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- DeFi industry also has impacts on the prices in the cryptocurrencies market
- Since the beginning of this year, the TVL in the sector is contuing to surge which also helped ETH price to surge
- dApps have been considered as hot and risky still it has the potential
Decentralized finance (DeFi) protocols have shown resilience after the sharpest dip experienced near mid-May. In the current scenario, Dogecoin and Non-Fungible Tokens (NFTs) are in a craze. However, it is also noteworthy that besides these trending cryptocurrencies, money is also being flooded on another side of the crypto industry. Many have also deemed that the sector is precarious because of its decentralized nature. Still, the entire DeFi sector is rising at a surprising pace.
What does the DeFi industry offer?
The DeFi industry offers services like borrow, lend, and yield interest. Moreover, the dApps also allows its users to trade assets and derivatives with other ranges of services also offered by the industry. Following the current scenario, we can consider that the DeFi industry is only for individuals who seek to borrow against their crypto holdings.
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How is decentralized finance different from traditional banks?
Although the DeFi industry offers similar services as traditional banks, there are two notable differences. All services provided by such sectors are related to crypto-assets. In comparison, our mainstream banks offer all such services for government-issued fiat currencies like dollars. And an essential part is that the sector is not intermediary or centralized.
According to Antoni Trenchev, the co-founder of Nexo Capital Inc, one of the largest firms in the DeFi sector, the sector is a significant banking infrastructure for the blockchain ecosystem. The DeFi platforms are entirely automated, meaning there are no middlemen. Tasks of loan officers and tellers are fully automatic.
How to access decentralized finance services?
Users globally with Ethereum wallets can choose any DeFi protocol of their choice. After deciding, they can simply connect their wallets with Decentralized Applications (dApps). The majority of dApps are running on the Ether network in the current scenario.
After making a connection, the users have to purchase the native crypto tokens of the specific protocol using ETH tokens. Ultimately, such specific tokens allow the users to access every service on the platform.
Traders are turning to derivatives and arbitrage
Several traders globally are observed turning from traditional platforms to DeFi platforms. Such investors believe that turning their derivatives and arbitrage strategies on dApps could help them amplify their returns in the crypto hub.
Moreover, the sector also allows traders to outsize bets with a minimal amount of their funds. Such a factor is only possible using effective leverage and amplify borrowing methods. In contrast, DeFi’s traction is ultimately helping the entire crypto industry to achieve new highs.
Total value locked in the DeFi sector is skyrocketing
The total count of assets like Ethereum coins that are being locked in the DeFi ecosystem is known as Total Value Locked (TVL). As individuals deposit more Ether coins as collateral, the TVL also increases.
According to the data from DeFiPulse, currently, more than $100 billion worth of crypto assets are locked in the industry. Among the total TVL, the $64 billion value of DeFi assets are locked on ETH.
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It is also important to note that a year ago, there was only a billion locked in the sector on ETH. However, since the beginning of this year, the value was observed soaring at a tremendous pace.
More margin debt is comprised on TVL than US stock market
An implosion in borrowed bets is one of the significant reasons behind the acceleration in the month-long sell-off faced by BTC. Following the dip in the prices, several bullish bets began to liquidate. And the factor brings a more deep downtrend on the prices. Ultimately the factors led to a vicious cycle of more liquidation.
Simultaneously, such an effect on leverage is occurring in the United States stock market. According to the Financial Industry Regulatory Authority, since April 2021, the margin debts in the US stock market have achieved a record $847 billion. The factor explains that investors had already borrowed such an immense amount against their crypto portfolios.
Margin debts are basically seen soaring alongside index levels. Hence the surge in margin debts could be considered a threat to the digital currency market. Moreover, currently, the total margin debts in the United States stock market represents only 2% of the $49 trillion. Notably, the figure in TVL explains the condition in the current scenario itself. TVL comprises approximately 6% of the $1.6 trillion crypto market.
Is it possible to control the leverage in TVL?
There are several DeFi protocols that have fixed collateral limits. Still, there are many that allow their clients to employ huge limits. For instance, BitMEX, one of the most popular derivatives exchanges, offers 100x leverage to its clients on a few future deals.
According to Alex Mashinsky, founder of Celcius Network, everything in the cryptocurrency ecosystem is rehypothecation, including collateral. Indeed, it is unclear what percentage of tokens are being lent and lent again across several platforms.
How is the decentralized finance sector helping fuel the crypto market?
To access DeFi services, there is only one way. The users are necessarily required to deposit any form of a crypto token as collateral. In the DeFi sector, the interest rates are highly attractive compared with mainstream banks.
Moreover, automatic transactions and virtually instantaneous settlements have also attracted several users. Keeping everything automatic and on the blockchain removes several counterparty risks that users face in the current system.
Following the aforementioned facts, the interest in the industry has surged impressively. Notably, such high interest is also one of the prominent reasons behind the skyrocketing price of Ethereum.
Ethereum competitors are also rising with financial services
According to Chainalysis, the blockchain-based industry accounts for about 40% of the ETH coins moved on the Ethereum network. And the value is up by 7% over the last twelve months. Moreover, there are several NFT running on the Ethereum blockchain.
On the other side, competitors of Ethereum offering DeFi services are also observed facing good growth. According to DeFiStation data, Binance Smart Chain (BSC) has more than $26 billion in TVL. Simultaneously, other large start-ups like Celcius and Nexo also have $21bn and $15bn.
dApps are risky yet have the potential
The level of services that the blockchain-based industry has offered has attracted several around the world. Still, several consider that the sector is immature and highly risky. There are many anonymous dApps, which make it tedious to figure out which platforms are trustworthy. In contrast, the main risk is the services that aren’t regulated and centralized. Hence if the apps fails, there will be no alternative help.
However, if individuals use a reliable platform, then undoubtedly, the sector has the potential to remove traditional bank. Moreover, the interest in the industry is contributing impressively to attract more individuals to the crypto industry.
