Decentralized finance (DeFi), a natural product that blockchain technology makes possible, has the infrastructure and the resources to help propel the technology to greater heights. Since July 2015, the Ethereum network was launched. The Ethereum network has seen transactions grow by 33x to over 1.2 million per hour. If other chains were added, blockchain transactions could exceed millions per second.
Many of these transactions were originated from DeFi services like Uniswap. This facilitates more than $1 billion in swaps every day. It also lends and borrows protocols such as Aave and Compound, with tens to billions of market sizes. These are huge numbers, but they only represent a fraction of the trillion-dollar TradFi industry.
DeFi only scratches the surface of TradFi’s services
Traditional financial systems allow for the exchange of goods and services. This includes stock markets, debt markets, derivative markets, commodities markets, payments, and so on. These exchanges are made possible by service providers, such as banks, insurance companies and stock exchanges. — who receive trillions of dollars in fees for the services they provide.
The mainstream DeFi services include borrowing, lending, decentralized trading, and yield-aggregating. This is a short list compared to the extensive financial services available in TradFi. The DeFi developers are constantly exploring new services and will change the status quo. The growth of protocols that are able to find the right product/market match will be explosive, as demonstrated by the recent rise in dYdX.
The trillion-dollar TradFi Market is ready for disruption
Consumer banking. Global retail banking revenue is $2.3 trillion. This includes multiple consumer finance products such as loan/lending, mortgage products, payment, and so on. Particularly, global consumer payments and transactions generate over $500 billion in annual revenue to banks worldwide. This could be tapped using a frictionless interface, a global stablecoin, and wide acceptance points — which was the goal of Facebook’s Diem prior to the regulatory pushback.
Capital market. Global equity market capitalization is over $100 trillion. This compares to just over $243 billion in total value locked (TVL), which is decentralized finance. Security tokens are a natural trend. Regulators will eventually have to approve and build the regulatory framework. Both centralized and decentralized exchanges must adhere to the know your customer (KYC), requirement to tap into the trillion-dollar equity market in TradFi.
Insurance. Smart contract technology can make the global insurance industry a trillion-dollar TradFi sector. One-third of global insurance premiums is used for administrative and commission expenses, which is basically short-changing consumers. Smart contracts allow for quick, accurate, and cheap implementation of insurance processes, from underwriting to claims. This will provide a lucrative source revenue for DeFi.
DeFi’s market addressable size
Transaction volume. In 2021, the Ethereum network processed more than 1.3 million transactions daily. This includes remittances, trading, lending, borrowing, and other types of transactions. This is a small number compared to the over 1 billion global credit card transactions per day and the 5.5 billion daily trading volumes in NASDAQ. Capturing 1% credit card transactions on Ethereum chain is at most 8x its current volume.
Protocol revenue. Annualized protocol revenue from all DeFi protocols amounts to $5 billion. Again, this is only a fraction of the $2.3 trillion global retail banking revenues, $2 trillion global cross-border payments revenue, and $35 billion global stock market revenue. TradFi is so lucrative, capturing 1% of the market means 10xing DeFi’s revenue.
DeFi trend accelerates with crypto crackdown It will accelerate DeFi use, even though countries such as China continue to crackdown on crypto. The number of active MetaMask and Ethereum wallet users has risen 10x to 10 million by August 2021. This is an impressive number, but it only represents a 5% penetration rate of the 221 million global crypto users. This shows that general crypto users who have become accustomed to frictionless centralized services like Robinhood are a huge market for DeFi. They can be captured if the UI/UX is improved.
Related: China’s Crypto Ban: Is it a cause for concern or a buy the dip?
DeFi has only been around for three years. The services became mainstream in the DeFi summer 2021. Compound and Aave were the leading lending platforms. They also partnered with decentralized exchanges like Uniswap or Curve to cement their position as market leaders with the first-mover advantage. These were not easy feats. Hayden Adams, founder of Uniswap, wrote an article about his journey to launching Uniswap V1. It was a culmination a lot of faith, friendship and hard work during crypto winter. With more DeFi builders from traditional startups and large tech joining the DeFi scene, the community has become stronger. This can only mean that we have more resources to expand the technology and space.
A dorm-room project was created on February 4, 2004 and it became a $1 trillion business with 3 billion users by 2021. It is now called Facebook or Meta, after the rebranding. DeFi is just starting, and it is possible to grow 100x over the next five years, given the talent and resources available.
This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Artem Tolkachev, the founder and CEO at BondAppetit, is also an investor in DeFiHelper. He has been an entrepreneur and lawyer in intellectual property and information technology since 2011. Artem was the founder and head of Deloitte CIS Blockchain Lab in 2016. He was responsible for a variety of innovative projects, including the implementation of enterprise-level blockchain solutions, tokenization real-world assets and tax structuring security token offerings.