2020 is a landmark year for DeFi, as the industry inflated more than $100 billion in volume from the second to the third quarter - mostly in Ethereum, according to a new report
Almost all decentralized financial transactions (DeFi) are now taking place in Ethereum, but congestion and the “gas prices” spiral are slowing activity - which may be giving competitors on the popular blockchain network an opportunity to grow, according to a new report.
DappRadar's decentralized application tracker (dApp) report on the state of the world DeFi documents a flurry of activity in the third quarter of this year, with transaction volume exploding by more than 10 times since the second quarter and now exceeding $123 billion. Of these transactions, 96% were in Ethereum.
The total value attached to the DeFi ecosystem now exceeds $ 10 billion, compared to just $ 1billion in June.
While other blockchains are trying to capitalize on increasing demand for DeFi, none come close to the volumes supported by Ethereum - a protocol that has become explosively popular in part because of its pioneering advantage and "composibility", which allows less experienced developers to help build the ecosystem.
In contrast, Bitcoin's Lightning Network itself - a protocol built on top of Bitcoin to facilitate faster transactions through the use of smart contracts - has only about $12 million in total value blocked in the DeFi ecosystem.
Bitcoin holders are switching to Ethereum instead of making use of their bitcoins. By converting bitcoin into an ethereum-based token that represents 1:1 bitcoin, called “wrapped bitcoin”, bitcoin holders have already invested more than $1 billion in BTC in DeFi.
The idea behind projects like Wrapped Bitcoin is to explore the liquidity of bitcoin and make it accessible on the Ethereum network. DeFi as a whole has attracted investors' attention as a way to use its digital assets to disburse loans or borrow crypto assets through smart contracts, rather than simply keeping its assets in portfolios.
DeFi participants who invest their cryptocurrency in liquidity pools managed by smart contracts are known as liquidity providers and receive interest or returns on their contributions through a practice known as "yield agriculture".
According to the DappRadar report, the biggest contributors to the Ethereum network were the DeFi Uniswap, Sushiswap, Balancer and Compound protocols, generating a total of 56% of daily active portfolios.
The growth in DeFi can be attributed to the impact of the Composite Protocol (COMP) in particular. "COMP was launched in June and we saw transaction volumes within the DeFi ecosystem exploding," said the report. "In just half of June, the volume of compound transactions grew 27x, reaching US $4 billion."
Congestion and scams
Despite the growing interest of investors in DeFi, its growth in recent months is not without risks. Observers, as well as industry experts, have warned that many projects may be nothing more than Ponzi schemes.
"A lot of people are committing scams because a lot of people are interested in DeFi, so if you put the word DeFi on anything, you'll get a lot of money on your way," said Marc Fleury, CEO and co-founder of Fintech company Two Prime, in an interview recent to Forkast.News.
As reported on Forkast.News, the world of DeFi is filled with dramatic events, such as the sudden increase in the SUSHI protocol followed by a free fall in value, anonymous creator Chef Nomi of SushiSwap returning $14 million in ETH and more.
DeFi's popularity is also clogging the already popular Ethereum network, increasing transaction fees known as "gas". These gas fees can be paid for with ETH denominations known as "Gwei".
"Although the results of Ethereum are surprising, one of the main problems in slowing it down is congestion," said the report. “Gas prices showed impressive heights during the third quarter of 2020. At peak times, transaction costs were more than 400 Gwei.”
According to blockchain software developer ConsenSys, Ethereum's congestion and scalability issues are still being resolved. Ethereum 2.0 - which co-founder Vitalik Buterin said would be a proof-of-bet protocol that greatly improves scalability - is due to be released next year.
"I would be very, very upset if we didn't have profound scaling problems at this point," said ConsenSys founder and CEO, Joseph Lubin, in a recent interview with Forkast.News.
“Scalability is being addressed with the evolution of the Ethereum 1.0 protocol, adding literally tens or hundreds of thousands of transactions per second on Layer 2 above Layer 1 and creating Ethereum 2.0, which will multiply all that scalability by, probably around 500 on beginning and even more with time, ”said Lubin, who is also a co-founder of Ethereum.
With Ethereum 2.0 not yet ready for the market, the DappRadar report notes that the newly relaunched Cardano can offer users an alternative and that Polkadot and Binance are also growing as competitors to Ethereum.