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8th November 2021 > > Decentralised Finance.


Decentralised Finance (DeFi) protocols have enormous growth prospects.

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Google data suggests that wider interest in cryptos from non-participants remains subdued. This is a good thing. I do not wish to see a bunch of weak hands with FOMO helping the rally.

Curious Cryptos’ Commentary – The inevitable rise of Decentralised Finance (DeFi)

DeFi has been an incredible success over the last year or so. There is now a plethora of platforms all fiercely competing for a slice of the action. One of the largest, Uniswap, facilitates over $1bn of swaps every day. Lending and borrowing protocols – Aave, Bancor, Benqi, Compound, Sovryn, and so on – just keep growing.

DeFi has $200bn TVL (Total Value Locked). I am aware that there is debate as to whether TVL is a good measure of the size and activity of DeFi, but it is one the very few measures we have, so we kind of have to go with it.

Another measure is the market cap of all DeFi, which currently sits around $160bn. Interestingly enough, we can combine these two measures to calculate a ratio which can be interpreted as equivalent to one that has been used since time immemorial for stock markets.

For stocks, the measure is Price to Book Value. In general terms the lower this number, the safer the investment in terms of a rapid price reversal for the stock or index in question. This is a very simplistic take on this ratio, but I am not here to give lessons in financial analysis.

Currently the S&P 500 has a Price to Book of 5.01.

The equivalent for DeFi (market cap divided by TVL) is 0.8.

I found this graphic on CoinTelegraph showing the relative size of DeFi to three different elements of TradFi (note that they show TVL as $240bn but my other sources seem to agree closer to $200bn.)

We all know that the disruptive power of cryptos is beyond debate.

Cryptos will take big chunks out of consumer banking and insurance in short order. Even if DeFi only takes 10% market share of these two elements of TradFi then TVL will grow 4 times from here.

As for a 10% market share of capital markets too, that would imply TVL growing 50 times or more.

There are issues around DeFi aggressing the capital markets in the next couple of years – the regulation and legislation around equities is particularly difficult to apply to DeFi, so these problems won’t be solved overnight.

But we have already seen bond issuance using blockchain technology - and by far and away the largest element of capital markets are the bond markets.

I see an estimate that the global notional for bond markets alone is $128 TRILLION but that doesn’t capture the large turnover of bonds that happens every day. The number quoted above is an understatement, potentially on an epic scale. If so, that only reinforces the huge growth potential for DeFi.

At the start of 2020, DeFi didn’t really exist in any meaningful sense.

At the start of 2021, TVL was at $40bn.

2021 will have seen spectacular growth of 6 times or more by the end of this year.

2022 will dwarf the experience of 2021.

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