Is DeFi the next ICO bubble?

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By Vanessa Malone

Updated November 23, 2020*

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Source: DEFi Pulse 11.23.20

Back in July 2020, the amount of collateral locked in Decentralized Finance(DeFi) projects reached $4 billion, double what it was just two weeks prior.

Now as we’re approaching the end of 2020, the total amount of collateral locked in DeFi is more than $14 billion. What is DeFi and where is it headed?

What is DeFi?

Decentralized Finance, or DeFi, falls deep within the crypto sector of fintech. It refers to digital assets, financial smart contracts, protocols, and applications (dApps) built on decentralized blockchains, most commonly Ethereum.

The goal of these dApps are to flip traditional finance applications on their heads and “defy” the current infrastructure by developing their decentralized and non-custodial counterparts. Right now the bulk of DeFi’s market value is focused on stablecoins and lending applications.

As a quick note, ‘decentralized’ refers to transactions that don’t rely on a central entity to complete the transaction. Instead, digital contracts are incorporated to take out the middleman and execute a transaction from person to person. ‘Non-custodial’ ties into this concept, and means that the investor or trader keeps hold of their assets and private keys instead of giving up control to a central entity to move assets on their behalf.

The rapid rise of the DeFi sector in 2020, going up by billions in a matter of weeks, is thought to be a primary reason for the Bitcoin and Ether price rallies. So while it represents a small percentage of the crypto market as a whole, it’s worth considering.

Does a significant spike in crypto project value sound familiar?

If this rapid injection of capital into crypto projects sounds familiar it’s because it brings unfortunate flashbacks to the ICO bubble of 2017. Thousands of companies raised billions of dollars from eager investors and a year later, more than 95% of those ICOs lost most or all of their value. This disaster left investors scorned, forced regulators to step in, and created a lasting stain on the crypto industry.

Not all hot air

Now let’s look at DeFi projects. Aside from Bitcoin and Ethereum themselves as proven DeFi use cases, thousands of additional DeFi projects have been raising capital, although it’s too soon to tell which ones will survive and which ones will follow in the footsteps of past ICOs. The top four projects with the most assets locked in to date are Maker, WBTC, Compound, and Uniswap.

Investors need to do their own due diligence in what they’re backing, but crypto assets have always had a knack for creating a sense of urgency. It is also important to note that the amount of assets locked in this wave of DeFi projects still represent a small percentage of the total global market cap for crypto. As of November 2020, the global market cap for crypto is upwards of $555 billion, which means DeFi represents just 2.25% of the entire market.

Nevertheless, the surge and value push it gave to Bitcoin and Ether is bringing to light the promise and demand for these types of DeFi applications when it comes to accessibility, transparency, and the return of ownership to the user/investor.

The majority of value in DeFi is placed on lending and stablecoin projects, but these are just two proven use cases.

We believe that for decentralized finance to move from a small group of crypto enthusiasts to broad adoption, the DeFi space needs to develop applications and functionality that allow it to operate in the same world as current financial systems.

In that same breath, we believe DeFi is also ready to take on decentralized exchanges and modernize how assets are issued and traded on a global scale.

DeFi for tangible assets

Horizon has built a decentralized exchange technology to present a third use case that backs tangible assets with the core values of DeFi intact. The product is built to cater to the masses by keeping the unfamiliar term “DeFi” in the background, and instead pushes the real benefits for issuers and investors to the forefront.

This product is called Open Order Book, and the goal is to power a global network of decentralized, non-custodial securities exchanges. The technology powers investor-driven marketplaces with best bids and offers displayed on the Ethereum public blockchain in real time. It is paired with a retail trading app where investors of all levels can buy, sell, and instantly settle digital assets directly from their smartphone.

Investors alone hold their assets and private key on their phones with all transactions cryptographically signed on Ethereum, adding increased investor protection.

How it integrates the core values of DeFi

  1. Returning ownership to the investor. On an Open Order Book powered exchange, you and you alone control your assets and their movement. Today, the majority of crypto trading happens on centralized exchanges, where investors give up security for usability. This creates a honey pot of private keys susceptible to hacks. On our exchanges, we empower the investor to manage their securities as simply as they would manage their bank accounts and other payment applications.

Concluding thoughts

A lingering question when it comes to DeFi is where it’s going and if the surge will continue. We’re under the impression that in order for this trend to continue, it can’t only appeal to a select group of crypto enthusiasts. To make it more accessible and understandable to the general public, the narrative needs to shift to the positive benefits DeFi offers everyone who participates that they can’t get from traditional financial applications.

DeFi represents an opportunity to empower the individual and enable them to truly take ownership of their finances. It represents access, transparency, and financial inclusion. Our goal is to provide the tools necessary to fuel growth and adoption in the fintech market.

About Horizon:

To request a demo or to learn more about Horizon’s one-stop-shop for securities offering technology and the marketplaces our technology is powering, please visit https://www.horizonfintex.com/.

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Horizon offers a suite of integrated securities software applications for compliant issuance through secondary trading of electronic securities.

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