Is Yield Farming bringing new users to DeFi? By Mohamed Fouda
With the rise of Yield Farming, billions of dollars flooded into various DeFi protocols. In less than two months, the total dollar value locked in DeFi tripled, going from $1B to more than $3B. These estimates don't account for cyclic borrowing and lending of the same asset which, when taken into consideration, inflate the value locked in Compound to $1.2B alone.
There are now 4 protocols that have half a billion-dollars locked in smart contracts, a DeFi milestone only MakerDAO could claim until recently.
The three billion-dollar question is, of course, where is this money coming from?
Are new inflows coming from new users? Or is this just a case of financial musical chairs - a reshuffling of existing crypto investors masquerading as industry growth? We can begin to answer this by looking to the activity on DeFi onramps, specifically two types 1) classic fiat onramps focused on DeFi like Dharma and 2) stablecoin issuance.
Stablecoins, particularly Tether (USDT), are some of the largest onramps for crypto in general and for DeFi in specific. USDT and USDC are major fiat-backed stablecoins with integrations to popular DeFi protocols, so analyzing their supply provides some signal as to whether recent DeFi growth comes from attracting new investors or not.
USDT (ERC20) Supply between June 1st and July 15, Source: Coinmetrics
The chart above shows USDT (ERC20) supply only grew by $200M between June 1st and July 15th. Additionally, USDC supply grew by about $380M in the same period. But the delta for DeFi total value locked (TVL) in the same timeframe is ~$2B. Realistically, not all new issuance flows into DeFi protocols, but even if we assume so, the total represents less than 30% of the growth of DeFi TVL.
In addition to stablecoins, we ought to analyze classic crypto onramps. Though popular crypto exchanges are important onramps, onramps/onboarding platforms that focus on direct DeFi integrations are particularly important to study. A good example is Dharma which allows users to instantly plug into DeFi by converting their fiat into DAI and lending that DAI on Compound to generate yield for users.
Other players in this vertical like Ramp and Transak try to provide similar services. For instance, DeFi lending app Aave recently partnered with Transak to provide direct onramp from fiat to Aave supported tokens.
The volume facilitated by classic onramps typically isn't made public, but suffice it to say it's much smaller than the volume facilitated by stablecoin issuance for several reasons. The most obvious one being that classic onramps are geared towards retail investors, while stablecoins are more appropriate for trading firms and other institutional players.
Circulation of Money
Since current onramp activity doesn’t show meaningful inflows from new investors into DeFi, the logical conclusion is that the current increase in DeFi TVL is mainly a recirculation of money within the current crypto market. For many existing crypto users, the yield earned from $COMP, $LEND, $BAL likely justifies the risks of moving cold-stored coins into DeFi protocols. In that sense, DeFi hasn’t actually gained significant traction yet from mainstream users.
Regardless, DeFi is a promising phenomenon that has the momentum to attract mainsteam users away from traditional financial institutions. It’s expected that the movement will slowly garner attention over time as digital assets are more widely adopted and the UX of dedicated onramps continues to improve. The burden remains on DeFi products to scale beyond the existing crypto-native user base.
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