DeFi is the fastest growing sector of the crypto market, with over $29 billion worth of value locked into smart contracts. It expands functionality and the use cases of cryptocurrencies. DeFi participants also save time and money in costs that are usually associated with traditional banking processes.
The DeFi boom of 2020 saw many existing and new DeFi tokens outperforming more pioneering cryptocurrencies like BTC, ETH, and Litecoin. Therefore, DeFi has become an interesting sector with many analysts recognizing its potential and threat to traditional banking institutions.
‘DeFi Will Eat JPMorgan‘, one of the world’s biggest financial institutions that cater to governments, international institutions, and corporations, according to a new report by crypto research and metrics provider Messari. JPMorgan here represents the peak of success for many traditional banks.
DeFi Is Laying A Strong Expansive Foundation
Not only has the price of DeFi assets soared more than three times in January 2021 from December 2020, but the DeFi market has also defined its pioneer platforms in different financial services categories.
Uniswap and SushiSwap are the leading decentralized exchanges (DEXs), with the King of DeFi Uniswap (worth $5.5 billion) processing $30 billion in trading volume in January. Top lending DeFi platforms are Aave, Compound and MakerDao, and Synthetix for synthetic crypto assets.
“There’s real value flowing through these markets, and we’ve argued before that many DeFi asset valuations are supported by fundamentals (i.e. network earnings power) despite their sky-high sticker prices.”
DeFi Has 3 Superior Merits over Traditional Finance
The long-term potential of DeFi protocols to rival or replace existing global financial systems depends on their global reach, market structure, and value capture. Messari explains that DeFi protocols are already more efficient in transferring value worldwide and scaling across borders and regulatory restrictions than legacy financial institutions like JPMorgan.
“They are not beholden to any specific jurisdictions; they are available everywhere (easy to access), yet have no physical “home” (hard to kill). That’s a deadly combination for a disruptive technology.”
In value capture, DeFi protocols will need to be affordable to incentivize and generate value for investors to attract and maintain them. Many DeFi applications that are based on ETH are currently frustrating users with unrealistic gas fees which discourage retail investors from using the platforms.
“There’s a delicate balance in managing stakeholder incentives in DeFi and its unclear how much extractable value there will be (or should be) for token holders today or in the future.”
Since DeFi is still in its early development and adoption stage, Messari says that it is too soon to tell how the market structure will look in the future. There might be many winning interoperable protocols for various financial services or single protocols that will absorb their rivals.
“There are already some signs that the latter is one potential outcome.”
Bullish On DeFi
Messari concludes that DeFi protocols will reward protocol maintainers greatly for their contributions to a successful single value or “everything protocols.”
“I’m bullish that in 15-20 years, DeFi protocols will be far larger than our current financial institutions. Their ignorance of borders and democratized economics will help them scale globally much more quickly than incumbents would like.”
