Decentralized applications have been a feature of the Ethereum ecosystem and other blockchain protocols in general since their inception. Many haven’t reached notable success until 2020.
Decentralized exchanges (DEX) have been around for years, back to 2017/2018 and even earlier. However, in recent times they’ve been used far more widely thanks to a growing tide of regulation.
Changing DEX Dynamics
From January 2018 until January 2019, there was barely any fluctuation in DEX volume. The crypto space was still in a multi-year bear market and the infrastructure needed to make DeFi attractive hadn’t really been established yet.
From January 2019, there was a gradual rise as total value locked (TVL) in DeFi applications eclipsed $1 billion for the first time.
Growth in the first half of the year was steady, from less than $1 billion to almost $5 billion by July. Then the exponential growth took over, as DEX volume passed the $10 billion mark in August and over $25 billion in total volume by September.
DEX volume has cooled to approximately $15 billion monthly from its all-time high. However, it appears that critical mass may have emerged in the space as it experiences massive month-over-month growth.
Users and institutions are usually more comfortable using centralized counterparts (CEX), even though hundreds of millions of dollars worth of cryptocurrency have been stolen from CEXs over the years.
That all changed in 2020 when decentralized financial applications like decentralized lending and DApp liquidity providers, also known as yield farmers, started to become popular.
Users that got involved early on during the DeFi craze started to see massive returns through yield farming. Farmers essentially use cryptocurrency to provide liquidity, and in exchange receive a reward in the native applications token as well as their initial stake.
This liquidity mining, or yield farming strategy, has mostly taken place on Ethereum based applications and has set the DeFi world alight.