Despite the exponential growth of decentralized finance (DeFi) over the past year, DeFi users only represent about 1% of total Ethereum addresses, according to a report on Ethereum’s DeFi ecosystem in Q1 2021 released by ConsenSys.
There are now over 150 million unique Ethereum addresses as of May 5. The number of DeFi users — 1.75 million — while still small for now, is growing fast, increasing by 50% in the first quarter of 2021.
Ether (ETH), which has a total market value of about US$400 billion, is the second-largest cryptocurrency by market value after Bitcoin and the vast majority of DeFi protocols and stablecoins operate on the Ethereum network. There is over US$93 billion in total value locked (TVL) in DeFi protocols on Ethereum and over US$136 billion in TVL across the different blockchains, according to DeFi Llama.
7x growth in stablecoins year on year
DeFi’s continued growth from 2020’s “Summer of DeFi” corresponded with an increase in stablecoins on Ethereum. Stablecoins are the main medium of exchange and can be used in DeFi applications to earn yield through lending, providing liquidity, or as collateral. Stablecoin supply increased by almost seven times from US$5.5 billion at the end of Q1 2020 to US$37.4 billion by the end of Q1 2021, according to the report.
Uses for stablecoins are also extending to traditional finance. In March, Visa announced that transactions can be settled with Visa in USDC, a stablecoin backed by the U.S. dollar, on Ethereum. “We’ve also seen the emergence of new use cases forming around USDC, including cross border B2B payments, trade settlement, and remittances,” noted Visa in a blog post. “The implications of our work with stablecoins are potentially far reaching — enabling our ability to one day support new Central Bank Digital Currencies (CBDC) as they become available.”
Alongside the explosive growth in DeFi, NFTs and stablecoins, high gas fees have been a persistent problem. The median transaction cost or “gas fees” increased from about 100 Gwei — a tiny fraction of Ether also known as “Nanoether” — at the beginning of 2020 to around 150 Gwei at March 31, a 50% increase in ETH. The increase came as ETH prices also increased, compounding the dollar value of the gas fees. ETH, which is currently trading around US$3,400 has seen its price increase by more than 1,500% in the past year.
As a result, DeFi developers have been moving their applications and users on to layer 2 in order to take advantage of lower gas fees, with TVL on layer 2 increasing over seven times from US$38.4 million on Jan. 1 to US$273.4 million by March 31. The report noted that leading DeFi applications such as Synthetix and dYdX are integrating with layer 2 solutions and expects the trend to strengthen for the rest of the year.
See related article: As DeFi swells past US$140 billion, FATF stokes worries over KYC/AML
NFTs beyond art
Although Google search interest in non-fungible tokens (NFTs) — unique, non-interchangeable (non-fungible) digital assets whose authenticity and true ownership are tracked on a blockchain — have somewhat cooled, the report notes that art NFTs only represent 11% of the overall NFT market distribution, and predicts that games and gaming NFTs will “skyrocket” with the transition to Ethereum 2.
See related article: The best of Ethereum 2.0 is yet to come, says Infura GM
DeFi trends to watch
Decentralized autonomous organizations (DAOs) investing in NFTs and flashbots dominating the Ethereum network are trends to watch in the second quarter of this year, according to the report.
Almost all major DeFi applications — from Uniswap to Aave to MakerDAO — are now governed by DAOs, which provide a mechanism for protocol development and treasury management through smart contracts on the blockchain.
DAOs are emerging as a new mechanism for NFT ownership, where decentralized apps (DApps) and smart contracts facilitate community-led NFT acquisitions.
In March, a group of NFT collectors formed a DAO to pool funds to bid for an NFT of Uniswap’s V3 video created by a digital artist who goes by “@pplpleasr1,” The DAO — called “PleasrDAO” won with a 310 ETH, approximately US$525,000 at the time of purchase. The DAO subsequently went on to win an NFT minted and sold by U.S. National Security Agency contractor-turned-whistleblower Edward Snowden for 2,224 ETH, or around US$5.5 million at the time of purchase. The proceeds of both NFTs went to charities.
Similarly, Flamingo, an NFT-focused DAO that is organized as a Delaware limited liability company, was also formed to purchase NFTs in the Ethereum ecosystem. FlamingoDao is member-managed and relies on smart contracts to facilitate the purchase of NFTs. According to the report, FlamingoDao has a treasury of 6,240 ETH.
FlamingoDao was one of the investors in a recent US$1.3 seed round by Yield Guild Games, a gaming NFT focused DAO, which included Delphi Digital, Scalar Capital, Animoca Brands, among others.
See related article: Beyond NFT’s hype: Artists and crypto experts take a hard look at NFTs
Another trend, Flashbots — a research and development organization that aims to mitigate the negative effects of maximal extractable value (MEV), also called miner extractable value, to smart-contract blockchains — have also garnered attention. The MEV on Ethereum today is predominantly captured by DeFi traders through structural arbitrage trading strategies and miners indirectly profit from these traders’ transaction fees, according to a Flashbots blog post.
“Miners are running MEV-adapted geth clients (flashbots) that are taking inefficient on-chain bidding wars off-chain,” tweeted “@0xEther” who frequently comments on Ethereum. “This is likely why — even though $ETH is claiming new ATHs — gas prices are still under 3 figures.”
In March alone, 12 mining pools using flashbots for mining accounted for over 58% of Ethereum network hashrate.
Ethereum’s next network upgrade — “London,” which is scheduled to take place around July 14 — aims to improve the efficiency of gas fees. The upgrade will incorporate the Ethereum Improvement Proposal (EIP) 1559 on fee market change, which involves replacing the transaction pricing mechanism from the current price auction model, where miners choose transactions with the highest bids, to a fixed-per-block network.
The impact of Ethereum network upgrades like EIP-1559 that simplify gas fees on arbitrage and trading strategies involved in using bots remains to be seen, according to the report.