Decentralized financing (DeFi) is a natural product made possible by blockchain technology and has the right and ready-made infrastructure to bring the technology to a larger playing field. The space has grown by leaps and bounds since the Ethereum network went live in July 2015.
Most of these transactions came from DeFi services like Uniswap, which enables swaps of over $ 1 billion daily, as well as credit and credit protocols like Aave, Compound and BondAppetit with a market size of tens of billions. While these are large numbers by any standard, it is only a trillion dollar TradFi (TradFi) industry decimal point.
DeFi only scratches the surface of TradFi services
The traditional financial system enables the exchange of goods and services, including the stock market, debtor market, derivatives market, commodities market, payments, etc. This is done by service providers – banks, insurance companies, stock exchanges, financial intermediaries, custodians, etc. – in the trillions of dollars Collect fees from the services provided.
Mainstream DeFi services currently include lending, borrowing, decentralized trading, and income aggregation – a relatively short list compared to the wide range of financial services offered on TradFi. This will not remain the status quo as DeFi developers are actively researching and building more services for the ecosystem. Protocols that find the right product / market fit will see explosive growth e.g. B. the recent rise in dYdX.
The trillion dollar TradFi market is ripe for disruption
Consumer-centric banking. Global retail sales are estimated at $ 2.3 trillion across multiple consumer finance products, including loans / credits, mortgage products, payments, and more. In particular, consumer payments and transactions, in particular, generate over $ 500 billion in annual revenue for banks around the world a smooth UI, a global stablecoin and wide acceptance points – the ambition of Facebook’s Diem before the regulatory pushback.
Capital market. Global stock market capitalization is estimated to be over $ 100 trillion, compared to just over $ 243 billion in Total Value Locked (TVL) for decentralized financing. Security tokens are an inevitable trend that regulators will eventually have to approve and construct the regulatory framework, and centralized and decentralized exchanges that adhere to the Know-Your-Customer (KYC) requirement can tap this trillion dollar stock market in TradFi.
insurance. The global insurance industry is another trillion dollar trad-fi industry that can be perfected with smart contract technology. Around a third of global insurance premiums are used for administration and commission costs, which consumers essentially fall short of. Smart contracts enable cost-effective, fast and accurate implementation of insurance processes from underwriting to claims and will be a lucrative source of income for the DeFi industry.
DeFi’s addressable market size
Transaction volume. The Ethereum network is processing over 1.3 million transactions daily in 2021, which include wire transfer, trading, lending, borrowing, and various other types of transactions. This is a tiny number compared to over 1 billion daily global credit card transactions and the daily trading volume of around 5.5 billion on NASDAQ. The recording of 1% of the credit card transactions in the Ethereum chain corresponds to at least 8 times the current volume.
Log revenue. The annualized log revenue of all DeFi logs is estimated at $ 5 billion. Again, this is a fraction of global retail revenues of $ 2.3 trillion; $ 2 trillion in global cross-border payments and $ 35 billion in global stock market turnover. The TradFi industry is so lucrative that capturing a 1% market share means ten times DeFi revenue.
Crypto penetration accelerates DeFi trend. Even if countries like China continue to crack down on crypto, it will only speed up the use of DeFi. Active Ethereum wallet and browser extension MetaMask users increased tenfold to 10 million in August 2021. While this is a seemingly high number, it only represents a 5% penetration rate among the 221 million global crypto users. This shows that the general crypto users who are used to smooth centralized services like Robinhood have a massive untapped market for DeFi and can be conquered with the improvement of the UI / UX.
Related: China’s crypto ban: buy dip or cause for concern?
DeFi is only three years old with services that became mainstream for the crypto community in DeFi summer 2021. Credit platforms such as Compound and Aave, together with decentralized exchanges such as Uniswap and Curve, consolidated their position as market-leading protocols with the first-mover advantage. These were not easy. Uniswap founder Hayden Adams wrote an article about his journey to launch Uniswap V1 – it’s a culmination of faith, friendship, support and hard work during the crypto winter. The DeFi builder community has grown stronger in this new cycle as more programmers from the traditional startups and big tech have entered the blockchain and DeFi scene, and this can only mean that we have more resources than ever before, to expand space and technology.
A dorm project was born on February 4, 2004 and grew into a $ 1 trillion company with 3 billion users in 2021 – it’s called Facebook or Meta after the rebrand. DeFi has just started and with the resources and talent flowing into the field now, 100x growth over the next 5 years is not a dream but inevitable.
This article does not provide investment advice or recommendations. Every step of investing and trading involves risk, and readers should do their own research when making a decision.
The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.
Artem Tolkachev is the founder and CEO of BondAppetit and investor in DeFiHelper. Since 2011 he has been a lawyer and entrepreneur specializing in commercial legal protection and information technology. In 2016, Artem founded and ran the Deloitte CIS Blockchain Lab. As part of this initiative, he led a number of innovative projects that included the implementation of enterprise blockchain solutions, the tokenization of real assets, the tax and legal structuring of security token offerings, and the development of cryptocurrency and blockchain laws.