DeFi performance in the first quarter of 2021: Ethereum's total fees are twice that of Bitcoin
Decentralized Finance (DeFi) refers to the shift from traditional centralized financial systems to peer-to-peer finance powered by the Ethereum blockchain.
From stablecoins, lending, prediction markets, margin trading, payments, insurance, gaming, and NFT markets, the DeFi ecosystem now represents a vast network of protocols and financial instruments worth over $53 billion.
Fundamentally, these financial activities are different from centralized financial activities for the following reasons:
DeFi applications are deployed as smart contracts, and the rules/logic of the application are written as code instead of being enforced by companies and legal documents.
They are global and permissionless - anyone with an internet connection can interact with them.
DeFi applications are composable. A DeFi smart contract or application can be used by other smart contracts or more complex applications, and almost all DeFi smart contracts are public open source code, which means that the entire financial system is being built in the open.
Looks like money has gone digital. We can pull out our phones and use Venmo to send money to friends. Decentralized finance takes this a step further — even the currency itself is digital, programmable, and verifiable on Ethereum’s blockchain.
One of the main benefits of DeFi on Ethereum is that financial activities are transparent and settled in real time. Wallets like MetaMask allow anyone across the globe to trade assets on decentralized exchanges like Uniswap. If someone else controls the financial rails, who the hell owns the assets we trade?
As of January 1, 2021, there are approximately 130 million Ethereum addresses. As of April 1, 2021, there are currently 146 million Ethereum addresses, an increase of 12% from the beginning of the year. MetaMask is a gateway for Ethereum and a "best" wallet in the cryptocurrency space with over 5 million monthly active users.
How many of these addresses use DeFi protocols? Still not many, it turns out. Despite a 50% increase in DeFi users this quarter, a 10-fold increase from Q1 2020, there were still 1.75 million addresses using at least one DeFi protocol at the end of Q1. Despite this, DeFi users only account for about 1% of the total addresses of Ethereum.
While all of this growth has been incredibly beneficial to the entire crypto ecosystem, the increased demand did create some challenges for the network. The median gas fee price rose from about 100Gwei at the beginning of the year to about 150Gwei on March 31, and ETH rose by 50%. At the same time, the price of ETH also rose from $732 to nearly $2,000, plus the dollar value of the gas fees that users need to pay. The increase in gas fee prices and ETH prices caused the average transaction fee to increase from $5.4 at the beginning of the year to $22.9 at the end of the first quarter, an increase of about 4.2 times.
In the first quarter of 2021, Ethereum’s total fees are twice that of the Bitcoin blockchain. Uniswap charges nearly half of Bitcoin’s fees, which are yields generated by liquidity providers of various tokens. For other DEXs, such as Curve, some of these fees will actually go to the vault fund itself. In the future, these fees may be distributed to users based on the amount of tokens they hold, or their vaults may be used to buy back tokens on the open market. They can also accumulate the value of the DeFi asset itself.
The continued growth of DeFi in the first quarter was matched by a corresponding increase in the supply of stablecoins on Ethereum. This correlation makes sense given that stablecoins are the primary medium of exchange and can be leveraged in DeFi applications to earn yield as loans, liquidity provider return on investment (LP), or as collateral for synthetic products . Ethereum’s total stablecoin supply nearly tripled from $19.5 billion on Jan. 1 to $37.4 billion on March 31. Looking at the year-to-year data, this trend is even more pronounced as the stablecoin supply increased nearly sevenfold from $5.5 billion at the end of Q1 2020 to $37.4 billion at the end of Q1 2021.
Ethereum is not only the settlement layer for nearly all leading dapps, but for nearly the entire digitized dollar ecosystem. On March 31, the total supply of stablecoins was approximately $42 billion, more than 4 times the total supply at the end of the fourth quarter. Even traditional financial services companies like Visa will allow settlement of transactions against USDC on Ethereum, showing that stablecoins are moving far beyond the use cases of traditional cryptocurrencies.
Additionally, demand for algorithmic stablecoins with novel peg structures continues to rise. Recently, the Fei protocol raised 639,000 ETH, which is about $1.27 billion at current prices. Fei uses a new stabilization mechanism called direct incentives, using dynamic minting rewards for DEX volume and penalties for DEX volume to maintain the stablecoin’s pegged exchange rate. Their mechanism does not require an over-collateralized debt system to achieve stability, which makes it different from MakerDAO's DAI. They use bonding curves to maintain a peg. However, these new algorithmic stablecoins pose significant challenges. Due to the way the protocol was designed, it became impossible to sell FEI tokens because its liquidity pools priced the tokens at a negative value, prohibiting purchases due to loopholes in the system rebate mechanism.
