Is DeFi the next ICO bubble?

By Vanessa Malone

Updated November 23, 2020*

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?

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.

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.

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.

  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.
  2. Decentralized, but with guardrails in place to protect investors. There are varying degrees of decentralization when it comes to DeFi services. While some die-hard crypto enthusiasts are all for complete decentralization, there are simply some benefits to having protections in place that leverage traditional financial guardrails. As evident in the volume of crypto trading, traders are willing to give up control of their crypto assets in exchange for liquidity. The problem is that whoever controls the private key controls the assets. The ~$14 billion of crypto locked into DeFi projects could disappear if an investor loses their private keys or if there is a hack. Open Order Book technology enables investors to verify who they are and have their assets returned to them if a private key is lost, stolen, or forgotten. In short, these digital assets are stored in a user’s smartphone wallet app and are protected solely by a users private key. Open Order Book integrates with a regulated custodian engaged by the securities issuer so that a parallel record of all asset ownership can be maintained by a regulated entity. This way, in exceptional cases, such as a lost private key, assets can be lawfully restored to their rightful owner by the issuer’s custodian.
  3. Open finance. The majority of financial services are controlled by central parties today. Whether it’s money transfers, asset purchases, or lending, you must go through an intermediary. Ethereum-based financial services instead connect individuals peer-to-peer and allow them to access basic financing more easily and affordably. While many DeFi projects can go over the general person’s head, Open Order Book marketplaces are designed to look and feel like traditional public marketplaces with an intuitive interface. To create market for everyone, we put in anti-market manipulation programmed into the software. This means no hidden fees, wash trades, inaccurate volumes, or other common manipulations. This aims to create an honest and accurate marketplace while leveling the playing field for the everyday investor.

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.

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/.

Horizon licenses and operates global securities exchanges.

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