In brief

  • DeFi activity boomed in Q3.
  • That's per a new report from metrics site CoinGecko.
  • Nonetheless, trading volume fell in September, the last month of Q3.

According to a report on this summer’s crypto market from Singaporean crypto metrics site CoinGecko, “Q3 2020 was the summer of Decentralized Finance (DeFi).” Well, yeah.

But the numbers are eye-catching. CoinGecko found that capital inflow into the crypto market increased by $9.15 billion in Q3, attributing the spike to DeFi protocols. 

The report ultimately confirms that decentralized finance stole the show after June’s introduction of “yield farming,” a new way of earning tokens on DeFi protocols—generally decentralized derivatives platforms, decentralized exchanges, and non-custodial lending protocols. 

The Rise of the DEX

For starters, inflows of Ethereum-based US dollar stablecoins USDT, USDC, DAI, and wBTC (an Ethereum-based version of Bitcoin) soared. Pegs to the dollar are useful when wading through DeFi, a highly volatile space. USDT’s volume rose by 61%, USDC by 157%, DAI by 598%, and wBTC by 1,766%. 

Capital inflows of stablecoins during Q3. Image: CoinGecko

And people genuinely used DeFi protocols, CoinGecko found. Although volume on decentralized exchanges (such as Uniswap) amounted to just 6% of volume on centralized exchanges (such as Binance), DEX volume grew by 700% in Q3, found CoinGecko.

(However, Sam Bankman-Fried, CEO of decentralized exchange FTX, called DEX volumes “bullshit” earlier this week because they are propped up by yield farming profits.)

And monthly growth of volume on decentralized exchanges outpaced monthly volume growth on centralized exchanges. The average monthly gain for the top 10 decentralized exchanges in Q3 was 197%, compared to an average of 35% on centralized exchanges.

Karan Ambwani, strategy manager at blockchain protocol Conflux Network, said that’s no accident: “The user experience of DEXs have improved significantly in the last few years as recent incentives influenced more people to try these DEXs. These newcomers in the DEX ecosystem would keep using them, the more they understand the issues with centralized custody and control when compared to a transparent smart contract.”

Jason Brown, business development manager at blockchain developer Komodo, agreed and said high DEX volume is likely the new norm: “The non-custodial nature of DEXs gives them a clear security advantage over their centralized counterparts. The market may fluctuate away from DEXs temporarily as regulations come into play, but those that find compliance solutions and focus on self-sovereignty for end-users will flourish.”

DEX trading volume for Q3. Image: CoinGecko

But what about Bitcoin? 

CoinGecko’s report also shows that Bitcoin is losing its edge; compared to the second quarter of this year, its dominance fell by 6.6 percentage points, from 68.9% to 62.3%. And in the same period, Ethereum’s dominance rose by 2.3 percentage points, from 10.4% to 12.7%. That’s probably because Ethereum houses all of the top DeFi protocols. 

BTC dominance versus altcoins. Image: CoinGecko

According to Brown, “Altcoins built on other blockchain networks generally provide more use cases.” Therefore, he said, “Bitcoin’s lack of technological upgrades and fee market-based mining system is not conducive to sustained growth. That being said, Bitcoin definitely retains its brand name and first-mover advantage.”

Still, Bitcoin’s price grew, peaking at $12,272 on August 18, and CoinGecko’s report showed that it stayed above $10,000—that was the price traders spent all of Q2 trying to reach—for 65 consecutive days. 

“On-chain fundamentals remain strong,” Simon Peters, a market analyst at trading site eToro, told Decrypt. “Continued conversation around bitcoin as a potential inflation hedge; listed companies such as MicroStrategy and Square acquiring Bitcoin; potentially another round of stimulus—all these factors played a part,” he said. 

All of which sounds great, but last month DeFi lost some of its sheen after most of the coins fell in price. Market capitalization and trading volume fell by 9% in September, found CoinGecko. Still, ever in good spirits, it found that overall trading grew by 34% in Q3, after having fallen by 44% in Q2 amid the coronavirus crash.