During last year, Decentralized finance has been the hottest topic of debate in the cryptocurrency world, propelling the entire industry to new heights, developing innovative applications for the technology, and making financial services more accessible.
It aims to return the economic infrastructure to the hands of the people, and just as TCP / IP facilitated the growth of so many companies on the Internet, DeFi is bringing business to the Blockchain.
Last year, the introduction of automated market makers gave DeFi a much-needed boost. The total value locked in decentralized financial platforms stood at around $ 1.2 billion in June 2020, a metric that had increased almost 100-fold by May 2021.
Liquidity Mining fueled the sudden surge in DeFi usage around the world last year, giving people access to additional tokens beyond the standard interest rewards. However, What changed the game was the way these platforms allowed users to do Yield Farming with their respective tokens to participate in their governance systems.
While 2020 was a good year for DeFi by the numbers, the true extent of the chaos that occurred last summer is only known by the people who were there to see it. However, The DeFi space has made considerable strides since then, tackling all manner of issues, from technical limitations to better incentive models.
Amid the collapse of national economies, a global pandemic, and Bitcoin struggling to surpass the $ 10,000 mark, DeFi made history last year, but Will history repeat itself? Will the DeFi sector be able to star in another parabolic rise a year after breaking into the mainstream world, not only for cryptocurrency users, but in the global financial sector?
500 days of summer?
The biggest competitor to the decentralized finance industry is today’s financial ecosystem itself. Traditional, centralized finance has been around for centuries, having evolved through years of trial, error, and modification. Although it is a flawed system when it comes to Bitcoin, it is not only better integrated into modern society than any blockchain-based service today, but it is also the most popular way that people put their money to work.
DeFi enables everything centralized finance has to offer and more, but there are still many challenges to overcome. For one thing, most decentralized applications run on the Ethereum network, where network congestion has driven gas fees to almost unaffordable levels. DeFi could potentially serve millions, if not billions, of users, but today fewer than 350,000 wallets interact with Ethereum on a daily basis.
Decentralized finance may not yet be ready for mainstream adoption, but traditional financial services certainly struggle to compete. However, some believe that DeFi is not competing with them at all. Sergej Kunz, co-founder of 1inch Network’s DeFi platform, told Cointelegraph:
“I’m pretty sure DeFi shouldn’t be seen as a rival to traditional financial services. DeFi is nothing more than a logical continuation of the development of financial technologies. I see banks and fintech companies becoming convenient gateways to the new world. DeFi Financial “.
Although the Blockchain technology space is primarily made up of developers, enthusiasts, and retail investors, decentralized finance is slowly attracting much bigger players to the game. Institutional investors want a piece of the cryptocurrency pie, and DeFi is becoming a popular flavor.
Most DeFi lending platforms advertise interest rates of between 8% and 70%, but with how fast the ecosystem is growing, these astronomical rates might not exist for long. It is likely that the more investors start to use the product, the lower interest rates.
Although Ethereum is currently getting most of DeFi’s attention, and other projects aren’t waiting for their congestion problem to be resolved. Blockchain interoperability is gradually becoming a reality, eradicating today’s decentralized ecosystems in silos, bringing more composibility to the space and allowing a better allocation of development resources. In fact, Bette Chen, co-founder of the Acala network in Polkadot, told Cointelegraph: “From a technological perspective, the 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 be instrumental in the development and proliferation of the decentralized network, which will then power high-performance upgradeable chains and DeFi applications.“he added.
Another major hurdle for DeFi is regulatory clarity. Most active cryptocurrency markets have been slapped with strict know-your-customer and anti-money laundering policies, and while this is an excellent step forward on blockchain technology’s path to mainstream adoption, regulatory uncertainty in DeFi could impede your advance in the short term.
DeFi is not going to become a fully regulated space overnight, and it may never be, As it may require an industrial-scale effort to create, update and maintain a robust regulatory framework for decentralized finance, but with a $ 70 billion market at stake, there are many incentives to do so.
In 2020 alone, DeFi’s total locked value (TVL) metric grew an impressive 2,000%, and similar growth this year would put DeFi in a $ 300 billion ecosystem in December. Currently, the TVL figure is almost a third of the way, and while it might be challenging for the space to experience such exponential growth again this season, it is not entirely impossible. Given that $ 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 isn’t exactly a comparable metric to market cap, DeFi is on its way to becoming a much more mature arena. With major players like Nexus Mutual and CDx making moves in the DeFi insurance space, tech giants Facebook and PayPal entering the blockchain realm, and savvy developers continually churning out innovative applications, growth on a scale similar to that of the last year is not totally out of the question.
DeFi has seen unprecedented growth in the past two years, driving a more participatory economy and accelerating the modern digital revolution. The challenges you have to overcome are by no means undemanding. From rudimentary interoperability features and capital inefficiency to low liquidity and unintuitive interfaces, DeFi has a lot of work to do in the years to come.
Blockchain technology is already incredibly complex, and adding the technical complications of DeFi platforms to the mix could be the biggest obstacle in its path. It is still difficult to figure out how to use all the products on offer, but at the very least, things can only go one way: develop.
The average investor is not going to know how MetaMask works or how to use it, and until the industry begins to produce more convenient and intuitive ways to interact with the ecosystem, widespread adoption will remain out of reach. Although Ethereum 2.0 is expected to merge the chains later this year, or early 2022, to create a more scalable version of the network with sharding, people are already finding ways around the problem.
Related: DeFi Resists Crypto Market Correction and Uniswap v3 Leads the Charge
Zhivko Todorov, DeFi ecosystem leader at LimeChain – a company that provides innovative Distributed Ledger technology solutions for businesses and startups – told Cointelegraph: “High gas commissions are a barrier to entry for retail users. However, we are at a crucial point where layer two solutions are rolling out and gaining traction, which would dramatically lower gas rates.“However, the congestion on Ethereum is not only increasing the gas commissions of the network, it is driving away a significant portion of traders.
“The performance of Blockchain is hampering the influx of HFT operators (high frequency operators in Spanish) to this sector“said Grigory Rybalchenko, co-founder and CEO of the EmiSwap exchange, in a conversation with Cointelegraph, adding:”High-frequency traders account for most of the volume on traditional centralized exchanges, and high fees are unlikely to push them to migrate to DEXs any time soon.“
Total digital asset market capitalization briefly topped the $ 2 trillion mark this year. However, the cryptocurrency market is still miniscule compared to the global stock market, which currently accounts for about $ 80 trillion worldwide. That said, decentralized finance has accomplished a lot in the space of just a few years, and as long as this pace of innovation continues, there could well be another DeFi summer as projects could start to capitalize on all the hard work done over the past year.