures has no actually involved BTC. Such new futures contracts can act as a catalyst to stabilize the price of Ethereum. Ethereum was dubbed as the ‘world computer’ due to its programmability. It has scalability and speed issue but still, it is the preferred blockchain to run complicated dapps. Ethereum 2.0 is supposed to solve the shortcomings of Ethereum. In the meantime, there has been a radical increase in the store of value for Ethereum. Confused? Ethereum is decentralized enough to be considered as a commodity! Physically settled futures contracts can vouch for that. Its store of value will be just after Bitcoin in the crypto domain. DeFi dominance shows the investor trust and the indication of its increasing store of value. Ethereum is achieving more liquid currency status day by day. Even the most liquid cryptocurrency Bitcoin runs on Ethereum platform to achieve DeFi penetration. Ethereum is showing the world the disrupting power of DeFi. It is only a use case of the second largest crypto. Ethereum has been continuously self-inventing itself to find new applications along with time. DeFi is definitely Ethereum but Ethereum is not DeFi.
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