The Decentralized Finance (DeFi) ecosystem continues to see strong growth, with at least 2.91 million unique Ethereum (ETH) addresses using at least one DeFi protocol during the second quarter, up 65% from the previous quarter.
In the second quarter, total unique Ethereum addresses increased 10% quarter-over-quarter to 161 million unique users.
DeFi, which hit $100 billion in market cap in May, is an emerging sub-industry within the cryptocurrency industry that is poised to disrupt the operational structure of a wide range of other industries including lending, betting, trading and many more.
Stablecoins supports Ethereum and the DeFi ecosystem
The investor’s shift towards stablecoins, a digital currency that is backed by a real asset and built mostly on Ethereum network, contributed to the growth in active addresses. Tether, the largest stablecoin, accounted for 48% of the total stablecoins market share on Ethereum, down from 58% in the prior quarter.
In addition to stablecoins being used as a hedge against crypto market volatility, they are used in building other DeFi platforms like borrowing and lending. This is one of the main reasons why users have started to prefer stablecoins like MakerDAO’s DAI or Centre’s USDC for DeFi protocols. DeFi lending protocols like MakerDAO, Compound and Aave holding accounted for around 23% of the USDC supply, according to ConsenSys’s second quarter report.
“Open questions around Tether’s backing, which only this quarter revealed that 49% of its treasury is backed by unspecified ‘commercial paper,’ might be part of the reason why DeFi users increasingly prefer USDC and DAI for DeFi protocols,” the report said.
Decentralized exchanges and DeFi tokens are growing
With $343 billion in total second-quarter trading volume, decentralized exchanges (DEXs) are turning out to be a key threat for centralized exchanges. DEXs have no central authority and traders are eligible to conduct peer-to-peer transactions using DeFi technology.
Furthermore, decentralized autonomous organizations including Uniswap, which allow anyone to swap tokens, saw a whopping growth this year.
The Ethereum-based decentralized exchange Uniswap is the perfect example of the DeFi ecosystem’s core products. Launched in September 2020, Uniswap token is considered the largest DeFi token and is currently ranked as the 10th largest cryptocurrency based on market cap of over $12.5 billion. Other prominent decentralized autonomous organizations include Chainlink, Compound and Synthetix.
“One of the significant moments for DEXs in Q2 was Uniswap’s deployment of its third version, Uniswap V3,” the report said. “Uniswap’s market share of DEX volume increased from 60% to 74% throughout Q2. The major change for Uniswap V3 is improving its capital efficiency, or concentrating funds at the price range where an asset is most likely traded.”
DeFi could become a perfect alternative investment for institutional investment
Low bond yields, higher equity valuations, along with concerns over rising inflation have been forcing institutional investors to look for alternative investment opportunities to generate above-average returns and yield.
The disruptive technology and forward-thinking institutional investors have already started investing in the DeFi market. Andreessen Horowitz recently invested in Uniswap, while Ark Invest’s Cathie Wood previously said she believes decentralized financial services are poised to disrupt the industry over the next five years. She also noted that DeFi and Ethereum reduce counterparty risk, a major factor that is not widely available in the traditional financial world.
Traditional stock and bond investors like Ray Dalio, the founder of Bridgewater Associates, have also been changing their stance on crypto markets. Dalio recently stated that Bitcoin is a better investment than bonds and hinted that cryptocurrency could become an alternative store of value.
“There exists the possibility that Bitcoin and its competitors can fill that growing need” for an alternative store of value, he wrote on Linkedin in January.
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