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Decentralized finance (DeFi) applications on the Ethereum blockchain have continued to grow and gain popularity. The total amount of ether locked in them—being used within the apps—has nearly doubled over the last few months. The figure has reached a new all-time high of 3.1 million ether, worth $798 million.
This shows considerable growth. Back in November, Decrypt reported that the amount of ether locked up was just 2.4 million ETH ($439 million).
While the amount of ether has grown, the value locked in it has risen at a higher rate. However, that’s largely because the price of ether has shot up in recent days as the crypto market has seen a resurgence in prices.
“It seems that during yesterday's little bout of crypto volatility there was a significant increase in the amount of money being deployed in this new area of the market. Presumably, traders were using this new option to increase their capital in order to take advantage of the huge moves in the market," wrote Mati Greenspan, crypto analyst and founder of Quantum Economics.
Among the top three DeFi projects with over $100 million worth of ETH locked up, decentralized lending app MakerDAO is still in the lead with $452.4 million—up from $335.4 million in November.
Maker’s closest competitor last year, open-source protocol for financial applications Compound, has lost some ground, falling to the third position with $104.5 million.
This time around, second place is taken by crypto-backed synthetic asset platform Synthetix, which increased its ETH lock-up from $99.4 million to $148.8 million.
Why is this a good thing?
Users lock ETH in DeFi applications and make their coins inaccessible for various reasons. In the case of Maker, for example, the platform allows freezing some ether as collateral to take a loan in DAI, an algorithmic stablecoin pegged to the US dollar.
Theoretically, if the supply of ether in circulation gets smaller, this could push up demand relative to supply and put upward pressure on ETH’s price. This is why Ethereum supporters see the coins being locked up on DeFi platforms as a good sign. The rapid development of such apps could also signify a strong real-world use case for the network.
However, Greenspan warns, “For anyone thinking about entering the space, just know that if lending your money to the government of Brazil is considered risky, lending it to a crypto start-up is exponentially more dangerous. Though I'm glad to see this new market progressing, keep in mind that there's no Fed to bail you out when things do turn sour and on a long enough timeline its very likely that many will get rekt.”
Not everyone’s on board
On the other hand, some analysts argue that such rampant growth of the DeFi market could potentially compromise the blockchain’s security—if Ethereum’s planned upgrade to a new consensus mechanism goes ahead.
Currently, Ethereum uses a proof-of-work consensus, like Bitcoin, yet the developers are actively adopting proof of stake, where users “stake” a bunch of their coins, putting them up as collateral, while they help to run the network.
And here lies a conflict of interests: If everyone locks up their funds in DeFi, then fewer people will stake their ETH—making the Ethereum network weaker. So, the greater the adoption of DeFi, the worse things could potentially get.