After the explosive growth of decentralized finance in the second half of 2020, we wonder what the next chapter will look like. What does it take for DeFi to go beyond the original cryptocurrencies and societies and start using financial services as we know them?
The second half of 2020 exceeded many of our expectations, and since then the market has only accelerated. The total book value of DeFi has increased from less than $ 1 billion in early June to $ 13 billion at the end of the year and over $ 27 billion since then. Encouraged by the launch of the COMP token on Compound, we have witnessed a spike in contraction and rapid asset flow.
On the subject: Was 2020 the year of DeFi and which sector is expected in 2021? Experts answer
Perhaps most excitingly, we are beginning to see the foundation of a new financial system being formed – with applications that enable everything from do-it-yourself exchange to lending and borrowing, payments, portfolio management and insurance. New forms of value are emerging: not only the promise of profit in a low-cost environment, but also access to financial services for companies and individuals working with cryptocurrencies and for the smallest banks in general.
DeFi today is all about maintaining a small subset of original users and cryptocurrencies that critics see as the Wild West. Will this change? Here are some ideas for what you can do next.
New Asset Types – New Sources of Liquidity in DeFi
The first iterations of decentralized exchanges were full of liquidity problems. Early adopters faced significant match latency rankings and token pairs were limited. Automated market makers and liquidity pools have become the main solution to this problem, as daily trading volumes on decentralized exchanges currently stand at around $ 2 billion and DeFi projects continue to find innovative ways to stimulate the supply of liquidity. This will continue. We believe that there is still a clear need for borrowers to reduce collateral requirements and use alternative forms of collateral.
Perhaps the best opportunity lies outside the realm of original cryptoassets. The potential collateral in assets is trillions of dollars: users want to borrow against assets they already own and often cannot access the funds they need in traditional ways. Real asset coding can dramatically increase the size of the DeFi world.
Scaling problems are addressed at level 1 and / or level 2.
Ethereum’s scalability limitations are often cited as the limiting factor for DeFi adoption. Rising gasoline prices and higher ETH prices can actually make low cost transactions unprofitable. This limits the attractiveness of markets for non-perishable tokens and other retail-focused services. Meanwhile, professional high frequency trading requires tier 2 solutions due to the limited flow of transactions in the chain.
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This will likely be resolved in 2021 in at least three possible ways:
Successful launch of Ethereum 2.0.
The emergence of dominant Ethereum tier 2 scaling solutions.
Extensive use of interoperability solutions in chains.
These three phenomena should not contradict each other. Together, they give us optimism that 2021 will be the year of significant progress in Defi’s scalability.
Institutional demand – convergence of CeFi and DeFi
We’re starting to see the original crypto institutional investors looking for higher returns at the expense of a stable currency. Many of these investors use centralized exchanges, at least in the beginning, but a number of self-defense products have emerged with a focus on institutions. Regulatory control over DeFi is likely to increase as these services take hold.
Meanwhile, regulators around the world have enacted stricter rules for virtual account service providers such as centralized cryptocurrency exchanges. The itinerary, published by the Financial Action Task Force and the Fifth Anti-Money Laundering Directive in Europe, demonstrates a move towards stricter Know Your Customer standards in cryptocurrency, and BitMEX’s October fee softened that. This will ultimately affect DeFi: in the short term, we expect to see the company’s products implement pseudonyms / no autonomous identity knowledge.
There are ideological and practical issues that need to be addressed. Is KYC fundamentally incompatible with DeFi? What rules really apply to DeFi today and in the future?