Definition:
DeFi Market Capitalization refers to the total value of all assets locked in decentralized finance (DeFi) protocols.
DeFi protocols are decentralized, blockchain-based platforms that provide financial services, such as lending, borrowing, and trading. The DeFi market capitalization is calculated by adding up the total value of all assets, such as cryptocurrencies and stablecoins, that are held in DeFi applications / smart contracts.
This figure gives an indication of the overall size and health of the DeFi ecosystem, and can be used to compare the relative popularity and value of different DeFi projects.
In the photo below, you can see the DeFi market capitalization since 2018. At it's peak, there was nearly $200 billion invested in the DeFi ecosystem.
What is DeFi, and why is it important?
Decentralized finance (DeFi) refers to a new financial ecosystem built on blockchain technology that aims to provide financial services in a decentralized, open, and transparent way. It allows users to access financial services such as lending, borrowing, trading, and insurance without the need for intermediaries, such as banks.
Overall, DeFi has the potential to democratize access to financial services, increase efficiency and transparency, and promote greater financial inclusion.
DeFi has several advantages over traditional finance:
Decentralization: Decentralization refers to the distribution of power away from a central
authority or organization. In a decentralized system, power is spread among many actors, rather than being concentrated in one place. This allows for greater autonomy, increased resilience, and reduced dependence on any one central point of failure. In the context of blockchain and cryptocurrency, decentralization refers to the distribution of the network, the ledger, and the decision-making among many actors. This decentralized system is usually powered by many nodes or validators, rather than being controlled by a central entity like a bank or a government.
Openness and accessibility: Over 16% of the world's population does not have a bank account. DeFi is open and accessible to anyone with an internet connection, regardless of their location, credit score, or financial status.
Transparency: All the transactions on DeFi are recorded on the blockchain, which makes them transparent and verifiable.
Automation: Many DeFi protocols are powered by smart contracts, which are self-executing and automated, making them more efficient and faster than traditional financial services.
What to watch for:
Market size: The DeFi market capitalization can provide insight into the overall size and growth of the DeFi ecosystem. If the total market capitalization is increasing, it can indicate that the DeFi market is expanding and that more assets are being locked in DeFi protocols.
Market dominance: By comparing the market capitalization of different DeFi protocols, you can identify which protocols have the highest market share and therefore the most dominance in the market. This can indicate which protocols are most popular among investors and which have the most potential for growth.
Market sentiment: The DeFi market capitalization can be used as a gauge of investor sentiment towards decentralized finance. If the DeFi market capitalization is increasing, it can indicate that investors are becoming more interested in DeFi, whereas if it's decreasing it could suggest that investors are becoming more cautious or losing interest in it.
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