Figuring out where the DeFi ecosystem started almost always ends in a rhetorical debate. Some argue that the invention of Bitcoin (BTC) a decade ago marked the beginning, as the main cryptocurrency was the first peer-to-peer digital money and represents the conceptual core that underlies DeFi. Others say – and it would be technically correct – that DeFi was launched in December 2017 when the Ethereum-based MakerDAO protocol was launched, followed by Compound Finance and Uniswap, which launched in September and November 2018, respectively. On the other hand, it wouldn’t be an exaggeration to say that DeFi’s real rise began this year.
The monumental rise in the total value set in the DeFi protocols – starting this summer and over $ 16 billion this month – has undoubtedly made the sector one of the most debated topics of 2020.. And as expected, there are those who support it and those who criticize it.
Related Topics: Introducing DeFi 2020: A Definitive Guide to Getting Started in the Industry
Although DeFi is among the hottest topics this year, they continue to argue that DeFi remains primarily a niche financial tool in the world of global finance. Given the rapid growth in money pouring into space, it’s no surprise that some DeFi compare to the 2017 ICO boom and predict its possible failure. In the meantime, others claim that the various projects in the room are not really decentralized and do not represent the real idea behind DeFi.
Other concerns are heavily related to the transaction fees of the Ethereum network, which has peaked several times this year, raising doubts about the network’s long-term sustainability. However, it would be wrong to hold DeFi solely responsible for high gas prices, as these are also influenced by the way institutions store and secure digital assets. One of the solutions could be to unlock the $ 250 billion Bitcoin treasure chest for DeFi products.
Related: The Butterfly Effect: Why DeFi Forcing BTC to Break Its 21M Supply Ceiling
While the concept of DeFi looks promising, there are some pitfalls, obvious financial risks, and also a number of technical risks. It just seems necessary to improve the underlying infrastructure for most of the decentralized applications.
Related Topics: Setting Expectations: Great opportunities in the crypto space can come at a price
In the long term, DeFi has the potential to change our world, where 1.7 billion people still do not have access to traditional financial services. Returning to the rhetorical debates about DeFi’s origins, one could say that DeFi completes the work started by Bitcoin and becomes the second step in the decentralized evolution, with the potential to solve the financial inclusion problem.
Towards the end of 2020, Cointelegraph reached out to experts in blockchain technology and the crypto space for their thoughts on a “DeFi Year”.
How did DeFi impact the crypto industry in 2020 and what can we expect from the DeFi space in 2021?
Brendan Blumer, CEO of Block.one:
“DeFi was without a doubt one of the most noticeable features of the year. The billions of dollars in funding that have accrued in the ecosystem underscore the widespread interest in DeFi. However, this increased awareness has also sparked further skepticism from part of the regulators who are pushing the boundaries and Want to understand the feasibility of DeFi applications.
At Block.one we believe that there has to be some evolution from DeFi to achieve a sustainable connection with the traditional economy and the creation of a more open financial system. We call it Open Programmable Finance or ProFi. We see ProFi as a bridge between the transparency and integrity of the EOS blockchain and the regulated financial world.
A key differentiator between DeFi and ProFi is that ProFi companies include authorized and risk-based access to transactions based on regulations and compliance. Cryptocurrency compliance and regulatory frameworks are rapidly taking shape and maturing. The real winners in the digital economy will be those who think long term and take the time to ensure that their products meet professional and legal service requirements. “
Brian Brooks, Acting Auditor for the Office of the Treasury Department’s Currency Auditor:
“Decentralization is one of the two great forces reshaping financial services. Along with the unbundling of the three traditional core banking activities of lending, payments and deposit protection, decentralization is changing the way we consume financial services and the way banks operate Believe we are still in the first quarter of a longer game and that much of the bigger wins and advances are still to come. “
Da Hongfei, Founder of Neo, Founder and CEO of Onchain:
“While blockchain-powered financial solutions are not new, this year we’ve seen exciting and innovative advances at DeFi, ranging from exciting new protocols to better cross-chain asset bridges.
I think it is clear that the blockchain technology space encompasses both decentralization and interoperability, and I am confident that both will move rapidly in the year ahead. With the most modern interoperability protocols such as Poly Network, we are laying the foundations for the intelligent economy of the future, a truly globalized world without borders. “
Dan Simerman, Head of Financial Relations at the Iota Foundation:
“I agree that 2020 was a ‘DeFi year’, mainly because DeFi projects dominated in terms of innovation and technical development. I would also say that DeFi has shown the crypto world that innovation is still possible and new is projects can fuel liquidity, funding and engagement in new ways. “After the ICO madness ended in 2017, it was believed that new projects would find it difficult to find their place in a market where private funding prevailed Has crowd sourced innovations. Thanks to the tools developed in the DeFi bubble, we will see a lot more innovation in the coming months.
