Why is there so much value locked in money market protocols?
Undoubtedly, speculation is currently the largest driver in the blockchain space. To this end, money market protocols enable individuals to take leveraged positions in the market. These individuals mostly collateralize their crypto assets because they don’t want to lose their existing principal position and take out a stable coin loan to purchase additional crypto assets. They can also use the stable coin loan to cover unforeseen expenses if necessary.
Maker DAO, the first defi protocol on Ethereum, saw its initial success with DAI as Ethereum community members wanted to take a leveraged position in Ethereum without selling their Ethereum. Balanced will serve a similar purpose in the ICON ecosystem. Shortly afterwards, money market protocols such as Compound and Aave emerged and started to offer more collateral options (ETH, LINK, WBTC, etc.) and more stable coin options (USDT, USDC, DAI, etc.) as a loan.
The crypto market was very volatile and various farming opportunities arose in 2020. As a result, savvy traders actively utilized money market protocols to profit since gains in the market outweighed the borrowing rate from the money market protocols. With an active lending market, 2020 saw a significant uptick in the usage of defi protocols and the TVL of the Ethereum defi ecosystem spiked from under $1B to $14B+ as you can see from the below chart.