Decentralized Finance (DeFi) was one of the defining trends of 2019 in the cryptosphere and, despite the recent COVID-19 pandemic, it is showing no signs of slowing down. Registering tremendous growth since the beginning of the year, DeFi maintained its growth trend even during March, registering the biggest month for the ecosystem so far.
According to a recent report from DappRadar, March saw an increase in activity with the most prominent DeFi apps, many of which registered record-breaking numbers in terms of activity. Both MakerDAO and dYdX registered an all-time high number of active unique wallets, with 1458 and 586 respectively. Other DeFi apps also registered increased activity, with Synthetix registering the third busiest day ever during March with 915 active unique wallets and Compound had the second busiest day of this year with 630 active unique wallets.
MakerDAO: Black Swan impact
Despite the growth in activity, the crash of March 12th had a negative impact on the DeFi market. This was specially illustrated by the disarray of the biggest DeFi app, MakerDAO, in a so-called “Black Swan” event. The sudden fall of Ethereum’s price hurt the price of stablecoin DAI, losing its peg to the U.S. dollar for a large margin, and put significant pressure on collateral loans. A possible emergency shutdown was even discussed, as around $4.5 million worth of DAI was undercollateralized in the process.
This led to many losses for investors while some lucky liquidators were able to acquire undercollateralized vaults at zero cost due to volatility and Ethereum’s network congestion. Issues around MakerDAO’s oracles also contributed to the mess, as there were significant discrepancies in Ethereum’s price across several exchanges.
Adoption of MakerDAO had been increasing substantially since November of last year, when the multi-collateralization functionality was added to the protocol. However, after March 12 usage has dropped significantly due to the issues stated above. Trust in the sector might have been shaken, as MakerDAO’s governance is looking to make changes to its protocol. In order to minimize risks and prevent similar situations in the future, a proposal is now up for vote for MKR token holders to lower DAI stability fee and savings rate spread to 0%.
Synthetix: The Growth of Synthetic Cryptos
Formerly a stablecoin project known as Havven, the project was rebranded to Synthetix in order to be a better fit for their new services. The primary function of the new Synthetix system is to allow the creation of on-chain synthetic assets.
This allows the creation of several stablecoins, pegged to different fiat currencies, and other ERC20 tokens pegged to the value of precious metals, commodities, indices, and stocks. The Synthetix network also offers users loan services and the possibility of earning a share of trading fees through its own token, Synthetix Network Token (SNX).
The creation of synthetic assets opens a new world of possibilities, bridging the gap between traditional and digital assets. Synthetix is poised to play an important role in the proliferation of DeFi, and that is seen by its continued growth in terms of adoption. During 2020, Synthetix has become the second most popular DeFi app in terms of trailing 30-day average. What is perhaps even more impressive is the retention rate, as more than 50% of users remain using the platform since September of last year.
Despite a slight drop in the retention rate for March, the Synthetix ecosystem seems to have been mostly unphased by the crisis despite the significant drop in the price of SNX token. In fact, Synthetix has recently surpassed MakerDAO and is now the number 1 DeFi app in terms of daily users.
Launched in late 2018, Compound is the current third-biggest DeFi app. It offers users savings and loans services in 8 different assets, including wrapped Bitcoin and Ethereum. The Compound protocol combines different assets into the same pool, increasing the liquidity of such pooled assets while also allowing users to withdraw their assets without having to wait for any loans against the pool to mature.
The platform has registered a serious decline in active users since the relaunch of MakerDAO last November, going from an average of 500 to 200 active users since then.
However, a change in this trend might be in store for the near future for Compound as it now offers one of the most attractive interest rates in the DeFi market. This becomes increasingly more prevalent if taken into consideration the proposal to stop interest rates on MakerDAO. The Compound team also has plans for full decentralization, having launched a testnet for experimental governance of the platform in February.
Not only did Compound seem to be unscathed by the COVID-19 crisis, it actually has registered a growth in retention rate during the months of February and, especially, March.
Coronavirus - a Stress Test for DeFi Markets
Although the COVID-19 pandemic has come with an obvious economic toll that will likely be felt for years to come, it seems like the cryptocurrency market is still holding its own, with exchanges seeing the highest volumes ever. DeFi is no exception as the Coronavirus only seemed to accelerate its growth.
Coronavirus did, however, serve as a “stress test” to the DeFi market, especially to its biggest app, MakerDAO. The volatility caused by the epidemic exposed the weakness in MakerDAO’s protocol, something that had been foretold two years ago. Although changes in the protocol are now in voting, the trust of investors in MakerDAO has fallen. This is illustrated by its loss of dominance over the DeFi market, as MakerDAO fell from roughly 57% at the beginning of March to now less than 50%.
Only time will tell if MakerDAO’s reputation has been tarnished and how serious the current recession will impact cryptocurrencies. However, in the long term, the future of DeFi certainly looks bright. Blockchain Capital has predicted that $5 billion in value would be locked in DeFi. Although that value seems far fetched today due to the recent recession, the truth is that DeFi is still in its infancy.