Decentralized finance (DeFi) has literally exploded this year. 2020 is set to be even bigger. DeFi offers a unique way to earn interest on digital assets without a middleman taking a cut. Decentralized finance is evolving and Ethereum based DeFi is at the forefront. While several other smart contract platforms have been taking pot shots at Ethereum’s lead, none of Ethereum’s would be killers have been able to gain significant traction this year.
When we look at the Ethereum ecosystem, 2019 was a year of continued growth and innovation. Looking at the numbers:
- 80m+: Total Ethereum accounts
- 4 million: New active Ethereum addresses
- 4.7 million: Ether issued his year from block rewards.
- 8,516: Live Ethereum nodes
- 520: New decentralized applications in 2019
If you’ve have followed Ethereum’s narrative in 2019, you have likely noticed the growth of the Decentralized Finance ecosystem. DeFi brought in hundreds of millions of dollars in value into the Ethereum ecosystem.
The first killer app for Ethereum was ICOs and raising money for cryptocurrency projects. The ICO was a revolutionary shift in fund raising, which drove a massive bull market. The ICO craze in 2017 raised billions of dollars, peaking in January 2018, and launched the programmable money race and the crypto app ecosystem, we have today. DeFi is Ethereum’s second killer app. In 2019, the DeFi was the most impactful trend in the crypto ecosystem. I expect that will continue to be the story in 2020, as DeFi could be worth $5 billion this year.
The traditional banking system on the verge of collapse, interest rates are negative and people that save are penalized for putting money aside. The story use to be that when you would give your money to the bank, to keep it safe, the bank would lend it to others and charge them interest on the money they borrowed and in turn the bank would pay you interest for using your money, minus the cost of running the bank account.
Well, DeFi lets people earn interest again, this time from their crypto assets.
DeFi is an umbrella concept describing financial services built on top of public blockchains like Bitcoin and Ethereum. DeFi runs on trustless protocols, without the need for financial intermediaries. It lets individuals and businesses borrow, lend, trade, invest, exchange, hedge, and store crypto assets. DeFi includes things like Maker which is both a stablecoin and a collateralized lending system.
Today, just about all DeFi projects are built on Ethereum, making it the gold standard for dApps. DeFi accounts for a substantial share of Ethereum’s ecosystem, with applications like:
-
- Lending: Dharma Lever, Compound, Celsius Network.
- Margin Trading: dYdX, Nuo
- Derivatives: dYdX, MARKET Protocol
- Tokenization: Abacus, Centrifuge, Harbor
- Insurance: CDx
- Prediction markets: Augur
Today most of these projects aren’t making money. For example MetaMask processes thousands of transactions every day, but doesn’t have a way to monetize.
The way to measure DeFi’s growth is by the Ether (ETH) that’s locked in smart contracts. Currently it’s worth over $680 million (around 2.5 million ETH), 
with MakerDAO dominating across the major apps.
This year several contenders have tried to unthrone Ethereum, like Waves, Cardano, EOS and Tron, but Ethereum’s, network effects and abundance of developers (Ethereum has 4x more developers than any other crypto ecosystem), make it very difficult for other smart contract platforms to sway away DeFi apps, from Ethereum
What about Bitcoin, can DeFi be replicated on Bitcoin?
DApps are possible on Bitcoin, but coding them is much more complicated, than on Ethereum. So far, Bitcoin’s most successful DeFi application is the Lightning Network. In 2019, the Lightning Network had impressive growth, with more than 6,000 active users and $6.2 million locked in the network. Other Bitcoin dApps are decentralized exchanges like Bisq or Sparkswap.
Ethereum is growing and getting stronger. Network activity is up, development is on track, and DeFi is hitting record figures. The only thing not so positive, is Ethereum’s price. You would expect the price to follow suit as DeFi has been growing and it probably will in 2020.
With Ethereum becoming a programmable store of value, it’s well on track to find the niche that will fuel the next bull run. Because the last bull run was based on ICO speculation, some had written off Ethereum based finance. DeFi could provide a tangible value and an opportunity to build financial infrastructure that is open to everybody, and starts to change how we interact with markets. This is nothing to take lightly and I am excited to watch this growth and the applications that will develop in the coming months and years.
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