Mind the Gap: Why ETH Price and DeFi Adoption Aren't in Sync

Eth deposits in DeFi lending & price, 2019-2020.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.

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.

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.

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 lending.

"What DeFi is creating is a virtuous cycle where investors who have higher risk tolerance are locking up ETH to generate Dai and leverage long ETH," Mariano Conti, head of smart contracts at MakerDAO, told CoinDesk Research.

Currently, Maker, the largest DeFi lending operation by ETH deposits, has a minimum collateralization ratio of 150 percent, meaning $150 worth of ether is required as collateral to borrow $100 worth of DAI. The leverage implied by this ratio is 1.67X.Liquid derivatives markets like BitMEX, Huobi and OKEx offer up to 100x leverage on crypto assets including ETH. With these options before them, how many long-ETH investors are likely to choose DeFi lending as a means to leveraged trading?

Would a Main Street borrower purchase ETH in order to obtain a cash loan worth less than said ETH? Perhaps, if DeFi lenders could accept non-crypto collateral.

As for that inverse relationship between ETH price and ETH deposits in DeFi lending, if it persists it may indicate the category is approaching an adoption limit.