DeFi Adoption Is Still Far From Mainstream: Chainalysis

Mainstream adoption of decentralized finance (DeFi) protocols remains at an early stage relative to the wider crypto industry, a Chainalysis report released Tuesday said.

In its "Global DeFi Adoption Index," the blockchain data firm found that while DeFi adoption has increased significantly over the past 18 months in both emerging and developed markets, most of that growth has occurred in countries and regions with higher incomes and more professional investors and traders.

DeFi adoption “has primarily been powered by experienced cryptocurrency traders and investors looking for new sources of alpha in innovative new platforms, even when we weight our index to favor grassroots adoption,” the report said. Alpha refers to a return on investment beyond a benchmark.

Although DeFi has attracted larger investors, the sector will need to do better in engaging smaller retail investors, the report said.

DeFi minnows wanted

DeFi, a crypto sub-sector in which financial services use smart contracts to facilitate transactions without intermediaries, has skyrocketed over the past year, as the total value of crypto assets in that corner of the crypto market surged from roughly $5 billion to $159.52 billion, according to data tracker DeFi Llama.

According to Kimberly Grauer, director of research at Chainalysis, the majority of DeFi use cases are “more sophisticated” applications that have posed challenges for retail investors to embrace.

The Chainalysis index used three metrics that emphasized grassroots DeFi activity – on-chain crypto volume received by DeFi platforms, total retail value (transactions of under $10,000) and individual deposits to DeFi platforms – to rank 154 countries.

The on-chain crypto volume received by DeFi platforms, for example, is adjusted by purchasing power parity (PPP) per capita, meaning that if two countries contributed the same amount of volume to DeFi, the country with lower PPP per capita would rank higher.

Developed markets, including the United States, the United Kingdom, Netherlands and Canada remain among the top-ranked countries in the index, although emerging markets such as China, India, Thailand and Vietnam have shown high DeFi adoption rates, too.

The report’s findings also differ from an earlier Chainalysis’ report on the larger crypto market, which showed higher adoption at the grassroots level.

Based on monthly web visits to DeFi platforms by geographic location, DeFi’s popularity grew most notably in North America between April 2019 and June 2020, and then in Western Europe starting around September 2019. Other regions started catching up in June 2020 – the beginning of last year's "DeFi Summer."

A breakdown of the transaction volume based on transaction sizes also shows that institutional and professional DeFi activity has gradually increased over the past 18 months.

“Right now, DeFi is targeted towards crypto insiders,” David Gogel, growth lead at decentralized derivatives protocol dYdX, said in the report. “It’s people who have been in the industry for a while and have enough funds to experiment with new assets.”

Gogel added that once gas fees on the Ethereum blockchain drop over the long term, DeFi platforms, which are mostly built on Ethereum, will become more accessible to ordinary people. Gas fees refer to the cost of transactions on Ethereum, which require computational power to execute. The fees are paid in Ethereum’s native currency, ether.

“The question for the coming years is whether we’ll see DeFi follow the same pattern as the cryptocurrency services that came before it, with wider swaths of the population adopting it for tangible benefits beyond speculation and investment,” the report concluded.