What will take DeFi services mainstream in 2020?

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2019 told a very clear story in the cryptocurrency industry. The market  consolidated into Bitcoin and a handful of tokens linked with revenue-generating  or heavily utilised projects. Some of which outperformed BTC.  

  • BNB, SNX, HT  (Exchanges)
  • CEL, CRO  (Lending)
  • LINK (DeFi  Oracle)

What's in store  for 2020?

As the market matures, bets are being placed on revenue-generating projects  and not a promise of utility alone, as starkly illustrated in the 2019  performers. An emerging story that fits the revenue generation criteria is in  decentralised finance. DeFi is bringing financial applications to the  permissionless ecosystem. Services previously available to a few such as  borrowing and lending, have now become easily accessible by anyone.
 
While certainly not mainstream by any measure, DeFi has been growing at a  steady pace and has amassed a total value of $784m USD locked inside smart  contracts. For context, it would sit around Rank 20 in market cap when  compared with token market caps. In contrast, the centralised stable coin  market sits around $5bn currently.

Source: DeFi Pulse

 

What will it take  for DeFi services to go mainstream in 2020?

 

The three main  hurdles for DeFi to overcome are product competitiveness, ease of use, and  risk perception. Generally speaking, DeFi is making good progress in  capturing market share, improving its ease of use and range of products.  However, pricing competitiveness still needs work which will come as  risk perception improves and liquidity grows. 

 

Decentralised  Lending
  

Lending has  become a tremendously valuable service in 2019 with Celsius  Network, currently the industry’s largest centralised loan originator,  issuing over $4bn.
  

Lending is  currently the biggest use case in DeFi, with Maker and Compound representing  70% of the value locked in DeFi. The steady increase in staked assets  demonstrates an improvement in risk perception. As users are able to borrow  and lend cryptocurrency without having to trust their counterparty, they  adopt smart contract failure risk and are transferring this trust to the  system instead.
 
 As a comparison of value locked between the centralised and decentralised services,  Celsius has $400m assets in storage and the DeFi marketplace’s leaders have a  commendable $446m in stored Maker and $100m in Compound.
 Another growing advantage of DeFi is the ability to expedite ease of use in  the on-boarding process without the KYC component required by centralised  companies operating under their jurisdictional legal requirements.
 
 As for product competitiveness, currently, their biggest competitors are Nexo  and Celsius, allowing lenders to earn up to 8% interest (approximately) on  centralised stable coins, outcompeting the decentralised counterpart, DAI,  currently generating 6% APR. The deeper margin books in centralised exchanges  create greater demand than the DeFi ecosystem which requires the value  to remain within the system (BTC is represented in Ethereum token as WBTC,  for example). Meanwhile, centralised loan originators have a flexibility  advantage in targeting more liquid pairings, enabling them to capture a  greater market. The centralised advantage spans across most assets, shown  below in a lender reward comparison between common assets in Celsius  (centralised) and Compound (decentralised).

               

Lender Reward Comparison: Celsius  & Compound


Decentralised Exchanges

Another use case of decentralised finance is in decentralised exchanges, or a  “DEX” such as Uniswap, Bancor and Kyber Network. These provide simple  interfaces for great ease of use to exchange tokens for other tokens via  metamask plugin, skipping the KYC process on centralised exchanges.
 
 However, a number of key challenges hinder their product competitiveness.  Without a fiat pairing, these DEX’s have a dependency on stable coins, which  are far less liquid than fiat with the exception of Tether (which has its own  set of problems). Additionally, the lack of fiat on-ramp means every user  will need to use another service, reducing their customer’s dependency on  their service.


Synthetic Derivatives
 

A recently emerging and rapidly growing application of DeFi is in derivatives. Almost entirely represented by Synthetix, the decentralised exchange allows margin trading of a variety of synthetic tokens, commodities  and even equities. Some features are still in development.
 
The system allows users to use collateral to mint synthetic tokens that track  an asset’s price without actually needing to purchase the “underlying” asset.  A benefit to synthetic derivatives is that you can exchange between synthetic  versions of the underlying assets without needing to find a counterparty looking to do the opposite trade. It enables traders to trade in their  domestic currency rather than being limited to USD for liquidity.
 
 The potential of synthetic derivatives is quite grand, as it also allows  “trades” to take place between pairings that otherwise wouldn’t exist and  bypass the order book depth, since the user is simply unminting his “sell”  currency and minting the new “buy” currency. This provides a liquidity  benefit to the decentralised marketplace that is deeply required but may  cause concerns for manipulation as the size of the synthetic derivatives  ecosystem grows.
 
 All in all, DeFi is on a good track to continue growth in 2020, but a DeFi  fever won’t come until the liquidity comes first.