At the end of September, the cryptocurrency markets recovered well from the so-called “September Curse” and reached a market capitalization of $ 2.32 trillion. The decentralized finance (DeFi) market has been an integral part of this growth. Total Value Locked (TVL) in DeFi logs rose more than 20%, from $ 113.5 billion on September 28 to $ 137 billion on October 6, according to data from Dappradar.
Even Bank of America (BoA) – a global banking giant – has announced its bullish outlook for DeFi and non-fungible tokens (NFTs). In an October 4 report by BofA Securities – a subsidiary of BoA – the company assessed the size of its crypto assets beyond “Bitcoin only”.
(Bitcoin’s strength) can run automated programs (smart tokens like Ether, Cardano, Solana and others with blockchains that can do more than record payment contracts securely), such as: B. a payment after an event. This is Decentralized Finance (DeFi), where smart contracts automate traditional finance manual processes, ”the report said.
It also compared tokenization to the beginnings of the internet and spoke of the decentralization and tokenization of many aspects of finance as they currently exist.
Cointelegraph discussed the rapid expansion of the DeFi markets with Johnny Kyu, CEO of the KuCoin crypto exchange. He explained:
“The DeFi market is growing in popularity as more and more people understand that a smart contract can be a worthy alternative to traditional credit or a bank deposit. The amount of funds blocked in DeFi reflects the market acceptance of private investors who are shifting their money from the traditional financial system to decentralized industry. “
While the TVL of the DeFi sector has experienced a boost due to the massive increase in the price of the native tokens of various projects, Kyu also attributes the growth to the attractive prices of the DeFi platforms.
A recent report from Dappradar found that TVL in the industry was up 53.45% in the third quarter of 2021 compared to the previous quarter. In September, the unique active wallets (UAW) associated with each decentralized application hit a daily average of 1.7 million. The quarterly average ADR is 1.54 million.
Cointelegraph spoke to Balancer Labs CEO Fernando Martinelli about the importance of the DeFi base that Ethereum has put in place. He said, “A new wave of DeFi projects is building on the infrastructure that the first generation built, bringing new use cases and more advanced products to DeFi power users.
Martinelli said that greater institutional involvement will push TVLs up in established “safe” protocols. In addition, the high returns of the DeFi platforms are shifting private investors from centralized platforms to the DeFi space. This increasing acceptance by various categories of investors enables DeFi to move into the next phase of its growth.
The next generation
The DeFi ecosystem started on the Ethereum blockchain due to the smart contract functionality offered. However, several other blockchain networks have since provided intelligent contract functions in their networks via Layer 1 or Layer 2 solutions. The best known of these networks are Binance Smart Chain, Solana, Avalanche, Terra and Polygon. Most recently, the Cardano network experienced the provision of smart contracts as part of the Alonzo hard fork.
While the growth of these networks could be perceived as organic, there is one big problem with the Ethereum blockchain that could have contributed to that growth: gas charges. The EIP-1559 proposal, which came as part of the London Hard Fork, involved burning ETH tokens to eventually turn ETH into “ultrasonic money”, improve scalability and reduce gas charges.
While the fees are no longer as absurd as they used to be during the height of the Bull Run in May, there have been a few instances in the past few weeks where the average transaction fee on the Ethereum network has seen a huge spike. Notably, the fee rose to $ 21.29 on September 7, and the gas price rose to a four-month high of $ 25.43 on September 27.
Martinelli said, “There is little doubt that the high gas fees for Ethereum – which have been particularly high recently due to congestion with NFTs – have helped fuel the rapid adoption of other networks. (..) Layer 2 solutions help Ethereum to scale, and we look forward to the ongoing developments in this area. “
The continued popularity of NFTs is also a major driver of this growth. The above-mentioned report from Dappradar mentioned that NFT space has also seen exponential growth. In the third quarter, the market generated over $ 10.67 billion in trading volume, up 704% over the second quarter and a massive 38.060% year over year.
While most of the major NFT sales were made on the Ethereum blockchain earlier in the year, blockchains like Binance Smart Chain, Solana, Polygon, Avalanche and Tezos are now starting to catch up. Recently, an NFT from the largest collection in the Solana ecosystem, Solana Monkey Business, sold for 13,027 Solana (SOL), which is currently worth more than $ 2.1 million, breaking the platform’s previous NFT record.
Shane Molidor, the global head of business development at AscendEX crypto trading platform, spoke to Cointelegraph about the potential of NFTs:
“Given the rapid market growth, some might say the market is a bubble, but I believe NFTs offer tremendous value propositions beyond just collecting JPEGs or images. NFTs can be used to record ownership not only of digital items, but also of collectibles, fractional assets and even virtual worlds. “
Errors, bugs and hacks
The rapid expansion of the DeFi ecosystem is not without its setbacks. Due to a combination of a lack of understanding and conscientious players, there were several exploits and hacks during the growth phase.
On September 30th, the DeFi Interest Protocol Compound Finance announced that there was a token distribution error in its newly implemented proposal 062. This bug inadvertently rewarded users with $ 70 million in COMP tokens. Subsequently, another $ 65 million COMP tokens are at risk, as the code update would not take effect for the next three days due to a timeout. In total, the mistake “won” $ 162 million, making it an extremely costly mistake. On October 7th, the Protocol adopted a proposal to remedy this problem.
In another instance of a technical glitch, the Bittfinex cryptocurrency exchange paid a transaction fee of over $ 23 million to transfer $ 100,000 to Tether (USDT) on the Ethereum blockchain to a Layer 2 subsidiary platform, DiversiFi. However, the miner’s goodwill prevailed when he returned the money to the stock market.
Despite the lucrative nature of DeFi markets, such widespread cases of hacks, bugs, and errors could serve as a deterrent to both institutional and retail investors. Retail investors are even more vulnerable to such events of financial loss due to the lack of experience and knowledge of institutional investors. Therefore, they often serve as a benchmark for private investors. Molidor told Cointelegraph:
“Institutional and retail access to DeFi is almost like a feedback loop. As more retail users enter the room and [the] As market capitalization grows, institutions begin to dig deeper into the industry to explore economic opportunities. When institutions enter DeFi, the space is given more visibility. It is through this visibility that DeFi is entering the mainstream discourse and again more retail users are becoming familiar with the perks and economic benefits that DeFi offers. “
But these negative cases are only a small part of the picture that unfolds in the DeFi market as it seeks to revolutionize finance. The independence of the user and the innovation that DeFi protocols bring to investors will only serve to add further space.