DeFi or “decentralised finance” represents a collective term for all sorts of financial applications employed in cryptocurrency or blockchain. They are specifically engaged towards disruption of financial intermediaries. Blockchain remains its inspiration, implying that its source remained decentralised and hence not of single origin. DeFi, hence, focuses on flexible accessibility along with decreased prices.
The momentous rise
The rise in the Defi market is extremely significant to the current times. Although what represents a contrast to this rise is the rising worth of Bitcoin and Ethereum. This surge is concealing a very essential trend that needs modification in order to ensure the growth of the industry. Total Value Locked (TVL) has hence witnessed a benchmark high of $17.5 billion, exceeding all the previous standards in Defi protocols. The graph indicates a sudden hike by 23% in just the initial days of 2021. as per the reports of data aggregator Defi pulse. The purpose of TVL is thus to estimate the relative prevalence of Defi projects. It also calculates the relative recognition of decentralised finance as one whole unit.
Outflows of ETH and BTC
The metric continues to be denominated in terms of the US dollar. The consequential growth witnessed in the last few days, hence, is capitalizing on the whole blow up in prices of Ethereum. The side has had a noteworthy increase of 65% since the primary days of December. The reality paints an interesting picture where significant outflows of ETH and Bitcoin are occurring in Defi protocols. The reason behind this transition remains that the crypto users are banking on the rise in prices and hence wish to benefit by selling their assets.
Smart Contracts
Automated blocks of code are used by protocols in order to provide services like provision of interest on deposits, offering loans and exchange in terms of assets. These blocks are called smart contacts. Ethereum network becomes the most viable platform to conduct these actions. ETH being the native asset, stands priced at above $,1000, which is super close to the highest value of January 2018. DeFi protocols facilitate these activities with their reliance on deposits of crypto assets. BTC and ETH deposits then provide for the fundamental collateral required for loans and exchanges. With the rise in DeFi’s locked value, it provides the participants with the opportunity to utilise the loan and exchange services along with a beneficial improved interest rate. The returns to locking the property then ensure worthy interest payments, sometimes offering annual returns, completely new to the traditional finance industry.
After the enormous run-ups of the holiday season, it has been observed that Defi users are encountering beneficial opportunities somewhere else, leading them to remove BTC and ETH by selling them. While TVL rose by 23% in dollar terms, Defi protocols witnessed a decrease of 4.5% in total ETH’s lock value and 4% in BTC’s lock value, during the same period. What remains noteworthy is that though the mainstream cryptocurrencies contribute the major chunk of Defi TVL, there are unpopular tokens and dollar-pegged stable coins like UDSC and DAI which contribute billions to TVL. Moreover, ’Altcoins’ and their rotation of value can also impel the TVL higher. The conclusion then remains that looking at the current state of BTC and ETH, it seems advisable to look past TVL as a measure of progress of Defi.
