The decentralized finance (DeFi) ecosystem is blooming as both the total market capitalization and total value locked (TVL) on these platforms, set record highs over the weekend. The market cap of DeFi-based tokens is nearing an impressive $12 billion mark after an explosive 62% weekly increase in Chainlink (LINK) price, which set an all-time high on Sunday at $14.20.
Currently, at $11.76 billion, the DeFi field shows no signs of stopping with projects like LINK, Compound (COMP), Synthetix (SNX), and Aave (LEND), all gaining double-digit percentages in the past week. The field still lags behind Ethereum (ETH), which supports most of these platforms, but the second-largest crypto has greatly benefited from the growth of the DeFi field – with the space contributing to 95% of the value created on ETH.
The growth of DeFi products
DeFi presents a new financial system completely run on blockchain technology giving users similar products to traditional finance such as lending, borrowing, savings, etc. However, these products gained wide attention in the past few months as value exploded.
On March 13, 2020, the TVL, which is calculated as the difference in the amount deposited and the amount loaned on DeFi platforms, stood at $565 million. Since then, the TVL has grown over 700% to $4.732 billion, as at the time of writing, with DAI-producing platform, Maker (MKR), dominating 30% of the total TVL.
On the market end, Chainlink’s trade volumes surpassed Bitcoin’s on Coinbase exchange the past Sunday as the FOMO on LINK grew. As reported by Hsaka Trades on Twitter, $145 million was traded on LINK pairs, while BTC’s daily volume stood at $94 million. On Binance, LINK daily trade volumes stood at $419 million, a little shy of the top crypto’s volumes at $485 million.
— Hsaka (@HsakaTrades) August 9, 2020
Yield farming role in growth explosion
The growth in the DeFi space can rightly be attributed to the recent rise of yield farming, with investors chasing ever-increasing yields from projects. The high rewards, some offering 20%-100% APY, in essence, shows a certain level of high risk, but Synthetix founder, Kain Warwick, believes they stem from “huge market inefficiency and information asymmetry.” He wrote on Twitter,
“Yes, there is risk, but there is also market inefficiency and information asymmetry. There is also nuance around yield comparisons, liquidity of the asset the yield is paid in etc.”
Additionally, Arca’s VP of Portfolio Management, Hassan Bassiri, explained in a recent blog post that yield farming is only part of the reason for growth. Two major factors on DeFi platforms, community governance and real value accretion, contributed majorly in the growth of the ecosystem, Bassiri said.