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Decentralized Finance (DeFi)

Disrupting the traditional financial system using blockchain

Overview

Decentralized Finance or DeFi comprises peer-to-peer financial services that use blockchain technology and eliminate intermediaries such as banks that make up the traditional financial system (TradFi). It has several advantages over TradFi, such as faster transactions, greater transparency, and streamlined cross-border transactions, among others. 

The Ethereum blockchain is home to the most number of DeFi projects, contributing to nearly 59% of the total value locked (TVL) in DeFi as of March 2023. Developments in blockchain technology have allowed for the creation of decentralized apps using smart contracts, which have, in turn, enabled DeFi. However, a high volume of activity has strained Ethereum, resulting in slower processing times and steep transaction fees. Planned upgrades to the chain, along with new blockchains emerging with innovative processes and interchain compatibility, are set to bring about more efficiencies in the space.

The search for high yields is the primary driving factor for this sector, as investors seek to generate returns that have consistently outperformed traditional investments like treasuries. In addition, a sizable underbanked population and difficulties faced by SMEs in obtaining credit are likely to drive demand for credit through DeFi applications.

What's driving this industry?

Industry Updates

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Market Sizing

The US protocol revenue for DeFi projects could reach USD 8.9 billion–16.6 billion by 2027

Conservative case

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Base case

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Expansion case

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Market Mapping


Most startups in the DeFi space operate in the borrowing and lending segment, while much of the incumbent activity is seen in the marketplaces and wallets segments. The incumbents are mostly established cryptocurrency exchanges as most DeFi projects also operate in the same blockchains as major cryptocurrencies. These incumbents mostly have internally developed solutions to expand their existing marketplace and wallet offerings to support DeFi protocols, enabling access to tokens from DeFi projects such as Compound, from the borrowing and lending segment.

While limited, the infrastructure segment is also seeing activity from traditional banks, as they experiment with blockchain technology in their own internal processes or to trial DeFi projects. Another notable incumbent is the Ethereum Foundation (a non-profit dedicated to supporting the Ethereum blockchain), home to the most number of DeFi projects. Startups in the infrastructure segment have garnered the most funding as Ethereum-challengers emerge, offering high performance at a lower cost.

Most disruptors operate as decentralized autonomous organizations (DAOs), a non-hierarchical governance structure where holders of the DeFi project’s native token are able to vote on strategic and operational matters of the DAO. Further, given the relatively young age of the disruptors (and the industry itself), most DeFi startups are at an early/seed stage.

Incumbents
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The Disruptors


Funding History

Competitive Analysis


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Incumbents


Cryptocurrency exchanges see DeFi as a natural extension of their offerings; traditional banks still testing the waters 

As most DeFi projects are based on the same blockchain as popular cryptocurrencies (such as Ethereum), established cryptocurrency exchanges such as Coinbase and Binance can expand their offerings to cover DeFi-related projects with relative ease. These exchanges are using their existing marketplace offerings to allow users to swap DeFi-related tokens, hold them using the same wallets as their crypto, and even provide direct access to deposit their tokens into yield-generating tokens like DAI from MakerDAO.

Traditional banks are yet to fully break into this space, as they are restricted by their internal compliance measures and an overall risk-averse approach to innovation. However, large international banks (such as JPMorgan and ING) are taking steps like experimenting with blockchain in their internal processes, working on building the infrastructure to develop apps on top of it, and testing peer-to-peer DeFi protocols in regulatory sandboxes.

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Notable Investors


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