In 2021, some of the fundamental innovations, such as mutual fund issuance and liquidity draining, will find their way into applications we would not consider “financial”. s, developers and companies looking to opt for a blockchain expect these building blocks to be available as part of their DApp toolbox. What we saw as radical financial instruments in 2020 will de facto become a requirement for blockchain and ecosystem selection in 2021. We could even see some of DeFi’s core innovations making their way into the world of centralized finance. “
Denelle Dixon, CEO and Chief Executive Officer of the Stellar Development Foundation:
“I’ve seen a growing focus and headline surge on DeFi in our industry in 2020. But even if the term is ubiquitous these days, I think DeFi means many different things to people and affects many different ways in existence and emerging projects. As a result, I have a hard time classifying the year as a whole as a DeFi year, but I think the DeFi craze has brought in a ton of new talent and interest in blockchain and cryptocurrencies, which is good for the industry as a whole a lot to do that falls within the scope of DeFi.
Still, I think this creates important considerations for all of us as to why DeFi was the focus of attention and whether we can make adjustments to ensure we meet these requirements. “
Emin Gün Sirer, CEO of AvaLabs, Professor at Cornell University, Co-Chair of IC3:
“DeFi on Ethereum has skyrocketed this year, building a vibrant community of apps and users. At the same time, the hacks and scams we’ve seen underscore how much work remains to harden the community during huge volumes the limits of DeFi on Ethereum 1.0.
The congestion on the network has raised interest rates to new levels, creating systemic risk as much of the market is driven by high leverage and secured credit. In the event of a price fluctuation, which can normally be absorbed by the system, we have seen the ripple effects of billing triggered by the fact that users cannot post guarantees or leave their position.
The main problem here is that the first shift in which the DeFi activity takes place is too overloaded. I think releasing new scalable layers like Avalanche will change that. We’ll see DeFi expand even further. “
Heath Tarbert, Chairman and CEO of the US Commodity Futures Trading Commission:
“DeFi is a growing global trend and its emergence shows how innovations are continually reinventing the financial services space. By combining multiple technologies to deliver financial services in new ways, DeFi could provide a way to broaden market access financially for a wider range of individuals and organizations. “It’s a new way of looking at finance that uses and reflects the new ways of interacting.
We can’t just think about the previous type of visit to a bank or stockbroker that we have known for years, especially when it comes to expanding access to financial markets and financial services. In the past, innovation has driven our markets and has been the linchpin of their success.
I think we as a regulator should expect DeFi to keep evolving and growing. Each regulator needs to figure out how DeFi affects their own jurisdiction. In the absence of regulation, the industry needs to figure out how to ensure market integrity and consumer protection. All of these are areas that regulators will focus on going forward. “
Jimmy Song, Blockchain Programming Teacher:
“As for the new scam vehicle, it’s absolutely true. We haven’t seen such scams since the 2017-2018 ICOs. This is of course nothing new, given the 2011 altcoins and the token sales for 2013-2014. If I can Want to add something good to the ecosystem, I have serious doubts, so if it turns out that DeFi is not a zero-sum game in three years time that will benefit the people who create the tokens, I’ll reconsider it.
I hope 2021 is more the same as people have a hard time learning that all of these things are minimally useful at best. I hope 2022 is the year it finally ends. “
Joseph Lubin, Co-Founder of Ethereum, Founder of ConsenSys:
“The fact that the value attributed to the DeFi protocols has increased from $ 675 million to nearly $ 15 billion in one year is evidence that DeFi, or what I call it, ‘open decentralized funding ‘Having a great year. However, it’s not just a new and exciting use case for cryptocurrencies, it is the unification of an entire decentralized financial ecosystem, the components of which have been in operation for several years. Many in our field refer to them such as Lego blocks or assemblable ones Open source systems that enable more complex financial applications that are accessible to everyone. They started with a collateral-backed stablecoin (DAI), the borrowing of these stablecoins and opportunities for efficient trading without a central exchange (automated market makers such as Uniswap and 1inch) We are now seeing insurance protocols, wealth management platforms, and even new innovations. Finance like flash loans.
