DeFi reaches $1 billion milestone in locked funds, Analyst: Mostly driven by Ether price surge

Decentralized Finance (DeFi) made a splash in 2019 and hit a milestone in February this year by locking over $1 billion in assets. However, cryptocurrency analytics firm Messari has a different view, suggesting that the growth in locked value is primarily due to the rise in Ether (ETH) prices rather than inflow of external funds.

• Ether has surged more than 100% this year
• Slow growth in total locked value of Ether

Total Locked Value (USD) Grows by 70%

Analyst Jack Purdy stated that the locked USD value is widely seen as a key indicator of decentralized finance growth, reaching a milestone of $1 billion recently, likened to Bitcoin's $10,000 mark, now standing at $1.15 billion as of the deadline.

While the growth in locked value is a positive signal for the DeFi ecosystem, Purdy believes a broader perspective is needed. He pointed out:

It is clear that the locked value highly depends on the price of Ether (ETH), which has doubled since the beginning of the year. Therefore, the surge is also locked into DeFi, although its growth also comes from contributions of other projects.

Additionally, Purdy mentioned the rise of DeFi giant Synthetix (SNX) last year, with SNX currently locking $125 million, and its token's price surged by 3,000% in 2019. However, 80% of the tokens are used for collateral, resulting in very low liquidity for SNX, with trading volume below $1 million, indicating its actual value may not be as high as it seems on paper.

Nevertheless, SNX remains an important part of the DeFi ecosystem, but more precision is needed in the statistics of locked value.

Minimal Growth in Total Locked Value of Ether

As shown in the chart below, the total locked value of Ether has only grown by 5% since the beginning of the year, while the USD locked value has surged by 70%, confirming Purdy's statement of "over-reliance on Ether price."

Therefore, Purdy believes that there haven't been many new users or funds entering the DeFi space this year, and the growth is partly due to profits generated within the ecosystem. He explained:

Just like using Ether to collateralize and obtain Dai through Maker to buy more Ether, the "seller" may also be a long-term holder of Ether who is unwilling to bear price fluctuations and converts Ether to Dai, then goes to Compound to lend and earn interest. Or perhaps another user wants to arbitrage price differences on Uniswap, thus collateralizing Ether in Compound for Dai.

Purdy emphasizes that in these transactions, the locked amounts continue to increase, indicating that DeFi applications have achieved their purpose, but it doesn't necessarily mean continuous growth of the overall DeFi ecosystem or the entry of new users and capital. Purdy further explained:

I believe the locked asset value in DeFi is still an important indicator, but it's crucial to understand the true meaning behind the numbers. In other words, assets locked in DeFi do not represent the growth of DeFi, but rather a growing confidence in DeFi.

Purdy concluded that as cryptocurrency users increasingly trust the value provided by these protocols, the common beliefs derived from ideology will greatly promote the overall development of DeFi and crypto technology. Continued dissemination will capture external attention, making cryptocurrencies mainstream.

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