Decentralized Finance or DeFi for short is one of the fastest-growing sectors of the crypto industry.

After a massive upswing in 2019, 2020 is promising to be another great year. Already the total value in USD locked in DeFi has surpassed $800 million. To date in 2020, this amount has surged over 22%, after the price of cryptocurrencies surged in the past 15 days.

We absolutely smashed through $800M locked in #DeFi. 💪
$1 billion we're coming for you 🔜 pic.twitter.com/DzaPNFpEJ7

— DeFi Pulse 🍇 (@defipulse) January 17, 2020

The biggest contributor to this growth is Maker which has a 56.67% dominance. The growth in Total Value Locked (TVL) has pushed the amount of DAI locked above 500 million. The curve of DAI locked in DeFi has been steepening lately, with 13 million added since Jan. 1st. Just a month ago, this number was 30 million and now at 60 million, it has grown by 65%.

Ethereum: A new, alternative, permissionless & trustless system

Maker’s dominance means, DeFi is dominated by Ethereum, with ETH locked in Defi exceeding $3 million.

Initially, it was largely comprised of two projects, MakerDAO and Bacon but since then we have seen the explosion of Uniswap, Compound, and InstaDApp. Synthetix is another one seeing “absurdly” high growth.

Projects like these, Lucas Campbell of DeFi rate says, are creating “a new paradigm for global finance” which has one common theme, Ether. This he said means,

“Ether is trustless value supplying economic bandwidth for Ethereum’s permissionless money protocols.”

With Ethereum creating a new, alternative, permissionless, trustless system, it means there will be no shortage of future demand for ETH as an economic bandwidth. Campbell says the next decades are nothing short of exciting for the permissionless finance and proliferation of DeFi. Campbell notes:

“However, in order for Ether to successfully deliver permissionless, trustless finance to the world it will require a massive amount of economic bandwidth to support it.”

The Trillion Dollar Case for ETH

To build a trustless economy, you need a trustless value that is only possible with decentralized crypto-native assets that settle on-chain.

The total bandwidth of Ethereum however, is just about $19 billion, its market cap, and with this, it can’t even support a small nation-state economy. But Campbell argues there is no shortage of addressable market with $250 trillion of global debt, $542 trillion in derivatives, and $90 trillion of equity markets.

MakerDAO already has a goal of Dai to hit 1 billion in circulating supply by 2020 end. On the assumption that a country like Argentina adopts Dai as its primary currency for commerce as “the appetite for the Argentine Peso dwindles,” and if it is able to capture 51% of the country's M1 supply, that would mean Ether price has to reach between $2,500 to $10,000 to provide a sustainable amount of economic bandwidth.

But that was just for Argentina, the ambitions are bigger. Campbell theorizes Dai competing with US Dollar which puts Ether price at $50,000.

These are “crazy” numbers but investor and Mythos Capital founder Ryan Sean Adams says at one point even $10 billion for ETH was crazy.

Although these numbers should be taken with a grain of salt, Adams says what needs attention is that,

“A trustless economy requires trillions in economic bandwidth. And that's the trillion-dollar case for ETH.”

Caveat Emptor: No Fed to bail you out here

All of this is very ambitious and shiny but DeFi has its own issues. For starters, the sector is still “very much under construction and new economic models are currently being tested,” points out, Mati Greenspan, founder of Quantum Economics in his daily newsletter.

It isn’t too dissimilar to traditional finance but brings in a high level of transparency and is obviously devoid of any central banks, which “could make all the difference in the world.”

But another big question is the APR they offer on lending the crypto asset.

While the US Federal Reserve offers you 1.5% to lend money to a government in the bond market and the highest yield one can get is less than 7%, it is mostly negative in developed countries like Japan and Germany, so how come these projects offer as much as over 9%?

The thing is they are lending the same crypto-asset out many times and taking a fee from each of the transactions, much like what happens in traditional finance. But as Greenspan notes,

“the only difference is there's no Fed to bail you out when things do turn sour and on a long enough timeline its very likely that many will get rekt.”