Four charts to understand the explosive growth of DeFi in 2020

Source: Planet Daily, Author: Blockchain Robin

The biggest story in the blockchain space this year has been the phenomenal growth of decentralized finance (DeFi). You can gauge the exponential growth from the fact that on January 1, 2020, the total USD value locked in DeFi was $690.9 million, and now — at the time of writing this article — it has swelled to a staggering $11.73 billion — tripling its value in September alone from the previous month.

For those new to the space, DeFi refers to the use of blockchain, cryptocurrencies, and smart contracts to provide financial accessibility & inclusion to those who are locked out of the current system due to geographic, economic, and financial barriers. DeFi platforms are decentralized applications (dApps) built on blockchains that support smart contracts, primarily the Ethereum network.

Blockchain analytics firm Chainalysis has looked at the astronomical growth of this space in 2020. Here are a few charts that provide a visual understanding of how the DeFi market has developed this year.

Weekly DeFi Value Comparison

Figure 1 - Chainalysis Insights

While in the above chart it seems that the growth of the DeFi sector has mainly occurred since June, this is not the case overall. While growth did really explode starting in June, it has actually been going on since the beginning of the year. It’s just that the growth in value since June has been so huge that it dwarfs the growth of the previous five months (Figure 1). After a brief lull in October, things are now recovering.

Comparison of weekly revenue of DeFi platforms

Figure 2 - Chainalysis Insights

Decentralized exchanges (DEXs) are the most popular type of decentralized applications (dApps), and the above chart lists the performance of these DEXs in DeFi growth this year. It can be seen that Uniswap (version 1 and 2), Kyber, Curve Finance, and 1inch Exchange have taken on most of the growth (Figure 2).

The value and amount of transfers received by DeFi platforms

Figure 3 - Chainalysis Insights

The above chart (Figure 3) shows the total value received by DeFi platforms in 2020 by total transfer value and transfer number. As can be seen, most participants are retail investors, which is reflected in the higher transfer number - the highest number of transfers is in the $10-1k range. Nevertheless, institutional investors seem to be driving the development of this market sector, with the highest transfer value in the $10k-100k range, followed closely by the $100k-1m range. Note how the transfer number size of large capital investors has decreased.

Value sent to DeFi platforms from illicit sources

Figure 4 — Chainalysis Insights

While the previous three figures highlight the massive growth of DeFi, this last one is equally disturbing, but perhaps not surprising. While the value of stolen and scammed funds peaked in October, the percentage of illegal transactions was only 0.05%. The huge drop in percentage compared to the peak of 1.00% in May is attributed to the fact that the overall market has grown a lot since then. From this perspective, 0.05% is a fairly small number when compared to 1.1% of total cryptocurrency transaction volume received or sent by addresses associated with illegal activity.

Unlike centralized financial institutions in the traditional financial system, DeFi platforms are managed by self-executing code, at least in theory, and they generally do not control users' funds at any time. They are routed between various wallets according to the platform's underlying protocol.

While DeFi platforms do not function like traditional money services businesses and may not fall under current regulatory & compliance requirements - unresolved issues such as auditing of platform code, liability for financial crime & other vulnerabilities remain.

There isn’t a lot of clear regulation in this area right now, the industry is continuing to grow and expand, and the future of finance is here.