In his 1991 book, "Crossing the Chasm," management consultant Geoffrey Moore defined a crucial gap between the early adopters of a new technology and the larger populations of users that come later. Decentralized finance (DeFi) may now be approaching a gap of its own.
This article focuses on DeFi services that allow deposits of ether (ETH), ethereum’s native asset, as collateral for loans issued in a dollar-pegged stablecoin, DAI. Lending is decentralized to the extent it is managed by an open network of participants, governed by rules and incentives established in a computer program. Borrowers may deposit these stablecoins to earn income, convert them to cash or use them to make leveraged investments in ETH and other crypto assets.
DeFi lending’s gains are impressive, but their relationship to the ETH price bears watching.
Demand for DeFi lending services built on ethereum shows a pattern of inverse relationship to the price of ETH. When ether prices are falling, the amount of ETH locked in DeFi tends to rise. Most recent data indicate the relationship operates the other way, too. (Data is from DeFi Pulse via Concourse Open.)ETH deposits in DeFi lending and price, 2020 year to date (chart)
If this apparent relationship persists, it may indicate a circular user adoption of DeFi lending that could be limited to a small percentage of the number of existing ETH holders. That is, existing DeFi lending offerings may not be sufficiently attractive to cross the chasm and draw new users into ethereum.
The early adopter in this analysis is the long-term holder of ETH, motivated by conviction that ETH’s value will increase in the future. For such investors, DeFi lending offers a way to earn income or free up capital, as outlined above.
Some of these uses, such as income-earning deposits and cash conversions, may accelerate during dips in price, explaining the apparent inverse pattern between ETH price and ETH locked in DeFi le...