This blog examined the top five new trends in decentralized finance (DeFi) in June of last year. At that time, DeFi was still fairly young. An intriguing new movement had just passed the $1 billion total value locked (TVL) milestone, which represents the sum of cryptocurrency cash that users have deposited into decentralized applications (dapps). By the end of the month, TVL would reach $2 billion, and by the end of 2020, it would reach over $15 billion. As the movement continues to grow, certain important patterns have become established while others are worth keeping an eye on as the market develops over the course of the year. Let's examine what they are and why they are important.
DeFi Is Growing: Pay Attention to the Trends That Will Shape the Movement in 2021
1. Making scaling solutions a priority
The Ethereum network is under pressure from the popularity of DeFi dapps, which is increasing gas prices for transactions. Simple token transfers can cost several dollars as of this writing, however more complicated smart contract activities, like opening a vault, can cost hundreds or more. The persistent gas issue and other problems will eventually be resolved in Ethereum 2.0, allowing the network to expand to a point where it can sustain widespread use. However, the improvement will take years to complete and is being implemented in phases, with Phase 0 launching on December 1, 2020.
While waiting for the full release of Ethereum 2.0, developers are developing stopgap and supplementary solutions that enable the introduction of large-scale dapps.
One strategy is to transfer specific actions and tokens to child chains on the Ethereum network. Matic Network, which is now a part of the larger Polygon suite of scaling solutions, serves as an illustration of this. Matic transactions are quick and affordable since they take place on sidechains.
Developers can batch-submit transactions off-chain to the main blockchain using a different method.
These packages, known as Rollups (also provided by Polygon), would let Ethereum to support 200 times more transactions.
2. AMM-based DEXes Automated Market Makers
Users Accept AMM-based DEXes Automated Market Makers (AMMs) offer an entirely new concept for decentralized exchanges (DEXes), utilizing liquidity pools and price established by an algorithm based on supply and demand as opposed to traditional order books.
Users don't actually trade directly with other users; instead, they do so via a smart contract-based liquidity pool. It is a sophisticated and simple approach to trustless crypto trading that avoids the issues and complexity of transferring the systems of conventional exchanges on the blockchain.
AMMs are a perfect example of how DeFi platform creators are adjusting to the distinct requirements of the market and offering customers chances unlike anything they have seen in the conventional finance sector. Along with Curve, Sushiswap, and Balancer, Uniswap—which popularized the AMM strategy—is a preferred DEX in the cryptocurrency industry. In actuality, the total TVL value of those four exchanges is around $13 billion. Just a small portion of the trade volume of the most popular AMMs is attracted by the largest order book-based DEX.
3. Are stablecoins the killer assets for DeFi?
Stablecoins provide users with essential means of storing and transferring value on the blockchain without subjecting them to the volatility for which cryptocurrency is infamous, as described by Ethereum co-founder Vitalik Buterin as simultaneously the most valuable and most boring things to come out of DeFi. Importantly, stablecoins are effective tools that make it possible to allocate funds to DeFi yield farming prospects in an effective manner.
4. NFTs: A Hot Trend in Crypto
Blockchain tokens known as non-fungible tokens (NFTs) are exclusive physical or digital items that are not divisible. As they demonstrate the legitimacy and ownership of digital artwork, collectibles, in-game items, and even plots of virtual land, they are swiftly gaining appeal. People can purchase and trade various kinds of collectibles using ETH and, increasingly, stablecoins on NFT markets like SuperRare, Nifty Gateway, Rarible, and others.
With over $180 million in sales to date as of this writing, NFTs are not only a lucrative market segment in the cryptocurrency world in and of itself, but there is also a DeFi use case for them. NFTs can be used as collateral for peer-to-peer loans thanks to protocols like NFTfi and Rocket, allowing owners to treat their digital collectibles like any other commodity that can be monetized.
5. Increase in Cross-Chain Collateral
New methods of injecting liquidity into the market are also becoming available as the need for collateral to deploy in DeFi dapps rises. The expansion of Bitcoin on Ethereum is a significant breakthrough in this sector (via ERC20 tokens that are backed 1:1 by BTC). Two instances of this are the Wrapped Bitcoin (WBTC) project, which tokenizes Bitcoin and other cryptocurrencies for use on Ethereum using BTC held in custody by the token issuer (much like USDC for Bitcoin), and the Ren Protocol, which employs a trustless paradigm. Bitcoin offers DeFi a tremendous amount of potential liquidity because it is the biggest and most valuable cryptocurrency. The value of assets locked in the Ren Protocol has increased from zero to approximately $1 billion in just six months, while there are currently over 125,000 BTC worth almost $6 billion available as WBTC.
What Else Is DeFi Predicting?
Users are starting to pay attention to a few more advancements in addition to the five mentioned above, such as:
CBDCs. In an effort to introduce their own Central Bank Digital Currencies, central banks and governments have been researching the advantages of blockchain technology for the past five years. The initial iterations of these CBDCs are now being tested, primarily in China. Several more nations are getting ready to follow.
Insurance. Decentralized insurance apps have the ability to make this multi-trillion dollar business more transparent and effective. Cover for different DeFi dangers, such as exchange hacks and smart contract attacks, is a tiny but expanding use case.
The emergence of real DAOs. Decentralized finance protocols can be more efficient, safe, and transparent than conventional centralized financial systems when correctly implemented. More initiatives are moving toward being fully decentralized operations as the DeFi space develops and public knowledge of them grows (decentralized autonomous organizations).
Time for DeFi to Shine
The expansion of DeFi in 2020 suggests a promising and fascinating industry. DeFi's potential to quickly influence the future of finance is now becoming more and more obvious. Thanks to emerging patterns supported by the strength of stablecoins, the rise in NFT usage, and new scaling and liquidity alternatives, dapps are poised to have another fantastic year.
