The market value of DeFi has increased more than tenfold over the past year, but experts warn that hackers and criminals will take advantage of the general hype around cryptocurrency and security loopholes in projects.
The DeFi wave is growing steadily
Decentralized finance, commonly abbreviated as DeFi in the cryptocurrency circle, is gaining momentum and growing exponentially as more institutions accept cryptocurrency as alternative assets and payments.
Despite the recent ban on Bitcoin mining in China, which has caused the prices of various cryptocurrencies with higher trading volume to fall heavily, globally speaking, the cryptocurrency as a whole is only approaching the mainstream. Leading banks such as JPMorgan Chase and Goldman Sachs are considering offering cryptocurrency investment services to their wealthy clients and institutions such as Visa and MasterCard, which have recently started supporting crypto-currency transactions on their networks.
Ray Dalio, the founder of the world’s largest hedge fund, the Bridgewater Association, recently reversed his stance on Bitcoin and said he would rather hold a BTC than a bond, despite the cryptocurrency’s uncertain future, which could be partly resolved by government regulation.
DeFi, currently one of the most popular cryptocurrency apps, is gaining momentum to attract even more capital to the market. The concept covers a wide range of banking operations, such as lending, asset trading, betting, etc., which are almost entirely performed on blockchain networks, using tokens as revenue and collateral.
The main goal of DeFi is to become an alternative to the conventional banking sector and replace the traditional technologies of the current financial system with blockchain technologies based on open source protocols.
As demand grows, so does the threat
DeFi’s size has been growing since the beginning of 2020, and its growth accelerated significantly last summer. The total value of assets placed and locked in the DeFi Ethereum ecosystem has increased tenfold in just 8 months, from $1 billion in February 2020, to about $10 billion in September last year.
But the summer of Defi 2020 didn’t define how crazy the market had become, as the market’s potential didn’t seem to have reached its ceiling yet. According to statistics published by Arcane Research, the total value of Ethereum DeFi in cryptocurrency as of April 25, 2021 was $77.3 billion. Meanwhile, Binance Smart Chain( BSC), another popular blockchain initiated and managed by the Chinese cryptocurrency exchange Binance, has also raised $47.3 billion already in its Defi project.
The development of the DeFi ecosystem is still at a very early stage, and relative to the cryptocurrency market capitalization of almost $2 trillion and the huge financial market, the total cost of DeFi applications is still very small.
“Despite scalability and structural challenges such as higher Ethereum gas fees, the DeFi app has plenty of room to grow. Other potential growth areas include payments, non-fungible tokens, and derivatives, “ said Tiki Chen, head of China marketing at Kava, DeFi’s cross-network lending platform. “With the upcoming launch of the Tier 2 solution on Ethereum, there will be much more innovation in the DeF space. Other public blockchains like Polkadot, BSC, and Solana will certainly keep up with Ethereum and grow their ecosystem.”
Despite the high hopes, some industry analysts remain skeptical of DeFi. One of their biggest concerns is the DeFi security issue, as a vulnerability in the project’s smart contract code can lead to hacks that incur losses of hundreds of millions of dollars.
According to a report published by CipherTrace, losses from cryptocurrency theft and hacks of decentralized finance have reached an all-time high in the first four months of 2021.
The report also states that as of the end of April, more than 50% of crypto crimes were related to DeFi projects, with a total loss equivalent to $240 million.