Decentralized finance (DeFi) is a natural product made possible by blockchain technology and has the right and ready infrastructure to propel the technology to a bigger playing field. The space has grown by leaps and bounds since the Ethereum network went live in July 2015, with Ethereum network transactions growing by 33x to 1.2 million per day currently, and blockchain transactions would exceed millions per day if other chains were included.
Most of these transactions originated from the DeFi services such as Uniswap, which facilitates over $1 billion swaps each day, as well as lending and borrowing protocols such as Aave, Compound and BondAppetit, with tens of billions in market size. While these are large numbers by any standard, it is only a decimal point of the trillion-dollar traditional finance (TradFi) industry.
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DeFi is only scratching the surface of the TradFi services
The traditional financial system entails enabling exchanges of goods and services, including the stock market, debt market, derivative market, commodities market, payment, etc. This is facilitated by service providers — banks, insurance companies, stock exchanges, financial intermediaries, custodians, etc. — who collect trillion dollars of fees from the services provided.
Mainstream DeFi services currently include lending, borrowing, decentralized trading and yield-aggregating — a relatively short list as compared to the wide-ranging financial services offered in TradFi. This will not remain the status quo as the DeFi developers are actively exploring and building more services to the ecosystem. Protocols that find the right product/market fit will see explosive growth, e.g., the recent rise of dYdX.
The trillion-dollar TradFi market is ripe for disruption
Consumer banking. The global retail banking revenue is estimated at $2.3 trillion across multiple consumer finance products, including loan/lending, mortgage product, payment, etc. Specifically, consumer payments and transactions gross over $500 billion annual revenue to banks globally and could be tapped with a frictionless UI, a global stablecoin and broad acceptance points — the ambition of Facebook’s Diem before the regulatory pushback.
Capital market. Global equity market capitalization is estimated at over $100 trillion, compared to only over $243 billion total value locked (TVL) in decentralized finance. Security tokens are an inevitable trend that regulators will eventually need to approve and construct the regulatory framework, and centralized and decentralized exchanges that adhere to the know-your-customer (KYC) requirement can tap into this trillion-dollar equity market in TradFi.
Insurance. The global insurance industry is another trillion-dollar TradFi industry that can be perfected with smart contract technology. About one-third of the global insurance premium is allocated for administrative and commission costs, which is essentially short-changing the consumer. Smart contracts enable the cheap, fast and accurate implementation of the insurance processes from underwriting to claims, and will be a lucrative source of revenue for the DeFi industry.
DeFi’s addressable market size
Transaction volume. Ethereum network processes over 1.3 million transactions each day in 2021, encompassing remittance, trading, lending, borrowing and various other types of transactions. This is a tiny number as compared to over 1 billion daily global credit card transactions, and the around 5.5 billion daily trading volume in NASDAQ. Capturing 1% of the credit card transactions on the Ethereum chain is at least 8x-ing its current volume.
Protocol revenue. The annualized protocol revenue in all DeFi protocols is estimated at $5 billion. This, again, is a fraction against the $2.3 trillion global retail banking revenue; $2 trillion global cross-border payment revenue and $35 billion global stock exchange revenue. The TradFi industry is so lucrative that seizing a 1% market share means 10x-ing the DeFi revenue.
Crypto crackdown accelerates DeFi trend. Even though countries like China continue to crack down on crypto, it will only accelerate the use of DeFi. Active Ethereum wallet and browser extension MetaMask users have 10x-ed to 10 million in August 2021. While this is a seemingly high number, it represents only a 5% penetration rate amongst the 221 million global crypto users. This shows that the general crypto users, who are used to frictionless centralized services such as Robinhood, are a massive untapped market for DeFi and can be captured as the UI/UX is improved.
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DeFi is only three years old with services that became mainstream for the crypto community in the 2021 DeFi summer. Lending platforms, such as Compound and Aave, together with decentralized exchanges such as Uniswap and Curve, cemented their positions as the market-leading protocols with the first-mover advantage. These didn’t come easy. Uniswap’s founder Hayden Adams wrote an article detailing his journey towards the launch of Uniswap V1 — it is a culmination of faith, friendship, support and hard work during the crypto winter. The DeFi builder community has grown stronger in this new cycle with more programmers from the traditional startups and big tech joining the blockchain and DeFi scene, and this can only mean we have more resources than ever to grow the space and technology.
On February 4, 2004, a dorm room project was born and became a $1 trillion company with 3 billion users in 2021 — it is called Facebook, or Meta after rebranding. DeFi has just started, and with the resources and talent flowing into the space now, growing 100x in the next 5 years is not a dream, it is inevitable.
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