The Ethereum (ETH) network kept locking in value in decentralized finance (DeFi) in 2019. The biggest projects still carry the most ETH, locked with Maker and Compound. But the space has expanded with smaller startups.
https://twitter.com/DefiOverview/status/1206440370927628288
The simplest DeFi organization is about payment systems. Even the Bitcoin Lightning Network (LN) is counted in that group, with more than $6.15 million in value carried this year.
The other big trend is crypto derivatives, with Synthetix at the top. Crypto-based derivatives are rather difficult to launch within the standard financial system, but crypto-only organizations offer this type of risk exposure.
Crypto lending is the other big scheme, where an ETH or other type of collateral is used to generate additional liquidity. The idea to lend out ETH arrived after the actual usage of coins decreased following the end of the ICO craze.
Decentralized exchanges became the third important factor in DeFi. An older project, Bancor, has lined up in the top 10 DeFi projects. But the dy/dx exchange, which arrived late in 2019, is even more active. Decentralized exchanges, however, become important in carrying tokens and products beyond the scope of centralized markets.
So far, DeFi schemes survive despite the warnings, Maker DAO has discovered a potential exploit and has patched it in its latest vote. But crypto lending also carries the risk of liquidations and the collateral is open to ETH market price fluctuations.
The other risk for DeFi are the constant upgrades on the Ethereum network. During the past Istanbul hard fork, some of the smaller DeFi startups saw their smart contracts compromised. Compound is also discussed as a potential risk for the sector.
Fortunately, despite episodes of low liquidity, neither Maker or Compound have faced a true “bank run”. But this does not mean that the ETH collateral is available at all times for withdrawal. High volatility also means some of the collateral could be liquidated to keep the stability of the DAI dollar-pegged coin.
ETH sank toward $141.37, sliding significantly from its stability levels around $180. But the growth of DeFi remained in the past months, and may continue into 2020. DeFi distributed apps are also expected to stay in the lead, as other Ethereum-based dApps shrink.