Other algorithmic stablecoins use elastic supply to maintain their pegs. Ampleforth is a leader in elastic supply algorithmic stablecoins. When the price is above the peg, the total amount of Ampleforth increases. Therefore, if we have AMPL in our wallet, our AMPL balance will actually increase correspondingly because the new AMPL distribution means lower prices. When the price is low, Ampleforth actually reduces the supply, which causes wallet supply to decrease. Algorithmic stablecoins based on elastic supply are far more volatile in price than dollar-backed stablecoins, with AMPL falling to lows of 32 cents and rising to highs of $4.
In the first quarter of 2021, every segment of DeFi benefited from a 50% user growth. DEX trading volume increased 2.5 times from about $25 billion in December last year to $63 billion in March this year. Uniswap’s weekly trading volume increased almost 1.6 times from about $5 billion in the first week of January to about $7.8 billion in the last week of March. Interestingly, Sushiswap’s weekly DEX trading volume has declined, from about $2.6 billion in the first week of January to about $1.9 billion in the last week of March, a drop of about 27%.
From January 1, 2021 to March 31, outstanding DeFi loans increased threefold from approximately $3.6 billion to $10.8 billion. During the first quarter, assets worth approximately $3.3 billion were borrowed, a 2.75-fold increase from net borrowing of approximately $2.75 billion in the fourth quarter. Aave has experienced similar growth. From January 1 to March 31, Aave's total outstanding loans increased nearly 2.4 times from $670 million to approximately $1.6 billion.
With the base exponential growth of DeFi projects from users to Total Value Locked (TVL), we should not be surprised that the market recognizes these improvements in the ecosystem. DPI is a decentralized financial market cap-weighted index token that tracks leading DeFi-related digital assets (AAVE, Synthetix, Uniswap, Yearn Finance, Compound, Maker, REN, Loopring, Kyber Network, and Balancer). It rose from about US$117 on March 31 to US$410 on March 31, an increase of 3.5 times. BTC only increased by 2 times during the same period, suggesting that the growth in the value of DeFi assets may be related to increasingly strong fundamentals, rather than just being driven by the overall rise in popularity of digital assets.
However, high fees are an ongoing problem for DeFi users. Therefore, DeFi developers want to move their applications and users to layer 2 to take advantage of lower gas fees. The TVL of layer 2 increased by 7.1 times from $38.4 million on January 1 to $273.4 million on March 31. DeFi applications, such as Synthetix and dYdX, have announced that they are actively working on integrating with layer 2 solutions. Synthetix has been working with Optimsm for several months, and dYdX recently announced that their new cross-margin perpetual investment is on Starkware’s STARK-based Rollups solution. We expect this trend to become more prominent throughout the remainder of the year.
Google searches for the term “NFT” reached an all-time high in early March. The search amount is relative to 0 ~ 100, and 100 is the maximum value within the specified time period. Google searches for NFTs hit 100 on March 12. NFTs are essentially data minted on the blockchain as liquid intellectual property. This data can be art, game virtual goods, reputation scores, access to private networks, etc.
The rapid growth of NFTs can be attributed to a variety of factors: due to the coronavirus pandemic, the income-generating activities of many artists have disappeared, and people are spending record time on the Internet. The global pandemic has changed the way we use the internet. NFTs shift the default ownership of digital IP from platforms to creators, with 62% of artists currently unemployed. Before the pandemic, visual artists had few, many mediums through which to reap the benefits of art; creating commissioned artwork, illustrations for corporate settings, side hustles, and/or wealthy parents. The pandemic has created a favorable environment for network-addicted and unemployed artists to monetize their work, and NFT trading platforms have emerged, including technical requirements to support the development of NFT trading standards.
By the end of 2020, the total market value of NFT encrypted art was $52,293,650 (42,720 ETH), with 53,663 unique artworks sold on the top five platforms. Currently, the total market value of crypto artwork is $490,242,627.92 (244,953.521 ETH), with a total of 151,977 artworks sold in the past 30 days.
In contrast, the transaction volume of the global traditional art market has steadily declined due to the epidemic. The global art market was worth over $67 billion in 2018 and is currently worth $50.06 billion. The 2019 Art Basel and UBS Global Art Market Report stated that 92% of millennial collectors said they had purchased art online, but the report did not include NFT art sales. Today, millennials make up nearly half (49%) of global collectors and are also the most active consignors, with 71% of millennial collectors saying they have resold works from their collections, while baby boomers The home is only one third. With online art sales soaring, and bonding curve-based NFTs and ERC-1155-based digital artworks, these new creations create an enticing asset class for millennials looking to speculate and resell art for profit.
Many news outlets are reporting a drop in searches for the term “NFT,” as well as a drop in the average selling price. However, artistic NFTs account for only 11% of the overall NFT market distribution.