Our portfolio and portal for every DeFi application, MetaMask, has improved your user experience over the past few years, making it easy for anyone to switch accounts and grant permissions only to the applications and websites they trust. The mobile app also makes it easier for DeFi apps to target a wider audience, namely cell phones, which are estimated to be closer to 2 billion people, or about 60% of the internet-connected population. More than 65% of MetaMask Mobile beta users were outside of North America and Europe, where mobile prevails. We heard from users that using MetaMask Mobile came in handy for individuals to exchange tokens, sell NFT art, and earn interest by providing collateral – all from a mobile phone.
ConsenSys started when there was no real ecosystem, infrastructure, and development tools. Now our development tools like Truffle support millions of developers looking to build their own applications. Infura supports more than 130,000 developers by delivering a node-optimized cloud infrastructure so that applications can be easily deployed without the infrastructure running. Our audit team, ConsenSys Diligence, ensures that smart contracts are tested and secure prior to deployment. All of this contributes to the rise of DeFi, as it is easier for developers to spin a project based on a vibrant open source ecosystem.
One trend that I expect to gain momentum in 2021 is that institutional money and professional traders are increasingly looking to expose themselves to DeFi. With this in mind, we’ve created an institutional version of MetaMask and are starting to involve professional custodians and traders to integrate MetaMask into their technology so they can seamlessly gain exposure.
I think the global low (and even negative) macro trends will make DeFi increasingly relevant to ordinary people. Not only tech and finance nerds will find this interesting. If bank accounts offer many different features that make lending and lending easier, enable more people to participate in the positive side of the markets, and even generate more returns, more people could switch to decentralized finance lines. As long as the traditional financial world collapses, people will be pushed in our direction.
I am also watching games act as a catalyst for the adoption of Ethereum-based NFTs for consumers. “
Mance Harmon, Co-Founder and CEO of Hedera Hashgraph and Swirlds Inc .:
“The rise of DeFi in 2020 laid the foundation for companies to incorporate component financing directly into their business processes. While the DeFi bubble in 2020 is somewhat similar to the ICO craze of 2017, the fundamentals are that the DeFi movement will in the future Changing the face of finance.
DeFi will make traditional finance deals faster and cheaper for businesses, governments and individuals alike. It will transform all financial transactions we conduct as organizations as well as in our personal lives. “
Meltem Demirors, Head of Strategy at CoinShares:
“Much of the financial industry is based on two basic concepts: securitization and lending. The crypto industry has been concerned with the introduction of colored coins for bitcoin and the ERC standard in securitization and lending. -20, which made this much more accessible and securitization Enabled through tokenization and the growth of asset-backed loan markets, to which holders of Bitcoin and other highly liquid cryptocurrencies could use their holdings for access.In 2020, securitization and leverage in the form of DeFi have found new means to support these activities, traditionally coordinated by trustworthy intermediaries such as banks, brokers and asset managers, has been migrated to a native medium of blockchain technology, effectively replacing trustworthy intermediaries, verifiable technology in the form of open source code, i.e. contracts regulating DeFi projects .
DeFi is a step in a path that many of us in the industry have viewed as inevitable – securitization, lending, and many of the basic financial functions of banks and other intermediaries can be effectively migrated to low-trust crypto primitives. Given that millions of people around the world have net billions of cryptocurrencies, it is inevitable that a market will develop that will make these assets financially productive. We have invested time, energy and capital in the DeFi space and hope to be able to do the same in 2021.
Institutions are not yet fully DeFi-ready, but make no mistake: They will try to replicate their existing business models (and the associated revenues) using cryptocurrencies as collateral. We expect more regulatory pressure and thus more anonymous development projects as well as the emergence of stable coins that do not have a single control point, such as the Empty Set Dollar (ESD) or Basis Cash (BAC), two of the former. Leaders in this room. We expect more assets to be “packaged”, ie securitized and made available as collateral in the chain, and we expect a more robust interest rate market that is starting to assess risk and duration across the market space. DeFi.
Ultimately, leverage is a very powerful drug and the industry will continue to innovate to keep the flow of capital free. Without access to a money printer, innovation will continue to fuel liquidity in the trading ecosystem, where the demand for cash and leverage continues to outpace supply, and more asset securitization and token provision as businesses begin, more esoteric types of collateral and credit with little or no collateral to investigate at all. “
Michael Zochowski, Director of DeFi at Ripple:
“2020 might not have been the year of DeFi, but it certainly served as the launch party. Within the crypto community, DeFi was the most talked about topic when we started realizing its potential, but we haven’t seen it jump. For that traditional markets, most of the current users are the ones who have already chosen cryptocurrencies, so for DeFi to break out of its bubble we need a strategic partnership with a mainstream player like a financial institution or fintech.
