Defi is more scalable than traditional finance: Hashkey Capital

Despite the market slump and crypto price drops, DeFi (decentralized finance) has witnessed ongoing user growth and institutional adoption, as many industry professionals remain optimistic that DeFi will significantly outperform several asset classes in 2023.

HashKey Capital's Research Team has issued its annual DeFi Ecosystem Landscape Report, delving into the industry's current situation.

The following are some of the paper's noteworthy results and significant takeaways:

• VCs have invested over $14 billion in 725 crypto ventures in the first half of 2022 alone (many of those in DeFi).

• In addition to VC funding, the industry has attracted a large number of new users, with user growth reaching 44% quarter over quarter in 2022. In Q3, user wallets surpassed 5 million.

• Defi's market capitalization has eclipsed that of many hundred-year-old banking institutions, such as Santander Bank.

• Ethereum has maintained its supremacy in DeFi, accounting for 58% of all DeFi operations, while Uniswap Labs has maintained its market domination on DEX (60% of weekly DEX volume).

• 2022 was also the year of connecting DeFi and TradFi, with DeFi lending among mainstream financial institutions in particular continuing to rise throughout the year. Société Générale and Huntingdon Valley Bank, for example, requested for and obtained MakerDAO loans, and J.P. Morgan performed a trial transaction on Aave utilizing the Polygon public chain.

• The industry was also more optimistic about uncollateralized lending towards the end of the year, with TVL (total value locked) climbing from US$26 million in July to US$76 million in October.

• Despite the bear market, it appears that the options and derivatives market is booming. Platforms such as GMX and dYdX have grown in prominence as other derivatives and futures platforms have captured the attention of crypto traders.

ALSO READ: DeFi's Inherent Challenges Inhibits its Growth

Decrease in Total Locked Value

Decentralized finance (defi) has the "potential to be many times more scalable than the existing financial industry," according to Hashkey Capital's end-of-year report. In addition to scaling possibilities, defi protocols are resilient and are likely to survive black swan occurrences such as the Terra Luna/UST failure, according to the paper.

However, Hashkey Capital, an end-to-end digital asset financial services firm, admitted in the research titled Defi Ecosystem Landscape Report that unfavorable market conditions that mostly existed in 2022 had contributed to the reduction in the value of total assets under management.

"The drop of the TVL - Total Value Locked (a proxy for total assets under management in Defi) - was partly influenced by the broader market conditions. Lower crypto prices (due to generally unfavorable macro) reduce the value of the collaterals offered in Defi lending, diminishing the incentive to obtain a loan against such collaterals. "DEX [decentralized exchange] activity and crypto trade volumes are also down," according to the research.

Source: TradingView

According to the data in the paper, the TVL, which peaked at $180 billion in December 2021, has declined from just under $150 billion in May 2022 to just over $50 billion in late October. Despite the TVL reduction, many sections of the defi market "display a very promising tendency," according to the report.

Slowing Defi Growth

Concerning the amount of adoption, the research notes that the growth rate has slowed in 2022 (31% vs. 545% in 2021). In response to this result, as well as the increase in wallets to over 5 million, the study stated:

“2022 might be viewed as a year of consolidation, with most projects focusing on producing and strengthening their products rather than marketing.2022 is also the year that the UI and user experience of Defi protocols dramatically improved, to the point where we can finally state that using some Defi protocols is easier than using a home banking app.”

According to the research, venture capital (VC) firms provided significant support for Defi protocols, investing "$14 billion into 725 crypto projects (many of which are Defi)" in the first half of 2022.

 

Source:TradingView

The research cites the futures and options sector as the likely cause of the next defi summer, citing a "significant rise in the number of customers and TVL" on key platforms like GMX. GMX saw its TVL increase from $108 million at the start of 2022 to $480 million by the end of October.

Another company, Dydx, "generated over $50 million in revenue and continues to have over 1000 weekly active users" despite seeing the price of its token collapse by 90% in one year.

DeFi FAQs

What are the benefits of DeFi over traditional finance?

DeFi reduces the fees charged by banks and other financial institutions for using their services. Individuals keep their money in a secure digital wallet, can transfer funds in minutes, and can use DeFi from anywhere with an internet connection.

How is DeFi superior to traditional banking?

The decentralized Exchange operates differently than traditional banks. They do not charge the fees that banks and other businesses do when you use their services. People who use Defi may effortlessly secure their money in digital wallets and transfer funds in minutes.

How does DeFi differ from traditional finance? 

A public blockchain serves as the trusted source of decentralized finance, controlling all financial operations. In contrast, public governance, which includes regulations and licensed financial institutions, serves as the source of trust, governing all traditional finance operations.

Why is DeFi the financial future?

DeFi is giving traditional finance a run for its money by lowering the cost of financing for businesses. This is achievable because DeFi is constructing new and creative financial infrastructure rather than modifying TradFi's existing financial infrastructure.

Why is DeFi superior to TradFi?

While TradFi consumer protection leaves much to be desired, it undoubtedly provides its clients with more protection than DeFi. In its current state, DeFi provides no consumer protection to users. Because DeFi is decentralized, there is no centralized authority to handle payment disputes.

Why is DeFi the biggest thing in banking history?

It enables developers to construct new financial products such as decentralized banking, money markets, and asset management organizations. DeFi wants to be 10x better, faster, and cheaper than current financial services.