Over the past year, decentralized finance has been the hottest topic of discussion in the crypto world, taking the entire industry to new heights, developing innovative applications for the technology and making financial services more accessible.
It intends to put economic infrastructure back in the hands of the people, and is bringing decentralized finance business onto the blockchain just as TCP/IP has facilitated the growth of so many enterprises on the Internet.
Last year, the introduction of automated market makers gave DeFi a much-needed boost. Total value locked in decentralized financial platforms sat About $1.2 billion in June 2020 – a metric that had grown nearly a hundredfold by May 2021.
Liquidity mining fueled a sudden increase in the use of DeFi around the world last year, giving people access to additional tokens beyond the standard interest rewards. The game-changer, however, was how these platforms allowed users to stake their respective tokens in their governance systems.
Although 2020 was a good year for DeFi in numbers, the true extent of the chaos that happened last summer is known only to those who were there to watch it. However, the DeFi space has made great strides since then, tackling all kinds of problems from technical limitations to better incentive models.
Amid the collapse of national economies, a global pandemic and bitcoin wrestling to cross the $10,000 mark, DeFi certainly made history last year – but will history repeat itself? Could the DeFi sector master another parabolic boom a year after it went mainstream, not just for crypto users but in the global financial sector?
500 days of Summer?
The biggest competitor to the decentralized finance industry is the very financial ecosystem that exists today. Traditional, centralized finance has existed for centuries, having evolved over years of trial, error and modifications. As far as bitcoin is concerned, it is a flawed system, it is not only better integrated into modern society than any blockchain-based service today, but it is also the most popular way for people to work. .
DeFi allows centralized finance offerings and everything else, but there are still many challenges that need to be overcome. For one, most decentralized applications run on the Ethereum network, where network congestion has pushed gas fees to nearly unattainable levels. DeFi can potentially cater to millions, if not billions, of users, yet today, less than 350,000 wallets interact with Ethereum daily.
Decentralized finance may not be ready for mainstream adoption just yet, but it certainly has traditional financial services struggling to compete. However, some believe that DeFi is not competing with them at all. Sergej Kunz, co-founder of the 1 Inch Network DeFi platform, told Cointelegraph:
“I am quite sure that DeFi should not be considered a rival to traditional financial services. DeFi is just a logical continuation of fintech development. I see banks and fintech companies becoming convenient gateways to the new financial world of DeFi “
Although the blockchain space mainly consists of developers, enthusiasts, and retail investors, decentralized finance is slowly bringing much larger players into the game. Institutional investors want a piece of the cryptocurrency pie, and DeFi is becoming a popular flavor.
Most DeFi lending platforms advertise yield interest rates between 8% and 70%, but with how fast the ecosystem is growing, these astronomical rates may not last very long. It is likely that the more investors start using the product, the lower the interest rates can be.
Although at present, Ethereum has accumulated most of the attention brought by DeFi, and other projects are not waiting for its congestion problem to be solved. Blockchain interoperability is slowly becoming a reality, erasing today’s silent decentralized ecosystem, bringing greater compatibility to space, and enabling better allocation of development resources. In fact, Bette Chen, co-founder of Akala Network on Polkadot, told Cointelegraph: “From a technical point of view, multi-chain is inevitable.”
The Substrate-based Polkadot platform has enabled decentralized applications to interact with applications on other distributed networks and continues to attract projects with its significantly more accessible development ecosystem. “Metaprotocols like Polkadot will play a key role in the development and spread of the decentralized web, which will then power high throughput, forkless upgradable on-chain and DeFi applications,” he added.
Another important hurdle for DeFi is regulatory clarity. Most of the active cryptocurrency markets have been slapped with Know Your Customer and anti-money laundering policies, and although this is an excellent step on blockchain technology’s journey to mainstream adoption, regulatory uncertainty in DeFi may hinder its progress in the short term. can do
DeFi is not going to become a fully regulated space overnight, and probably never will as it may attempt to create, update and maintain a robust regulatory framework for decentralized finance on an industrial scale, but $70 With a market share of billions, there is a lot of incentive to do so.
In 2020 alone, DeFi’s total value locked metric increased by an impressive 2,000%, and a similar increase this year will see DeFi form a $300-billion ecosystem by December. Today, TVL’s figure is about a third of the way there, and while it can be challenging to go through such exponential growth again this season, it’s not entirely impossible. Since $300 billion is less than a sixth of the current total cryptocurrency market capitalization, it could be argued that DeFi is certainly more important to blockchain than that fraction.
Although TVL is not a comparable metric for market capitalization, DeFi is well on its way to becoming a more mature sector. With major players such as Nexus Mutual and CDX entering the DeFi insurance space, the tech giant Facebook and paypal With blockchains entering the realm of blockchain, and specialist developers consistently producing unprecedented applications, growth on the same scale as last year is not entirely out of the question.
DeFi has experienced unprecedented growth over the past few years, driving a more participatory economy and driving the modern digital revolution. The challenges it has to overcome are by no means unnecessary. From rudimentary interoperability features and capital inefficiencies to low liquidity and intuitive interfaces, DeFi has its work cut out for it in the coming years.
Blockchain technology is already incredibly complex, and adding the technical complexities of the DeFi platform to the mix could be the biggest hurdle in its path. It’s still hard to figure out how to make use of all the products on offer, but at the very least, there’s only one way things can go from here – Evolve.
The average investor won’t know how MetaMask works or how to use it, and until the industry starts producing more convenient, intuitive ways to interact with the ecosystem, mainstream adoption is out of reach. Will be outside Although Ethereum 2.0 is expected to merge chains later this year, or early 2022To create a more scalable version of the network with sharding, people are already looking for solutions to the problem.
Zhivko Todorov, DeFi ecosystem lead at LimeChain – a company that provides innovative distributed ledger technology solutions for enterprises and startups – told Cointelegraph, “High gas fees for retail users are a barrier to entry. are at a critical point where layer-two solutions are launching and gaining traction, which will lead to a massive reduction in gas charges.” However, congestion on Ethereum isn’t just increasing the network’s gas fees; This is alienating a significant segment of traders.
“Blockchain’s throughput is hindering the influx of HFTs [high frequency traders] Traders in this area,” Grigory Rybalchenko, co-founder and CEO of Amiswap exchange, said in conversation with Cointelegraph, “high-frequency traders account for the most volume on traditional centralized exchanges, and high fees are unlikely to push them away. is. To migrate to DEX any time soon.”
The total market capitalization of digital assets briefly crossed the $2 trillion mark this year. However, the crypto market is still small in comparison to the global stock market, which currently represents approximately $80 trillion worldwide. That being said, decentralized finance has achieved a lot in just a few short years, and as long as this pace of innovation continues, there could be another DeFi heat, as all the hard work done by the project as a whole You can start cashing in. past year.