During the past year Decentralized finance is the hottest topic of discussion in the cryptocurrency world, taking the entire industry to new heights, developing innovative applications for the technology, and making financial services more accessible.
It aims to bring the economic infrastructure back into the hands of the people, and just as TCP / IP has enabled so many businesses to grow on the Internet, DeFi brings business to the blockchain.
Last year, the introduction of automated market makers gave DeFi a much-needed boost. The total value of decentralized financial platforms was around $ 1.2 billion in June 2020, a figure that had increased almost a hundredfold by May 2021.
Liquidity mining fueled the sudden surge in DeFi usage around the world over the past year, giving people access to additional tokens on top of standard interest premiums. However, What changed the game was the way these platforms allowed users to participate in their systems of governance using their respective tokens.
While 2020 was a good year numerically for DeFi, the true extent of the mayhem that occurred last summer is known only to people who have seen it. However, The DeFi space has made significant strides since then, addressing all sorts of issues from technical constraints to better incentive models.
Amid the collapse of economies, a global pandemic, and bitcoins battling to break the $ 10,000 mark, DeFi made history last year, however Will history repeat itself? One year after entering the mainstream world, will the DeFi sector be able to experience another parabolic rise, not only for cryptocurrency users but also in the global financial sector?
500 days of summer?
The greatest competitor to the decentralized financial industry is today’s financial ecosystem itself. Traditional, centralized finance has been around for centuries and evolved through years of trial, error, and modification. While it’s a flawed system when it comes to Bitcoin, not only is it better integrated into modern society than any blockchain-based service today, it’s also the most popular way people use their money.
DeFi enables everything centralized finance has to offer and more, but there are still many challenges to overcome. For one thing, most of the decentralized applications run on the Ethereum network, where network congestion has driven gas charges to almost prohibitive levels. DeFi could potentially serve millions, if not billions, of users, but today fewer than 350,000 wallets interact with Ethereum every day.
Decentralized finance may not be ready for widespread adoption yet, but traditional financial services certainly struggle to compete. However, some believe 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 as convenient entry points for entering the new financial system. “World of DeFi”.
Although the blockchain tech space is mostly made up of developers, enthusiasts, and retail investors, decentralized funding is slowly pulling much larger players into the game. Institutional investors want a slice of the cryptocurrency pie, and DeFi is growing in popularity.
Most DeFi lending platforms offer interest rates between 8% and 70%, but with the rapid growth of the ecosystem, these astronomical interest rates may not be around for a long time. It is likely that the more investors use the product, the lower the interest rates.
Although Ethereum is currently attracting most of the attention from DeFi and other projects are not waiting for their congestion problem to be resolved. Blockchain interoperability is gradually becoming a reality as it eradicates today’s decentralized ecosystems in silos, making space more combinable, and enabling better allocation of development resources. In fact, Bette Chen, co-founder of the Acala network in Polkadot, told Cointelegraph: “From a technological point of view, multistring 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 much more accessible development ecosystem. “Metaprotocols like Polkadot will be instrumental in developing and deploying the decentralized network, which will then power high-performance updateable chains and DeFi applications.“, he added.
Another major hurdle for DeFi is regulatory clarity. Most active cryptocurrency markets have been beaten with strict know-your-customer and anti-money laundering guidelines, and while this is an excellent step in blockchain technology’s widespread adoption, the regulatory uncertainty in DeFi could be yours Hinder progress in the short term.
DeFi won’t and may never become a fully regulated space overnight. Since creating, updating, and maintaining a robust regulatory framework for decentralized funding may require an industrial-scale effort, but with a $ 70 billion market at stake, there are many incentives to do so.
In 2020 alone, DeFi’s Total Value Locked (TVL) metric grew an impressive 2,000%, and similar growth this year would bring DeFi into a $ 300 billion ecosystem in December. Right now, the TVL number is nearly a third of the way, and while it might be challenging for the space to see such exponential growth again this season, it’s not entirely impossible. Given that $ 300 billion is less than a sixth of the current total market capitalization of cryptocurrencies, it could be argued that DeFi is certainly more important to the blockchain than that fraction.
While TVL isn’t exactly a metric like market cap, DeFi is on its way to becoming a much more mature domain. With big players like Nexus Mutual and CDx moving into the DeFi insurance space, tech giants Facebook and PayPal entering the blockchain space, and savvy developers constantly developing innovative applications, growth is on a scale like last Year did not get completely out of hand 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 master are by no means undemanding. From rudimentary interoperability features and capital inefficiency to poor liquidity and non-intuitive interfaces, DeFi has a lot to do in the years to come.
Blockchain technology is already incredibly complex, and adding the technical complications of DeFi platforms could be the biggest obstacle in its path. It is still difficult to figure out how to use all of the products on offer, but at least there can only be one way to go: develop.
The average investor will not know how MetaMask works or is used, and until the industry starts developing more convenient and intuitive ways to interact with the ecosystem, widespread adoption will remain unattainable. 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 to work around the problem.
Related: DeFi Resists Crypto Market Correction and Uniswap v3 leads the indictment
Zhivko Todorov, DeFi ecosystem leader at LimeChain – a company that innovates Provides distributed ledger technology solutions for companies and startups – told Cointelegraph: “High gas commissions are a barrier to entry for end customers. However, we are at a crucial point where Layer 2 solutions are rolling out and gaining momentum, which would bring gas prices down dramatically.“However, the congestion on Ethereum not only increases the network’s gas commissions, it also drives away a significant portion of the traders.
“Blockchain performance is hindering the influx of HFT (radio frequency operators in Spanish) operators into this sector“said Grigory Rybalchenko, co-founder and CEO of the EmiSwap exchange, in an interview with Cointelegraph, adding:”High frequency traders make up the bulk of the volume on traditional centralized exchanges, and high fees are unlikely to make them migrate to DEXs anytime soon.“
Total market capitalization for digital assets briefly passed the $ 2 trillion mark this year. However, the cryptocurrency market is still tiny when compared to the global stock market, which is currently around $ 80 trillion worldwide. However, decentralized funding has achieved a lot in just a few years, and as this pace of innovation continues, there could well be another DeFi summer as projects could begin to capitalize on all the hard work of the year past.