History will repeat itself – as we saw with the 2017-2018 altcoin boom, many projects will fade, consolidate or be acquired, including some of the “darlings” of 2020 as we are already seeing. The ones that are really useful have earned a place in the crypto ecosystem. The simplest applications that replicate basic financial services such as packaged assets and decentralized exchanges are likely to be most successful.
DeFi’s new platforms will grow in importance as it becomes increasingly clear that performance and costs need to be improved significantly. Further sidechain projects, network bridges and smart contracts are expected to drive new networks. With the advent of these new systems, interoperability and efficiency will become more important. With Eth2 still going to be years, I expect at least 25% of the value provided in DeFi will flow to networks other than Ethereum by the end of 2021, with strong momentum until 2022 if Ethereum further delays its upgrade plan. “
Mike Belshe, CEO of BitGo:
“This was the year DeFi became a household name, or at least a recognized term, in most financial circles. BitGo has long been associated with DeFI, and one of our products – Wrapped Bitcoin (WBTC) – appeared in January 2020 and is now Often used in DeFi, and in less than a year, the market cap for WBTC has grown to $ 1.6 billion.
BitGo has the role of the sole administrator of WBTC. This means that we insure every bitcoin deposited on WBTC. For every WBTC there is a BTC in BitGo’s vaults, which is kept safe.
The strength of WBTC is the transparency and auditability of the system which, combined with BitGo’s security record, has made it possible to attract institutional and retail DeFi users and create a significant amount of liquidity with market capitalization. in continuous growth.
We are confident that DeFi applications and use cases will continue to gain momentum in 2021. We will see innovations from decentralized lending to collateral and insurance that can build on the DeFi infrastructure even without our involvement. The diverse community of blockchain technology identifies exciting use cases that go well beyond what the technology was originally designed for. This limitless potential for new developments is the reason why we are so passionate about building in this space. “
Paul Brody, Director and Global Innovation Leader for Blockchain Technology at Ernst Young:
“DeFi is amazing and exciting because the truth about smart contracts is that most of them aren’t very smart. In the past they were little more than asset registrations. With the advent of DeFi, we have run out of things, and duties therefore we are much closer to the goal of smart contracts.
We are now entering the exciting and terrifying era where smart contracts will automatically move, hack and exploit assets and money, and we will learn to deal with these risks while creating value. We’re already seeing a little of this, but in 2021 it will move a lot further.
For 2021 I hope not only that the DeFi contracts are mature, but also that we see a transition from DApps to Zapps – zero knowledge applications – privacy-oriented versions of DApps that can be used by companies. . I think we’re going to see a much more serious approach to testing and safety as well.
Finally, I hope that decentralized applications beyond finance will emerge in 2021. Decentralized processes, business systems and infrastructures lie ahead of us. They take the concepts that were first used at DeFi and apply them to a much wider range of services and systems, from inventory to manufacturing to procurement. “
Roger Ver, CEO of Bitcoin.com:
“Like cryptocurrencies in general, DeFi is just getting started. It’s just one more area that Satoshi Nakamoto’s invention made possible.
Cryptocurrencies, tokens, decentralized crowdfunding such as Flipstarter, ICOs and much more are now possible. The ecosystem is still beginning and we are all happy to be a part of it. “
Samson Mow, Head of Strategy at Blockstream:
“2020 was a year of DeFi if we define a year based on hacks and failures. Like Ethereum, DeFi has helped enrich some insiders and make many others lose money. I would expect more in 2021.” of which will be. ” “.
Scott Freeman, Co-Founder and Partner of JST Capital:
“2020 was a remarkable year for the entire crypto ecosystem, not just DeFi. However, we have found that the institutional growth within DeFi is remarkable and perhaps even more surprising than the institutional adoption of Bitcoin. We have also seen that The liquidity on decentralized exchanges and credit platforms has improved dramatically.
We assume that DeFi will continue to grow in 2021 as we see solution-oriented projects rather than interesting technologies looking for a problem to be solved. “
These quotes have been edited and compressed.
The views, thoughts, and opinions expressed herein are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.