Blockchain technology disrupts all areas of the global economy with its unlimited possibilities and innovative products. Decentralized finance is one of the sectors that has tried to shake up the traditional financial ecosystem. The multitude of DeFi applications that are popping up across the fintech space offer solutions such as lending, participation, derivatives trading and more.
The current trend has been justified since then DeFi is trying to build an alternative to rigid banking systems. Additionally, government regulations (or lack thereof) and a flawed financial infrastructure have allowed DeFi projects to flourish.. The DeFi concept It also faced various obstacles such as liquidity problems and daily usagethat prevented it from entering the major financial market. On the other hand, 32% of those who took a Blockfolio survey have no idea what DeFi is.
DeFi’s market capitalization has increased surprisingly in the past few monthswhich indicates the growing interest in the crypto industry. So could this be the financial revolution the world has been waiting for?
DeFi numbers don’t lie
The latest statistics from DeFi Pulse show this More than $ 7.7 billion is tied up in the DeFi market, and In the past two months, its market capitalization has increased by around $ 4 billion. Several DeFi projects and platforms have seen impressive growth. Compound, a decentralized loan protocol, currently has a market capitalization of $ 540 million;; However, by mid-June it was only about $ 100 million.
Token Insight’s Q2 2020 report revealed this The number of DeFi users has more than doubled from 100,000 to 230,000 since January 2020. However, industry experts fear that the hype surrounding these astronomical numbers may only be temporary may be based on speculation rather than application of use cases for DeFi products. Johnson Xu, the chief researcher at TokenInsight, told Cointelegraph:
“In the short term, the high interest rate and the incentive to run down liquidity have triggered a boom in space that is driving the DeFi market straight up and leading to a speculative surge in DeFi. We believe that the recent DeFi boom could only be short-lived with no additional applications and use cases being built to add significant value within the space.“.
Usually, There are a number of factors in the DeFi ecosystem that are contributing to the radical growth in decentralized finance.
DeFi tokens are currently popular in the crypto space. New projects aim to add value to cryptocurrency users. According to the DeFi Pulse token list, there are a variety of projects out there, most of which are offering their native tokens. The increasing adoption of DeFi products is due to the purchase of these tokens, especially for loans and bonds like COMP by Compound and LEND by Aave.
Loans lead the way when it comes to widespread adoption of DeFi products. And rightly so, since then The crypto lending industry has passed the $ 10 billion mark. Debt is an integral part of the financial economy that is the driving force behind the increasing adoption of DeFi credit products. There is also the benefit that people interested in DeFi loan protocols earn interest. Vadim Koleoshkin, COO of Zerion – a DeFi interface – told Cointelegraph:
“”Loans are one of the easiest financial instruments to understand in the DeFi space. She promises to generate passive income from her assets, which is protected by the debtors guarantee. Other products such as AMM pools (Uniswap, Balancer, Mooniswap, Bancor), trading strategies (TokenSets, Melonport) or yield farming involve many more risks associated with both market conditions and complex intelligent contracts. However, even the loans may not be 100% secure. “
The rise in popularity of DEX
Since intermediaries are no longer required due to the decentralized exchange, their popularity has steadily increased in recent months.. Decentralized platforms such as Curve, Uniswap and Bancor saw phenomenal growth. Uniswap’s daily trading volume recently exceeded that of Coinbase Pro as most of its trades are automated.
The increased liquidity and security of DEXs has made DeFi attractive and promoted its adoption. These exchanges are finally seeing remarkable volume as defi-mania takes them by the hand.
Decentralized and secure forecasting markets
DeFi products are also used by people to set or predict certain outcomes. Platforms like Augur have attracted a large number of investors. Currently, these DeFi platforms are used by investors to protect their assets from smart contract flaws. However, In the future, such products will be expanded to include motor vehicle and natural disaster insurance.
The DeFi token economy is robust and thriving because of its incentive structure that drives market share. Currently, COMP, Compound’s governance token, is one of the most popular tickers in the DeFi market that has taken the idea of liquidity mining to a whole new level. With yield farming and staking, investors expect to reap the benefits of holding COMP tokens, which allow them to generate returns from various portfolios.. Even so, income farming carries risks, as Ethereum co-founder Vitalik Buterin recently pointed out.
Nowadays, The Aave loan protocol creates strong competition for MakerDAOas the latter is the king of the DeFi token market. LEND now occupies the highest position on the list of DeFi tokens with the highest total blocked volume. Additionally, government tokens are giving investors the ability to determine protocol changes that could cause tragedy, as most tokens are currently controlled by a small group of whales. Nevertheless Buying DeFi tokens cannot be compared to the 2017 ICO craze, as most projects already have effective products.
While DeFi tokens are an integral part of disrupting the financial sector, other major market makers have slowly and steadily redefined the financial world.. Platforms like Uniswap provide the DeFi ecosystem with innovative mechanisms such as the creation of automated markets that automatically resolve trades. Others, like Augur, are based on a predictive log that allows you to vote on the outcomes of events.
The Challenges Before Moving to Mainstream Adoption
Despite the craze for DeFi, this part of the crypto industry is still in its infancy, and there are still a few things that need to be addressed before DeFi can go from its beginner stage to a true market shaper. financially. A key concern of DeFi products is the security vulnerability that comes with smart contracts. An example of this is the attack on the bZx protocol in March, in which a hacker used the system’s flash lending function to exploit a program bug. Buterin pointed this out on an episode of the podcast from unleashed: “Many people underestimate the risk of smart contracts”.
Since most of the DeFi contracts are based on the Ethereum blockchain, the high fees of the network present a huge challenge for selling the products. In response to this problem, Koleoshkin noted, “DeFi allows access to a range of financial products from anywhere in the world, however It is accessible to those willing to pay tens of dollars for each operation“.
There is also great concern that the recent revenue craze sends the wrong message about decentralized funding.. The high interest rates on offer could blind the parties to the systematic risks of credit protocols. Attention should be drawn to other fundamental elements of the DeFi ecosystem such as market forecast oracles, synthetic tokens, and decentralized exchanges.
The usability of DeFi products needs to be improved to be intuitive and easy to use. Data protection and privacy, as well as handling the liquidity issue, should be at the heart of DeFi protocols to prevent loss of funds.
Also ideas like Sustainable liquidity mining models will help protect DeFi products from the effects of price volatility. The DeFi ecosystem also needs Address the problem of interoperability between networks to encourage adoption. To improve usability and liquidity, every smart contract and every decentralized application should interact seamlessly with each other. Koleoshkin noted:
“The entire market is a playground for financial freaks who are much more comfortable managing their own wealth than opening a brokerage account. The DeFi space, however, is highly fragmented and there are many gaps in the market infrastructure that can hinder development. and maintenance costs increased. “
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