Blog

Anton Chashchin, Commercial Director at CEX.IO Loan

Decentralised finance or DeFi was already present in 2015 when Maker Foundation launched a decentralised lending platform under the name Maker DAO. But DeFi did not shape up until 2018. In early 2018, Uniswap was already a functioning service, and Compound was launched in 2018. But even then DeFi was not nearly as popular as it became in 2020.

Money-lending protocols

Maker DAO, being the first decentralised money-lending platform, was the niche leader in 2018 when its MKR governance token reached over $1 billion in market capitalisation on 20th January 2018. But then it dropped quickly, being driven down by the global downfall of the cryptocurrency market. Later, Compound rose to prominence and took the lead over decentralised money-lending services until January 2020.

Then Aave launched the alpha version of its Aave v1 platform, which saw a rapid liquidity growth in a short while. The breakout of the COVID-19 pandemic left an imprint on the rising popularity of DeFi money-lending services because of the passive income they generated.

Then Compound issued its mineable COMP governance token, and it quickly increased the profits of Compound liquidity providers because it quickly grew in price, letting people gain from the token’s increasing price along with the constant passive income they had from the liquidity they had locked in the protocol. The platform quickly saw a humongous liquidity inflow totaling $1 billion, while the COMP token grew from $62 to $372 from 18th July to 21st July 2020. That was the starting point of the DeFi boom. Aave followed suit and launched its own governance token AAVE. Its price grew rapidly along with the growing liquidity in Aave protocol.

Then Balancer was launched – another DeFi money-lending protocol, forming the three dominant species in the DeFi money-lending space. The project offered a similar profitability model to that of his older rivals, issuing its token BAL in the amount of 25 million. The token’s price reached a high of $37 on 30th August but got cheaper in autumn, falling to the $9 – $17 zone in September – November 2020. Contrastively, AAVE consistently grew into autumn and winter, reaching multiple all-time-highs, with the last one at over $95 being registered on 19th December 2020.

There was also yearn.finance, whose YFI governance token saw an incredible growth of around 124,400% from 18th July to 19th September. The token’s astronomical price growth owed to the fact that its founder Andre Cronje, who single-handedly developed the platform, did not hold any investment rounds. The platform is centred around money borrowing and lending and its governance token, allowing the lenders to earn on their locked value and the token’s price growth.

Decentralised Exchanges

In the early 2018, decentralised exchanges (DEXes) were getting launched, but they did not have a big audience at that time due to low liquidity volumes and lower operational capacities compared to centralised exchanges. The first successful one was Kyber Network. Its liquidity grew consistently but slowly. Integrations with other projects helped to grow trading volumes on its DEX.

Uniswap was the first decentralised exchange of the second generation – DEX 2.0. Uniswap made a good user interface and saw a quick growth of trading volumes on its DEX, biting off some of Kyber Network’s volumes.

As decentralised exchanges grew in number, their growing popularity giving rise to new competitive projects in the field, so-called DEX volume aggregators started to appear. They combined liquidity from different DEXes in one place, letting traders trade derivatives and assets with relatively low liquidity on DEXes with higher volumes in one place. The first such project was 1inch exchange, another one – Paraswap. They both positively affected the whole DEX space, rapidly driving DEX trading volumes to historical records.

Synthetic Assets

Synthetic assets were the third big thing in the DeFi space. Synthetic assets are derivatives like contracts for difference that can be created for any asset. Synthetic assets in the DeFi space are created using a single digital token that is pegged to an underlying asset. Such tokens represent the liquidity locked in synthetic protocols; depending on the liquidity locked in the protocol, people can use this liquidity to create synthetic assets to buy underlying assets for certain amounts of respective tokens.

Synthetix is the largest project in synthetic assets in the DeFi space. From a user’s perspective, it is a decentralised exchange for derivatives. Synthetix was launched in September 2017 under the name of Havven with a token sale that let Synthetix Foundation raise $30 million by selling 60 million HAV tokens to investors. It was rebranded into Synthetix in 2018, changing the ticker of their token for SNX. The SNX token’s market capitalisation reached a peak of $879 million on 1st September 2020 in the first wave of 2020’s DeFi market surge.

The second big project in the space of decentralised synthetic assets is UMA. It features its own UMA governance token, which reached a peak of $1.485 of market capitalisation on 1st September 2020. As of December 2020, the UMA token capitalisation has decreased to around $500 million.

Wrapped Bitcoin

Wrapped BTC and Ren project were another idea that maximized liquidity in DeFi protocols. They both created protocols for locking of BTC on Ethereum’s network, which made it possible to use BTC to raise liquidity on decentralised exchanges and money-lending protocols like Compound, Maker and Aave. Coupled with Bitcoin’s immense growth after the start of the recovery after the big fall in March, it was a great time for DeFi to benefit from Bitcoin’s growth. And the sharp price growth that this market saw in September and November must largely come from BTC’s price growth.

Conclusion

The DeFi space took several years to shape up, and the efforts came to fruition in 2020. The sector’s rise may also be the first signal for high-net-worth individual and institutional investors to tap into the novel industry’s high-return potentials in 2021 and further.

There is still some undiscovered technological potential in the DeFi space: DAOs and the insurance can be the next big things in DeFi. And the established technologies must have room for further advancements. Therefore, DeFi may keep on driving technological evolution of the crypto space in 2021, while creating new excellent opportunities for extremely profitable investment.