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DeFi Challenge: Organic User Adoption

Sead Fadilpašić
Last updated: | 3 min read

DeFi (decentralized finance) protocols to face the same challenge as all cryptos on their path in 2020, and it’s organic user adoption.

Source: iStock/pidjoe

The growing trend of DeFi, which marked 2019, has in fact been highlighted by a large increase in the number of assets being locked up in different DeFi protocols. However, a potential challenge facing DeFi protocols will be related to organic user adoption, according to financial technology and data company Digital Assets Data (DAD).

Organic growth, in general, refers to the growth rate achieved by increasing output, expanding the customer base, increasing sales internally, etc.

“Adoption is a challenge for all of crypto,” Brandon Anderson, Data Science Lead at DAD told “We would like to see protocols in this space have growth throughout the whole range of address sizes. We are currently doing additional research to separate these accounts into categories that will allow us to see things on a more granular level.”

Following their analysis of Maker‘s Dai Stablecoin System and the current distributions, the company concluded that the majority of assets being locked and borrowed in the DeFi space is actually the responsibility of just “a few addresses.” Some 155,000 Collateral Debt Positions (CDP’s) were created on the old version of the Maker protocol, while 77% of these positions with positive amounts locked held less than ETH 0.05.

As a reminder, MakerDAO is the creator of a decentralized stablecoin Dai, which is stabilized against the value of the U.S. dollar and backed by crypto collaterals that can be viewed publicly on the Ethereum blockchain. It enables others to stake their crypto as collateral in order to borrow the stablecoin. In November 2019, as reported, MakerDAO system has seen the activation of Multi-Collateral Dai (MCD) that can be backed by multiple assets. Therefore, the single-collateral Dai generated with only ETH became Sai, while the MCD took on the name Dai.

This also means that each asset has its own CDP or vault, and DAD found that some 3,500 vaults have been created in the new system.

“However, these accounts in the lower tier of vaults appear to be actual adopters with more than 1 ETH being locked into the accounts,” said Anderson.

According to DAD, there is one address that maintains 27% of the value locked in CDP’s on the old version, while “the new Vaults system has a similar distribution, with one address holding 15% of the value locked.”

MakerDAO’s Dai Stability system still dominates the space, as it boasts more than USD 400 million in assets locked up, additionally being at an all-time high in the number of ETH locked up, which is some 2.5 million, or about 2.2% of the total supply, according to Digital Assets Data.

On the other hand, due to ETH’s price drop, the USD value locked dwindled from its all-time high of c. USD 500 million recorded in June. The company finds a key question for 2019 to be: will MakerDAO continue its dominance, or will investors move to other protocols that provide higher yields?

As to what can be done to surpass the adoption challenge, Anderson said that:

The applications these protocols are building are making interaction with the Ethereum network easier to use. This ease of use might provide better on-ramps for other individuals who may not want to deal with the technical burdens. As these applications continue to evolve and more users join a given protocol, you could see an increase in smaller accounts, potentially an increase in large accounts that see it as a solid investment.

According to him, adoption of DeFi protocols can result in more demand for ETH in order to interact with these contracts (i.e. to lock values up or to transfer value between them).

“This provides a greater value proposition for ETH as well as the protocol tokens that are being adopted,” the Data Science Lead said.

Meanwhile, a report found in October 2019 that dapps (decentralized applications) are experiencing “huge growth,” with Ethereum-powered services leading the way. Ethereum-powered DeFi dapps picked up 310,000 new users in Q3 2019, which was the largest quarter-on-quarter growth rate. Maker dominance rate on the DeFi scene, was almost 51% in early October, per DeFi Pulse, whereas that number now is 57%. Total value of funds locked in DeFi apps at the time of writing (12:04 UTC) is USD 856.9 million, down from yesterday’s all-time high of USD 893.8 million, out of which USD 493 million is in Maker.
Learn more: DeFi is the Ultimate Defense Against Political/Financial Disasters