From El Salvador’s acceptance of Bitcoin as legal tender to the rise of stablecoins in emerging markets, cryptocurrency’s march into the mainstream is undeniable. And yet, beneath headlines touting astronomical growth is a more complex question: Who is actually using crypto? 

According to a new set of data compiled by the blockchain data firm Chainalysis, which Rest of World was given exclusive access to, the concentration of crypto has grown exponentially in the hands of early adopters and experts. The trend has been enabled by another innovation in the crypto space known as DeFi, or decentralized finance, through which users control their own private keys and funds, as opposed to platforms with a central custodian such as Coinbase or Binance. The global total value locked in DeFi is currently about $170 billion, up from around $6 billion this time last year. 

Latin America is ranked as one of the fastest-growing regions for cryptocurrency adoption. It is there that, according to Chainalysis’s data, DeFi has grown to represent over half of the estimated crypto activity in June after being practically nonexistent as late as May 2020. The conventional wisdom is that this swelling is spurred by everyday people — known affectionately as “normies” in the crypto community — who, in turbulent emerging markets, are turning to stablecoins and other crypto tokens due to economic volatility. The data indicates that the opposite is true. The increased market share of DeFi illustrates that the crypto ecosystem continues to be dominated by a limited number of big speculators.

DeFi “is still kind of an insiders’ club,” said Kimberly Grauer, the director of research at Chainalysis. “It’s not quite reaching the everyday user yet.”

Pablo Sabbatella, an Argentine crypto educator and entrepreneur, was more blunt in his assessment. “Ninety-nine percent of people in crypto are writing articles and building protocols for the 1% of people that are already deep into crypto — nobody is thinking about making a DeFi product easier to access for the vast majority.”

Cryptocurrencies such as Bitcoin can be a convoluted endeavor for the average person, and the current state of DeFi technology only exacerbates that confusion.

Centralized crypto trading platforms like Coinbase emphasize a simple interface that encourages first-time users to take part — it is relatively easy to sign up and buy tokens, which are managed by the platform rather than users keeping track of private keys.

The data plotted here shows the share of all economic activity that was in DeFi occurring across all cryptocurrencies tracked by Chainalysis within Latin America, with activity represented by all on-chain transactions received by ~2,000 services tracked. It is an approximation as all DeFi transactions happen on-chain whereas funds flowing to centralized exchanges often occur off-chain.

DeFi has the advantage of more user control, building off the crypto adage of “not your keys, not your coins.” However, it also means that DeFi applications often require advanced knowledge of processes. Many DeFi protocols replicate the advanced financial instruments used by traditional banks, offering services such as lending and borrowing, where investors can earn massive interest rates on their crypto holdings or borrow while using their tokens as collateral.

As a result, DeFi tends to attract crypto experts, as well as financial institutions with extensive resources that can take advantage of arbitrage opportunities. In a recent blog post, Chainalysis found that over 60% of DeFi transactions in the second quarter of 2021 were above $10 million.

Despite its current inaccessibility to the general public, Sabbatella is optimistic that DeFi will revolutionize the economy of countries such as Argentina. The common selling point for cryptocurrency in Latin America is that it offers an alternative to devaluing currencies and volatile economies. Bitcoin, with its massive fluctuations, may be just as turbulent as the Argentine peso. Stablecoins pegged to the US dollar — many of which run on DeFi protocols — offer a more reliable alternative. 

"Ninety-nine percent of people in crypto are writing articles and building protocols for the 1% of people that are already deep into crypto."

Sabbatella leads the growth team at a DeFi company called Exactly, which will allow users to make a deposit or take a loan in crypto for a fixed interest rate for a specific period of time. The difference is that, instead of being executed by a teller at a bank, the entire transaction will be completed by a computer program.

What Exactly is betting on is that, by making DeFi more accessible and lucrative, customers dissatisfied with the conventional banking system will switch over in droves. One of the top Latin American venture capital funds, Kaszek, recently led a $3 million round for Exactly — its first investment in the DeFi space.

Abraham Cobos is the crypto strategy manager at Bitso, a Mexico-based crypto exchange valued at $2.2 billion. Though Bitso may not be a DeFi platform, Cobos also sees great potential in the technology, especially if projects such as Exactly are able to diminish what he calls the “information asymmetry” that makes DeFi so profitable for some and impenetrable for others.

The decentralized nature of DeFi comes with a major downside, however. If something goes wrong — say there’s a bug in the program or someone can’t figure out how to transfer their money — there is no customer support.

This lack of supervision, as well as the fact that the technology is relatively nascent for both developers and users, makes the platform ripe for scams. DeFi hacks represented an estimated 76% of all major financial hacks for the first half of 2021. In 2020, they comprised just 25% of the hacks. There is still no significant national or global regulation addressing DeFi, and any government oversight could dramatically alter the landscape.

As DeFi spreads and new protocols offer unrealistic returns, Sabbatella warned that it was on advanced users like him to make sure that people are making informed decisions. “Not everybody will get their money — like 90% of crypto projects are scams, or if they aren’t scams, they won’t work,” said Sabbatella. For him, that’s part of innovation, but the risk factor may be enough to keep the normies at bay.