The explosive growth in DeFi is less impressive than it seems and is still far from adoption by mainstream investors, JPMorgan says

• DeFi growth in the ethereum network has exploded in dollar terms over the past year.
• But that growth has been mostly fueled by the 1,000% surge in the price of ether, JPMorgan said in a note on Thursday.
• "If one looks at the quantity of ethereum coins locked into DeFi, it has been hovering around 35 to 40 million ETH since last November," JPMorgan said.

The rise of decentralized finance has been explosive in dollar terms over the past year, but the surge is less impressive than it may seem, JPMorgan said in a Thursday note.

The total value locked in DeFi on the ethereum blockchain has soared to nearly $200 billion today from about $20 billion last year, according to JPMorgan.

"However this impressive growth in dollar terms mostly reflects a valuation effect, i.e. the mere fact that the ethereum price has risen by 1,000% over the past year," JPMorgan said. When looking at the quantity of ethereum coins locked into DeFi, it has been range bound between 35 million and 40 million since last November, according to the bank.

"In other words the growth of DeFi activity looks a lot less impressive in volume terms, i.e. adjusted for valuation effects," JPMorgan said. From a volume perspective, JPMorgan estimates DeFi has grown about 50% year-to-date.

DeFi applications in the crypto-world include the lending and borrowing of digital assets, derivatives, insurance and even the management of crypto assets, similar to a robo-advisor. But while DeFi applications are popular with sophisticated crypto investors, and they're still far off from being adopted by mainstream investors, JPMorgan said.

"There is little doubt that DeFi is still at early stages and thus has a lot of potential to grow over time. But until it becomes mainstream it faces several hurdles," JPMorgan said.

Those hurdles include vulnerabilities to hacking and protocol attacks, difficulties in assessing the risk/return tradeoff, and the struggle of regulators to understand the technical issues and risks associated with DeFi.

"Enforcing know-your-customer and anti-money-laundering checks is a necessary first step but a general perception that regulations would be naturally less effective on DeFi might prove a major obstacle going forward in terms of regulators allowing DeFi to transition into the mainstream," JPMorgan said.