DeFi can be 100 times larger than today in 5 years

Published at: Nov. 6, 2021

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.

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.

Related: China's crypto ban: Buy the dip or cause for concern?

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.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Artem Tolkachev is the founder and CEO of BondAppetit and an investor in DeFiHelper. Since 2011, he has been an intellectual property and information technology lawyer and entrepreneur. In 2016, Artem founded and headed Deloitte CIS Blockchain Lab. As part of that initiative, he led a range of innovative projects involving the implementation of enterprise blockchain solutions, tokenization of real-world assets, tax and legal structuring of security token offerings, and the development of cryptocurrency and blockchain legislation.
Tags
Related Posts
Crypto wallets: An important battlefront to gain wallet share and mind share
Digital wallets are software constructs that mimic physical wallets and provide the functionality of storing, using and categorizing payment instruments. The journey of digital wallets started with payments and morphed to other forms of stubs such as digital passes, tickets and boarding passes. However, crypto wallets attempt to redefine the digital wallet landscape as something more than safe storage of payment and crypto instruments. With more than 100 crypto wallets and growing, this sector in the cryptosphere is getting crowded and adding further complexity to an already fragmented blockchain and digital asset space. As I study this space and try …
Decentralization / Aug. 29, 2021
First cross-chain governance proposal passes on Aave
On Monday, the first cross-chain governance proposal passed on decentralized finance, or DeFi, borrowing and lending platform Aave. According to DeFi Llama, the amount of total value locked on Aave is approximately $12 billion. As told by its developers, an executed proposal on Aave, which is built on the Ethereum (ETH) network, was sent to the Polygon (MATIC) FxPortal. The mechanism then reads the Ethereum data and passes it for validation on the Polygon network. Afterward, the Aave cross-chain governance bridge contract receives this data, decodes it, and queues the action pending a timelock for finalization. The development team wrote: …
Adoption / Feb. 1, 2022
Easy-to-use DeFi protocols will become the new gatekeepers to crypto
It has arguably never been easier to participate in the crypto ecosystem. After centralized exchange powerhouse Coinbase recently began allowing its users to deposit part of their fiat paychecks into the exchange in the form of crypto, more people are beginning to realize the potential of the industry and participate in this ever-growing ecosystem. But, crypto is commonly perceived as fundamentally intricate or lacking the proper interfaces, and whether this is right or wrong, this has been the perception for some time. To some people, the premise of digital currencies will always seem far too complicated. More recently, however, there …
Adoption / Feb. 5, 2022
How to convert your digital art into NFTs and sell it
What is an NFT? NFTs are nonfungible tokens. The adjective “nonfungible” is often used in economics to represent features such as uniqueness and non-interchangeability. In the crypto space, nonfungibility simply indicates that one item cannot be exchanged for another. A “token” as a unit of account is basically a certificate of validity stored on the decentralized blockchain, making digital assets traceable and accessible to everyone. As a result, NFTs are a one-of-a-kind virtual currency that can fall into pretty much any category and usually take the shape of paintings, videos, music, collectible items in video games or any other type …
Adoption / March 26, 2022
The truth behind the misconceptions holding liquid staking back
Blockchains have relied on proof-of-work (PoW) validation since their inception. Yet the PoW consensus proved to be unsustainable with its high energy usage and its need for fast, powerful hardware creating high barriers to entry. That’s why blockchains are adopting proof-of-stake consensus algorithms (PoS), where those wanting to earn rewards don’t have to compete against other miners, but can simply stake part of their crypto for a chance to be chosen to be a validator — and reap the returns. Everyone who owns crypto on PoS blockchains must want to take advantage of the opportunities staking provides, right? Actually, according …
Adoption / May 22, 2022