The Ethereum and decentralized finance ecosystem has continued to see strong growth, with 161 million unique Ethereum addresses as of July 1, an increase of 10% from the end of Q1, according to ConsenSys’s latest report on the Ethereum DeFi ecosystem in Q2 2021. 

Some 2.91 million unique addresses used at least one DeFi protocol, an increase of 65% from the previous quarter, and the number of monthly active users on MetaMask, a non-custodial wallet on the Ethereum blockchain, surpassed 7.3 million in June, the report said. 

See related article: Report: 1.7 million DeFi users now on Ethereum, 50% more since Jan. 1

Stablecoins — a key element of the cryptocurrency ecosystem that allow investors to hedge against volatility in crypto markets — continued to grow at a rapid pace in Q2 2021, representing total issuance of nearly US$65 billion, up more than 60% from the end of Q1, the report said. 

Tether (USDT)’s share of the stablecoin market dropped to 48% from 58% in Q2, and USD Coin (USDC) saw its share increase. 

“Open questions around Tether’s backing, which only this quarter revealed that 49% of its treasury is backed by unspecified ‘commercial paper,’ might be part of the reason why DeFi users increasingly prefer USDC and DAI for DeFi protocols,” the report said.

The rapid growth of stablecoins has also drawn scrutiny from regulators around the world, with China saying that they pose risks to the global financial system and U.S. Treasury Secretary Janet Yellen calling for the United States “to act quickly to ensure there is an appropriate U.S. regulatory framework in place” for stablecoins.

See related article: Stablecoins promise much, but can they deliver?

Institutional capital ‘flooding’ into DeFi

Institutional capital has also been “flooding” into DeFi, attracted by higher yields than traditional finance. “As protocols chase liquidity, attractive yields like 32.5% for providing sUSD [synthetic U.S. dollar] liquidity on Aave are increasingly becoming the norm,” the report said.

DeFi has seen greater adoption among small- and mid-cap crypto funds with assets under management of less than US$1 billion, with larger financial entities staying on the sidelines for now due to their more demanding compliance and regulatory requirements.

Investment firms “will no doubt” lead the adoption of DeFi, the report said. According to PWC, 47% of traditional hedge fund managers, representing US$180 billion of AUM, are looking at investing in crypto. An Intertrust survey found that hedge funds are expected to hold 7% of their assets, which works out to US$312 billion, in cryptocurrency in five years. 

DeFi infrastructure for functions such as compliance, trading and data analytics is being built — financed by funding rounds, strategic investments and even acquisitions — to build and scale access for institutions to access crypto, said the report, adding that new DeFi lending products such as Aave’s permissioned pools and Compound Treasury targeted for institutions had also been launched. 

See related article: Why Thailand’s oldest bank is investing US$110 million in DeFi

Rise of decentralized exchanges

Decentralized exchanges saw trading volumes surge to a total of US$343 billion in Q2 2021, surpassing U.S. Nasdaq-listed centralized crypto exchange Coinbase’s Q1 2021 total of US$335 billion, and a whopping US$173 billion in trading volume in May alone, the report said. 

“One of the significant moments for DEXs in Q2 was Uniswap’s deployment of its third version, Uniswap V3. Uniswap’s market share of DEX volume increased from 60% to 74% throughout Q2,” the report said. “The major change for Uniswap V3 is improving its capital efficiency, or concentrating funds at the price range where an asset is most likely traded.”

Alongside DeFi’s growth, decentralized autonomous organizations such as Uniswap, Compound, Aave and Synthetix have flourished in Q2 as a new organizational structure for groups to coordinate financial decisions such as for deploying capital, where DAO members typically use tokens to vote on proposals. More than US$6 billion is held in DAOs, with over 700,000 DAO members and token holders, according to DeepDao.

See related article: BitDAO raises US$230M with Peter Thiel, VCs to drive DeFi adoption

Scaling DeFi

Ethereum, which hosts most DeFi protocols, stablecoins and non-fungible tokens, has been plagued by scalability issues and high gas fees

The report notes that the median gas price on Ethereum fluctuated significantly between April 1 to June 1, from 100 gwei to 300 gwei at its peak. 

“Every DeFi user dreads when gas reaches 300 gwei, which happened on May 18 as the price of ETH slid and users rushed to interact with DeFi lending protocols to avoid liquidation, where the total gas costs exceed US$100,” the report said. “Since June, the median gas fee has been quite low, hovering around 30 gwei, or US$1.33, for a simple transfer and US$12.65 for a Uniswap trade.”

The report attributed lower gas fees recently to the rise of Ethereum scaling solutions such as layer-2 technologies that aim to dramatically reduce the cost and speed of transactions on Ethereum. 

“[Ethereum virtual machine-] compatible blockchains have really taken off in Q2, attracting users with much lower fees and higher throughput … In fact, Binance Smart Chain and Polygon’s proof-of-stake commit-chain have recently overtaken the number of transactions on Ethereum,” the report said. “As more and more layer-2 networks go live, rollups in particular, we may see assets further redistributing.”

Ethereum is set to undergo a major upgrade known as the London hard fork that will this week incorporate Ethereum improvement proposal 1559. EIP-1559 is expected to reduce Ethereum transaction fees and add deflationary pressure to the supply of Ether. The update is part of a series of upgrades as Ethereum transitions from a proof-of-work consensus model to proof-of-stake to become more sustainable, secure and scalable. “The Merge” — Ethereum mainnet’s merge with the Beacon Chain’s proof-of-stake system — will mark the end of proof-of-work Ethereum and is scheduled to take place later this year or next year.

See related article: What’s Ethereum price outlook for the rest of 2021?