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A snapshot of DeFi mid-2020

With the recent halving of Bitcoin, there is renewed interest in the world’s bigger cryptocurrency. But what’s going on in DeFi? How has DeFi fared during the March cross-asset sell-off and what does the future hold for the innovative space of decentralized finance?

The tumble in March

The stock market meltdown that happened in March 2020 as COVID-19 became a global pandemic, spared no industry. Assets in all classes tumbled, gold dropped double digits, oil reached negative territory, and Bitcoin sank down to the $4,000 range. The amount of ETH locked in various DeFi protocols and applications is an indication of user engagement, and that amount dropped in tandem with the rest of the global economy.

Total ETH locked in DeFi was at 3.146M mid-Feb, and by mid-April it was down to 2.686M – a 15% decrease. Bear in mind we’re talking about ETH locked into DeFi, not the price of ETH itself which was cut in half during the same period. The withdrawal of ETH applies to all major categories in the decentralized finance ecosystem including lending, DEXs, Derivatives and Payments. The only sector that saw a rise in total value locked in was Assets, largely dominated by the Set Protocol.

Set Protocol allows for the creation, management, and trading of Sets, ERC20 tokens that represent a portfolio or basket of underlying assets. The first user-facing application was launched in 2019 as TokenSets, and it offer two types of sets: social trading sets with strategies executed by human traders and robo-sets with hard-coded strategies. Each Set periodically rebalances its portfolio according to a strategy coded into its smart contract.

That said, if you bought into any of the sets available before ETH dropped, your portfolio would have gone down with the market. Some users voiced their disappointment in the TokenSets Telegram channel, considering the protocol’s promise is “your crypto portfolio on autopilot”.

Do people trust the trustless DeFi ecosystem?

DeFi works without central authorities or third parties. Anyone can join the movement and take actions on their own accord whether it’s lending, borrowing, opening high-interest savings accounts or any other of the many financial services available. It is a trustless alternative financial system that is equitable, fair and neutral.

But, it does require people to trust in its design. A trustless ecosystem can only thrive if the people believe the system is robust and their assets are safe. Only then, will we move on from people motived by speculation and potential profits to crypto holders that are interested in the underlying technology and use the applications for practical means.

For the time being, it seems most remain somewhat cautious when it comes to engaging with DeFi. A DeFi report commissioned by ConsenSys Codefi argues that most users will try out a protocol with a small amount for the purposes of experiments and learning. The report illustrates the point by looking at the way people have engaged Collateralized Debt Positions (CDPs).

These are smart contracts, or code that self-executes when certain conditions are met, which can be used to create stablecoins in exchange for collateral – which is how Dai works. The report found that 95% of all CDPs are opened purely for testing purposes, a conclusion drawn from the fact that most of their value is below 0.0058 ETH. Whales dominate the remaining 5%, with CDPs north of 1,000 ETH.

Trust is key for attracting retail DeFi users and making this trustless ecosystem work. Given that DeFi, or crypto in general, is still perceived as risky, creating trust demands a combination of education and experimentation. News such as the recent dForce hack where attackers exploited a vulnerability in Uniswap and Lendf.Me to steal $25M certainly doesn’t help to instill confidence, but over time it does make the system more robust and reliable, opening up the way for a rising retail DeFi userbase.

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