Explosive DeFi: Where we are and where we’re heading

The entire crypto space continues to evolve rapidly, surpassing the market capitalization of $ 3 trillion for the first time in 2021. In addition, global blockchain spending is projected to surge seven-fold over the past four years, reaching an estimated $ 6.6 billion in 2021. It will triple by 2024. This is impressive considering that the launch of Bitcoin more than 10 years ago has sown the crypto industry.

With the emergence of various sectors such as NFTs, GameFi, Metaverse and Decentralized Finance (DeFi) today, the blockchain industry has grown beyond peer-to-peer transactions. But nothing has caught the attention of the traditional financial industry like DeFi.

DeFi = decentralized finance

DeFi is an eclectic combination of blockchain technology, digital assets and financial services aimed at financial intermediation. The market will grow explosively in 2020, and many even call it the “Year of DeFi.” However, it is still in the early stages of maturity.

According to Defillama, DeFi’s Locked Total Value (TVL) has increased from $ 625 million in April 2020 to the present, exceeding $ 21.1 billion, to $ 255 billion in December 2021. It is decreasing from the peak that exceeds. These include DEX Curve, which accounts for 9.6% of this TVL, the staking platform Lido, the money market anchor, and the lending protocol Aave.

DeFi is revolutionizing finance, starting with exchanges, derivatives, wealth management, credit, insurance and stablecoin. Unlike traditional finance, which relies on intermediaries to manage and process financial services, DeFi operates in a decentralized environment. Decentralized applications (dApps) are built on public, unauthorized blockchains, and services are typically encoded with open source software protocols and smart contracts.

As a result, investors are spending more cash on DeFi and Web3-focused startups, according to a report from transaction tracking firm Pitchbook. Young Web3 and DeFi startups landed a total of $ 1.26 billion worth of investment in the third quarter of 2021. This is considered the “best growth opportunity”.

Fundamentals

In the DeFi sector, dApp provides financial services without the need for a centralized intermediary or institution. Here, the open protocol gives you the flexibility to combine services programmatically. This is the exact opposite of what the traditional market represents. In traditional financial markets, today’s systems are becoming more complex as intermediaries act as agents of trust, liquidity, payments and security. The 2008 global financial crisis actually highlighted these intermediate financial system flaws, inefficiencies, structural inequality, and hidden risks.

In addition, legacy financial infrastructure has additional drawbacks such as slow settlement cycles, inefficient price discovery, liquidity challenges, and lack of guarantees on underlying assets. The remedy is the emergence of decentralized finance. It aims to address these challenges by leveraging blockchain technology to facilitate alternatives to traditional service providers and market structures.

DeFi not only uses a distributed ledger as the payment layer for transactions, but also utilizes a variety of other technologies, such as smart contracts, which are programs that run when certain conditions are met. Here, digital assets represent the value that can be easily transferred. At DeFi, the governance system gives token holders of the protocol the right to vote for the future.

Wallets, on the other hand, are used to manage assets stored on the blockchain. Storage wallets are much easier to handle and operate with other applications, but non-storage wallets allow you to use your private key to gain exclusive control over your funds.

Good and bad points

The opportunities presented by DeFi are very simple and there are many topics. This eliminates the high fees charged by banks, brokerage firms and other financial institutions. DeFi enables faster and more efficient transactions, reduces counterparty risk, increases feature interoperability for transparency, improves accountability, enhances stakeholder control, and permits. Achieve fast-paced innovation.

In addition, being an open source protocol means that anyone can build on the platform, offering even more juicy yield opportunities with investments that far exceed the profits offered in the legacy market.

DeFi has many potentials in terms of efficiency, innovation and financial inclusion, but it also has risks. Some of them are scalability, throughput, transaction fees, limited interoperability between blockchains, over-collateralization, and regulatory challenges.

Its early stages of growth mean that DeFi is now promoting short-term profits and attracting malicious actors. For example, rug pulls, fraudulent projects, malicious people, and hacks are also quite common in DeFi. The numbers speak for themselves.

According to an Elliptic report, DeFi users actually lost $ 10.5 billion in theft in 2021. The biggest DeFi hacks include PolyNetwork, which lost $ 611 million. Next, a cyberattack broke out on Axie Infinity’s bridge to the Ronin Protocol, causing hackers to leak $ 522 million. The latest DeFi hack took place on April 17th. Beanstalk, a stablecoin protocol, lost $ 182 million in a flash loan attack. Next comes the infamous $ 326 million wormhole hack.

These are just a few of the cyberattacks that have attracted media glare and have become a hot topic in the city on social media platforms. The actual number is much higher. Such cases show that the DeFi sector is far from a simple and secure way for the masses to develop capital.

Latest development

Despite the risks of using DeFi, the sector continues to grow and innovate, creating several new trends.

Liquidity mining is one of DeFi’s hottest trends, and the protocol allows users to provide liquidity and be brilliantly rewarded with native tokens. Yield farming is another popular farming that combines staking, lending and borrowing to optimize profits.

The rise of non-fungible tokens (NFTs) has also paved the way for new products that combine NFT and DeFi, such as Play-to-Earn games such as GameFi, Decentraland and The Sandbox. With the advent of 5G, DeFi is also expected to benefit as it provides a significant high-speed connection.

Next is Decentralized Autonomous Organization (DAO). Its growth can be attributed to the rise of DeFi innovation, gaining significant traction as it reaches mainstream awareness. DAOs are used in everything from art and sports to crowdfunding and finance.

Some of the most exciting DAOs include Beets DAO, a group focused on purchasing music-based NFTs. ConstitutionDAO, a group effort to buy a copy of the US Constitution. FriendsWithBenefitsDAO, a cryptocurrency member-only social club. And hire Raid Guild, a Web3 marketing and design agency.

However, the discussion about DeFi is incomplete without Ethereum, where most of these applications are built due to their capabilities and the adoption of developers. Ethereum is currently moving to ETH 2.0 to improve scalability. However, other Layer 1 blockchains such as Terra, Avalanche, Solana, BSC, Polygon, and Layer 2 solutions such as Arbitrum and Optimism adopted in 2022 enable smooth movement of information between different networks. Introducing cross-chain technology.

For example, DEX Mangata Finance is built on the Polkadot network and bridges with Ethereum to offer low fixed rates and MEV-free transactions.

The last word

Overall, DeFi has great potential for users as it is available 24/7 for everyone in the world. These decentralized protocols offer new and diverse investment opportunities. Not to mention the double-digit interest rates offered by many DeFi protocols, they are much higher than the interest rates of less than 1% for regulated banks.

Of course, this calls on giants like Morgan Stanley to stay “quite small” in the DeFi industry. But while DeFi is still new, it’s growing rapidly, attracting investments and users, and working on banks that don’t have billions of bank accounts.

Peter Kris is CEO of Mangata Finance..