DeFi in 2019: From the Margins to the Mainstream, Challenges and Opportunities Coexist

In 2019, Decentralized Finance ( DeFi ) gradually evolved from a community fringe concept to an industry mainstream narrative, attracting more and more attention from both inside and outside the industry. As the luster of Bitcoin and Ethereum diminished, DeFi began to carry more expectations. So how did DeFi develop in the past year? What new changes will 2020 bring?

From Monopoly to Flourishing Diversity

Looking back to early 2019, MakerDAO was almost the only "star" project in the DeFi space, holding an absolute advantage in user numbers, locked value, and business model. However, the market landscape changed rapidly. By the end of 2019, MakerDAO's share of the total locked value in DeFi had dropped to around 50%, with emerging synthetic asset platform Synthetix, lending platform Compound, and InstaDApp among others capturing a significant market share, resulting in a diversified competitive landscape in the DeFi ecosystem.

Data shows that by the end of 2019, the amount locked in the DeFi ecosystem was close to $670 million. In terms of various segments, impressive projects have emerged in areas such as lending, decentralized exchanges, payment, and asset management. Among them, the lending platform Nuo Network on Ethereum performed the best, with the amount locked growing by 116,000 times over the year, reaching $6.96 million. Overall, lending projects lead significantly in both total locked amount and growth rate.

In contrast, star projects in 2018 such as Augur and Bancor performed mediocrely, with the locked amounts decreasing by 42.94% and 68.60% respectively in 2019. The prediction market project Veil, closely related to Augur, despite receiving top-tier capital support, announced its shutdown just six months after launch.

Outside of the Ethereum-based DeFi, the Bitcoin Lightning Network has also made significant progress. By the end of 2019, the number of Lightning Network nodes reached 10,925, with 35,298 channels and approximately $6.25 million locked in the network.

Capital Favor, Financing Exceeds 500 Million Yuan

In 2019, DeFi projects raised approximately $74.2 million, exceeding 500 million RMB. The lending sector accounted for the vast majority, reaching as high as $61.9 million. MakerDAO ranked first with two rounds of funding totaling over $27.5 million, followed closely by Compound with $25 million, and the Lightning Network development team ACINQ received $8 million in funding.

The investors are primarily top institutions from the United States, such as a16z, Coinbase Ventures, Polychain, and Paradigm. Institutions with a Chinese background include Dragonfly Capital and NGC Ventures.

Overall, the DeFi ecosystem in 2019 showed a robust growth trend, with an increasingly rich array of products, and the business model centered around MakerDAO has begun to be validated. Although it also faced some setbacks, the boundaries of DeFi continue to expand, extending to public chains like Bitcoin, EOS, and Polkadot, and giving rise to various DAOs and decentralized exchanges among other broad DeFi applications.

Decentralized Finance仍面临诸多挑战

Despite significant progress, there are still some urgent issues that need to be addressed in DeFi:

1. The development of the underlying public chain is below expectations, with weak prices and liquidity. Issues such as the delay of the Ethereum 2.0 upgrade and congestion in the EOS network have affected the development of Decentralized Finance.

2. Systemic risk is concealed. DeFi projects are highly interconnected, and issues in a single project may trigger a chain reaction. The low asset utilization caused by over-collateralization is also a hidden danger.

3. The user base is small and overlaps significantly. The daily trading volume and number of users in Decentralized Finance are still limited, and there is still a long way to go in educating and cultivating mainstream users.

4. The operation is complicated, the concepts are obscure, and the user experience needs improvement.

2020 Decentralized Finance Development Outlook

1. BTC may gradually replace ETH as the core anchor asset of the Decentralized Finance ecosystem.

2. The broader DeFi landscape will further unfold, with the inclusion of central bank digital currencies and projects like Libra intensifying competition.

3. CeFi and Decentralized Finance may strengthen cooperation, which is expected to significantly enhance liquidity.

4. After Ethereum's transition to PoS, it faces regulatory risks of being classified as a security, which may impact the Decentralized Finance ecosystem.

Overall, Decentralized Finance is in a period of rapid development, with opportunities and challenges coexisting. How to avoid risks and improve user experience while maintaining innovation will be the key to the development of DeFi in 2020.