Chinese adopt decentralized finance to evade repression of cryptocurrencies
Cryptocurrency exchanges operating in an anonymous environment register strong increase in volume after a statement from the Chinese central bank last Friday
The Chinese government may, unwittingly, have been the engine for a new episode of growth in the adoption of what is called decentralized finance (DeFi).
Known for their anonymity guarantee, solutions in this cryptocurrency segment registered a sharp rise in prices and trading volume soon after China intervened once again in the digital currency market, preventing the offer of trading services to residents of the country.
The measure mainly affected the traditional cryptocurrency exchanges, which have centralized management and are undergoing a shift in adapting to compliance rules, which directly implies the reinforcement of identity verification policies, known as Know Your Client (KYC) – Binance, for example , no longer allows to operate without presenting a personal document.
Along with Huobi, the company announced that it will no longer serve users who register using Chinese phone numbers, moving to meet local government regulations. But while centralized exchanges see their market shrink, the reverse is true in the parallel world of DeFi.
The grants decentralized criptomoedas (DEX, its acronym in English) have a single parent entity, as the transactions are processed by smart contracts (contracts intelligent) autonomous collective created by programmers often anonymous.
If, on the one hand, these software put users' money at risk due to the high risk of hacks , on the other, users seem increasingly willing to pay the price to hide their identity, whether to escape taxes or government repression, as is the case. Chinese case.
Journalist Colin Wu, who covers the cryptocurrency sector in China, said on Sunday (26), via Twitter, that "all Chinese communities are discussing how to learn DeFi".
Decentralized Exchange surpasses Coinbase
One of the signs of a sudden increase in demand for decentralized solutions for trading cryptocurrencies is the explosion in the adoption of dYdX, an exchange launched in May 2019 and which operates entirely via smart contracts.
Its differential is the offer of leveraged trades, something commonly found only in conventional exchanges. Furthermore, since last year, dYdX has been focusing on the Chinese market, adapting its interface to Mandarin.
The bet was successful and, now, gained new momentum after the trading ban in the country. The brokerage had greater trading volume than Coinbase, the first cryptocurrency exchange to go public on the exchange, with US$7 billion traded in the last 24 hours.
“5 years ago I left Coinbase and eventually founded dYdX. Today, for the first time, dYdX is doing more business than Coinbase”, said the exchange's founder, Antonio Juliano.
The adoption was also directly reflected in the price of the DYDX governance token, which entered the top 100 cryptocurrencies by market value after skyrocketing from $12.34 to $20.86, up 69% in two days.
DeFi has a record of five months of invested capital
The search for DeFi, however, goes beyond dYdX. The main metrics of the sector point to a strong growth in the general demand for this type of product after the statement from the People's Bank of China (PBOC, its acronym in English) that banned the trade of cryptocurrencies.
According to the monitoring tool DeFi Pulse, the amount deposited in DeFi intelligent contracts reached 7.8 million Ethereum ( ETH ), equivalent to US$ 23.6 billion, the highest since the highs of April. The number adds to DeFi's positive performance in 2021, a period in which user volume more than tripled, according to Dune Analytics.
The most used platform to create DeFi applications in the world, Ethereum works as an operating system that runs on blockchain. Thus, to bring capital to platforms that operate there, it is necessary to buy ETH, deposit in smart contracts and, only then, be able to buy new tokens.
For now, the Aave Finance ( AAVE ), Compound Finance ( COMP ), InstaDapp (INST), Uniswap ( UNI ) and Curve Finance (CRV) protocols concentrate around 85% of deposited amounts, with around 6.9 million of ETH allocated by users seeking income and cryptocurrency loans.
The amount invested, in general, works as a liquidity to allow trades without a traditional purchase book. Instead, algorithms connect individuals who want to buy and sell cryptocurrencies. They also automatically balance assets depending on supply and demand in sets of trading pairs called liquidity pools.
In practice, to use DeFi all you have to do is download an application on your cell phone, access decentralized exchange sites and start trading without any kind of registration, as long as you already have previously purchased cryptocurrencies.
Such solutions are already on the radar of US authorities. In early September, the US Securities and Exchange Commission (SEC) opened an investigation against UniSwap Labs, developer of the world's largest decentralized exchange, UniSwap, which soon closed one of its accesses to the platform for fear of reprisal .
However, as the Chinese government has yet to make specific efforts against the sector, DeFi applications appear to be the ideal alternative for the potential market of billions of cryptocurrency users that the state blockade is trying to suppress.