Decentralized finance (DeFi) is a natural product made possible by blockchain technology and has the right infrastructure ready to push the technology into a larger playing field. The space has grown by leaps and bounds since the launch of the Ethereum network in July 2015, with Ethereum network transactions growing 33 times to currently 1.2 million per day, and blockchain transactions exceeding millions per day if other chains are included.
Most of these transactions originate from DeFi services like Uniswap, which facilitates more than $1 billion in swaps every day, as well as lending and borrowing protocols like Aave, Compound, and BondAppetit, with tens of billions of market size. While these are big numbers by any standard, they are only a decimal point in the trillion-dollar traditional finance (TradFi) industry.
DeFi only scratches the surface of TradFi services
The traditional financial system entails enabling the exchange of goods and services, including the stock market, debt market, derivatives market, commodity market, payment, etc. This is facilitated by service providers – banks, insurance companies, stock exchanges, financial intermediaries, custodians, etc. – who collect a trillion dollars in fees from the services provided.
Currently, core DeFi services include lending, borrowing, decentralized trading, and revenue aggregation – a relatively short list compared to the extensive financial services offered on TradFi. This will not remain the status quo as DeFi developers explore and build more services for the ecosystem. Protocols that find the right product/market will experience exponential growth, for example, the recent rise in dYdX.
The trillion-dollar TradFi market is ready for turmoil
bank customer. Global retail banking revenue is estimated at $2.3 trillion across various consumer finance products, including loans/lending, mortgage products, payments, etc. Globally and can be leveraged without UI friction, stable global currency and broad points of acceptance – Diem’s ambition on Facebook before regulatory rejection.
capital market. The market capitalization of global equities is estimated at more than $100 trillion, compared to just over $243 billion of total locked-in value (TVL) in decentralized finance. Security tokens are an inevitable trend that regulators will eventually need to approve and build on the regulatory framework, and centralized and decentralized exchanges that adhere to KYC requirements can tap into TradFi’s trillion-dollar stock market.
insurance. The global insurance industry is another trillion-dollar industry of TradFi that could be improved with smart contract technology. About a third of global insurance premiums are allocated to administrative and commission costs, which is basically something that leads to a short change for the consumer. Smart contracts enable cheap, fast and accurate execution of insurance operations from underwriting to claims, and will be a profitable source of revenue for the DeFi industry.
DeFi Addressable Market Size
Deal size. The Ethereum network handles more than 1.3 million transactions every day in 2021, including money transfers, trading, lending, borrowing and various other types of transactions. That’s a minuscule number compared to the more than 1 billion daily global credit card transactions, and a daily trading volume of about 5.5 billion on Nasdaq. Having 1% of credit card transactions on the Ethereum chain is at least 8 times its current size.
Protocol revenue. Annual protocol revenue across all DeFi protocols is estimated at $5 billion. This, again, represents a fraction of the $2.3 trillion global retail banking revenue. $2 trillion in global cross-border payments revenue and $35 billion in global stock exchange revenue. The TradFi industry is so profitable that capturing a 1% market share would mean a 10-fold increase in DeFi revenue.
Crypto crackdown is accelerating the DeFi trend. Although countries like China continue to crack down on cryptocurrencies, they will only accelerate the use of DeFi. Active Ethereum wallet and browser extension MetaMask have 10x-ed to 10 million in August 2021. While this appears to be a high number, it represents only a 5% penetration rate among the 221 million global crypto users. This shows that public crypto users, accustomed to frictionless centralized services like Robinhood, represent a huge untapped market for DeFi that can be captured with improved UI/UX.
Related: Cryptocurrency Ban in China: Buying Dip or a Reason for Worry?
DeFi is only three years old with services becoming mainstream for the crypto community in the summer of 2021 DeFi. Lending platforms such as Compound and Aave, along with decentralized exchanges such as Uniswap and Curve, have cemented their positions as market-leading protocols with a first-mover advantage. This did not come easily. Uniswap founder Hayden Adams has written an article detailing his journey towards the launch of Uniswap V1 – 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 traditional startups and big tech joining the blockchain and DeFi scene, and this can only mean that we have more resources than ever to grow the space and technology.
On February 4, 2004, The Bedroom Project was born and became a $1 trillion company with 3 billion users in 2021 – called Facebook or Meta after rebranding. DeFi is just getting started, and with resources and talent pouring into the space now, growing 100 times in the next five years isn’t a dream, it’s inevitable.
This article does not contain investment advice or recommendations. Every investment and trading move involves risks, and readers should do their own research when making a decision.
The opinions, ideas and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Artem Telkachev He is the founder and CEO of BondAppetit and an investor in DeFiHelper. Since 2011, he has been a lawyer and entrepreneur in the field of intellectual property and information technology. In 2016, Artem founded and headed the Deloitte CIS Blockchain Lab. As part of this initiative, he has led a range of innovative projects that include the implementation of enterprise blockchain solutions, tokenization of real-world assets, the tax and legal structure of security token offerings, and the development of cryptocurrency and blockchain legislation.