Decentralized finance (DeFi) is a natural product enabled by blockchain technology, with the necessary infrastructure in place to propel the technology to a larger playing field. Since the Ethereum network went live in July 2015, the space has grown by leaps and bounds, with Ethereum network transactions increasing by 33x to 1.2 million per day currently, and blockchain transactions would exceed millions per day if other chains were included.
The majority of these transactions originated with DeFi services such as Uniswap, which facilitates over $1 billion in swaps per day, as well as lending and borrowing protocols such as Aave, Compound, and BondAppetit, which have market capitalizations in the tens of billions. While these are significant figures by any measure, they represent only a decimal point of the trillion-dollar traditional finance (TradFi) industry.
DeFi is only scratching the surface of traditional networking services.
The traditional financial system includes exchanges of goods and services such as the stock market, debt market, derivative market, commodities market, payment, and so on. This is facilitated by service providers — banks, insurance companies, stock exchanges, financial intermediaries, custodians, and so on — who charge trillions of dollars for their services.
Mainstream DeFi services currently include lending, borrowing, decentralized trading, and yield-aggregation — a relatively short list when compared to the broad range of financial services provided by TradFi. This will not be the case in the future, as DeFi developers are actively exploring and developing new services for the ecosystem. Protocols that find the right product/market fit will experience rapid growth, as evidenced by the recent rise of dYdX.
The trillion-dollar Trade Finance industry is ripe for disruption.
Banking for individuals. Global retail banking revenue is estimated to be $2.3 trillion across a variety of consumer finance products such as loans/lending, mortgage products, payment, and so on. Consumer payments and transactions, in particular, generate over $500 billion in annual revenue for banks worldwide and could be tapped with a frictionless UI, a global stablecoin, and broad acceptance points — the ambition of Facebook’s Diem prior to regulatory pushback.
The capital market. Global equity market capitalization is estimated to be more than $100 trillion, compared to decentralized finance’s total value locked (TVL) of only over $243 billion. Security tokens are an unavoidable trend that regulators will eventually need to approve and build the regulatory framework for, and centralized and decentralized exchanges that follow the know-your-customer (KYC) requirement can tap into TradFi’s trillion-dollar equity market.
Insurance. Another trillion-dollar TradFi industry that can be improved with smart contract technology is the global insurance industry. Approximately one-third of global insurance premiums are allocated for administrative and commission costs, essentially shortchanging the consumer. Smart contracts allow for the low-cost, quick, and accurate implementation of insurance processes from underwriting to claims, and will be a lucrative source of revenue for the DeFi industry.
The addressable market size of DeFi
The volume of transactions. In 2021, the Ethereum network will process over 1.3 million transactions per day, including remittances, trading, lending, borrowing, and various other types of transactions. This is a small number when compared to the over 1 billion daily global credit card transactions and the NASDAQ’s daily trading volume of around 5.5 billion. Capturing 1% of credit card transactions on the Ethereum chain would at least 8x the current volume.
Revenue from protocol. All DeFi protocols are expected to generate $5 billion in annualized protocol revenue. Again, this is a drop in the bucket compared to the $2.3 trillion in global retail banking revenue, $2 trillion in global cross-border payment revenue, and $35 billion in global stock exchange revenue. The TradFi industry is so lucrative that capturing a 1% market share means tenfolding DeFi revenue.
The crypto crackdown has accelerated the DeFi trend. Even if countries like China continue to crack down on cryptocurrency, the use of DeFi will only increase. In August 2021, the number of active Ethereum wallet and browser extension MetaMask users has more than tenfolded to ten million. While this appears to be a large number, it represents only a 5% penetration rate among the 221 million global crypto users. This demonstrates that general crypto users, who are accustomed to frictionless centralized services like Robinhood, represent a massive untapped market for DeFi that can be captured as the UI/UX is improved.
DeFi is only three years old, and its services became mainstream for the crypto community during the DeFi summer of 2021. Lending platforms like Compound and Aave, as well as decentralized exchanges like Uniswap and Curve, have cemented their positions as market-leading protocols with first-mover advantage. These weren’t easy to come by. Hayden Adams, the founder of Uniswap, wrote an article about his journey to the launch of Uniswap V1 — a culmination of faith, friendship, support, and hard work during the crypto winter. With more programmers from traditional startups and big tech joining the blockchain and DeFi scene in this new cycle, the DeFi builder community has grown stronger than ever, which 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 that would grow into a $1 trillion company with 3 billion users by 2021 — it is now known as Facebook, or Meta after rebranding. DeFi is still in its early stages, and with the resources and talent flowing into the space now, growing 100x in the next five years is not a pipe dream; it is an unavoidable reality.