DeFi: Is the hype already over – or is it just getting started?
Decentralised Finance (DeFi) has seen tremendous growth in recent months. Some tokens have risen a hundredfold and many investors have become millionaires overnight. Is the hype coming to an end – or are we at the beginning of a financial revolution?
According to CoinGecko, the market capitalisation of all DeFi projects has grown since the beginning of the year from just 20 billion US dollars to almost 93 billion US dollars at the time of going to press.
In Ethereum alone, the capital managed by DeFi protocols has grown from US$16 billion to over US$44 billion since 1 January 2021.
Many who have only come across the sector in recent months are currently wondering whether DeFi is a bubble – along the lines of “What Goes up Must Come Down”. Anthony Sassano, an early Ethereum investor and Financial Peak supporter of various DeFi projects, disagrees. He still sees plenty of potential for the young sector.
Sassano argues that current DeFi user numbers are still tiny compared to centralised exchanges and traditional finance. In some categories, the projects already outperform their centralised counterparts, Sassano says. On top of that, Ethereum hasn’t even scaled on a large scale yet, he added. Moreover, DeFi is still an extremely complex field for new people, he said.
Very few people understand Decentralized Finance. Moreover, many DeFi projects are still in their infancy.
Therefore, Sassano believes that Decentralized Finance still has an extremely high growth potential.
All in all, the total addressable market for decentralised finance applications is every single person on planet Earth – 7.8 billion of us – all of whom will eventually have access to DeFi as long as they have some hardware and an internet connection.
Sassano is convinced that we are only at the beginning of a revolution. If Ethereum and DeFi manage to become a decentralised, permission-free and censorship-resistant financial system for the world, he says the entire market could grow many times over.
DeFi battle: SushiSwap overtakes Uniswap
One event in particular made headlines in the DeFi space this week. Namely, the decentralised exchange (DEX) SushiSwap (SUSHI) overtook Uniswap’s (UNI) Total Value Locked (TVL) this week.
The TVL indicates how much capital is locked up in a DeFi protocol in total. For example, on decentralised exchanges, all individual liquidity pools for the respective trading pairs together form the TVL of the protocol. First place among the largest DEXs on Ethereum is now held by SushiSwap with a TVL of $4.58 billion. The second place is held by Uniswap with a TVL of 4.26 billion US dollars. Why is that – and why do DEX need a high TVL?
TVL alone does not make a DeFi king
The more liquidity a DEX has, the better the conditions for traders. This is because the slippage fees are significantly lower when the liquidity in the respective pools is higher.
Although SushiSwap is a fork of Uniswap, the project has gone its own way since the spin-off. Since liquidity providers on SushiSwap also receive SUSHI tokens in addition to rewards through transaction fees, DEX has been able to attract a lot of capital in recent months – including from Uniswap users.
Nevertheless, it is important to note that TVL alone is not indicative of the success of a DeFi protocol. Uniswap still records a trading volume almost daily that is significantly larger than SushiSwaps. For example, despite lower TVL, Uniswap turned over more than $500 million within the last 24 hours. SushiSwap only turned over 116 million US dollars in the same period. This is partly because Uniswap still has more users than SushiSwap. In addition, Uniswap is more deeply integrated into the entire Ethereum DeFi ecosystem.