7 Key Trends Driving the DeFi Market in 2023

Decentralized Finance (DeFi) has been one of the most intriguing and transformational developments in the world of cryptocurrencies. Here, we will discuss the 7 key trends driving the DeFi market in 2023. 

 

Decentralized finance (DeFi) is a fintech solution that uses a distributed ledger to make it possible to do financial deals without banks or other centralized financial institutions. 

All transactions are written down on a public and unchangeable log, so institutions don’t have to charge a fee for each one.

With just a phone and an internet link, you can borrow, save, lend, or trade cryptocurrencies without knowing your customer (KYC). 

This makes DeFi easier to use, more integrated, and more transparent, which are all well-known benefits.

The growth of DeFi protocols has also made it easy for a number of new crypto companies to get started. 

Demand has gone up a lot, and the business is expected to grow from $11.78 billion in 2021 to $231.19 billion in 2030, which is a nearly 20-fold increase.

Key Trends Driving the DeFi Market in 2023

We think 2023 will be just as exciting, if not more so, than 2022 because so many exciting things happened in 2022 and before. Here are some new trends to keep an eye on.

1. Real-world assets on the Blockchain
2. The revival of DEXs 
3. Decentralization derivatives and option
4. The emergence of CBDCs
5. Governance Token

Real-World Assets on the Blockchain

By moving real-world assets (RWA) to the blockchain, they have helped to open up large amounts of liquidity and usefulness that would have been hard or impossible to get in the real world. 

Even though blockchains have the ability to make things more open and liquid, tokenizing physical assets hasn’t worked out very well. 

One reason could be that there is a complex but “good enough” legacy market for most real-world assets that has been around for a long time.

Carbon credits are a fairly new type of asset, and they might be an exception to this rule. There is no carbon system that has been in place for so long that it can’t be changed. 

The building of web3 infrastructure to put carbon credits on-chain could be the first real success story of tokenizing real-world assets.

Also, big players in the DeFi lending market, like MakerDAO, have made it legal to buy in US Treasury and corporate bonds and have teamed up with traditional banks to offer loans with RWAs as security. 

At the moment, 57% of MakerDAO’s income comes from US Treasury bonds, which are worth more than $500 million. 

One of the most useful ways for DeFi to be used is in partnerships with banks and real businesses. Goldfinch is another example. It is a decentralized global credit protocol that lets users loan their USDC to real businesses. 

Goldfinch’s revenue has continued to grow even during the bear market, with about $100 million in loans given out. 

This gives real returns outside of crypto activities, but there are risks because the loans are not well-secured and bad debts can happen.

In 2023, RWAs will likely increase in popularity since many in the industry regard them as a fantastic opportunity to integrate traditional institutions with DeFi liquidity.

The excitement for RWAs is shared by Vitalik Buterin, who writes that “the formula behind stablecoins can be applied to other real-world assets,” such as DAO-governed stablecoins backed by physical assets.

The Revival of DEXs

Decentralized apps (dApps) are apps that are built on top of blockchains. They are generally open, independent, don’t need permission, and don’t hold users’ funds. 

Decentralized exchanges (DEXs) are dApps that are an important part of DeFi and where most trade takes place.

This is different from centralized exchange (CEX) applications, which are usually permissioned and custodial. 

This means that the CEX holds the funds and handles them on behalf of the users. 

Several controlled exchanges (CEXs), including Sam Bankman Fried’s FTX, closed down in 2022, which was a shame. 

Many users are worried about these centralized platforms’ lack of transparency and control, and they are scared of losing their money on CEXes. 

This has caused DEXs to come back to life, and they have a lot of room to grow because they are the natural choice for users who want to leave centralized markets. 

Even though DEXs can be harder to use and require more care from the average user because they have to keep track of their own private keys, they give users full power over their money instead of giving it to a business. 

In 2022, we saw interesting liquidity mechanisms like GMX’s GLP token and GNS’s DAI vaults acting as the counterparty liquidity, as well as Perp v2 and Rage Trade building on top of Uniswap v3’s concentrated liquidity mechanisms to improve liquidity and trade. 

By TVL, Uniswap is still the best DEX, and its market capitalization has been more stable than ETH’s in 2022. 

After their license for Uniswap v3 expires in April 2023, Uniswap v4 could come out with even more cool features. This could be a turning point for the DEX space. 

Decentralized Derivatives and Option

Derivatives are one of the greatest markets in the world in terms of notional value and volume, and the derivative volume on CEXs is currently above $1 trillion, according to CoinGecko, reflecting the renewed interest in DEXs and blockchain derivatives.

The fact that derivatives often come with debt is what makes them so popular. 

Some types of derivatives are perpetual contracts and options contracts, which give users a lot of leverage, up to 50x on some of the most famous perpetual DEXs. 

As people become more cautious about using CEXs, some of this volume may move to on-chain derivative DEXs. 

As new features are added to make dealing on-chain derivatives better, there is a chance that this trend of rising volume and more people using it will continue. 

Permanent trading is already popular, but options trading is still growing. Protocols like Panoptic Options and Dopex are coming up with new ways for people to trade options. 

In 2023, a new story called “OpFi,” which stands for “DeFi infrastructure powered by options,” could make it easier for more people to use options.

The Emergence of CBDCs

We can’t talk about real-world assets without talking about Central Bank Digital Currencies (CBDCs), which are real-world cash currencies that move into the digital world. 

A central bank, not a private bank, issues a CBDC, which is a digital currency. It is also a liability of the central bank that is measured in the national currency.

The Atlantic Council think tank says that more than a hundred countries are looking into CBDCs at the research and development stage. 

Some countries, like Nigeria and the Bahamas, have already started their CBDC programs, while others, like China, India, and Thailand, are still in the test stage.

China’s digital yuan has been the most successful, with more than $14 billion worth of deals. 

But overall numbers have grown much more slowly. In 2020, they grew by a record 154%, but since then they have only grown by 14%. 

With the start of its e-rupee, India is one of the more recent countries to join the CBDC race. 

India will be a good example of how to start a large-scale CBDC initiative. It is the biggest democracy in the world and has a huge crypto audience. 

Even though CBDCs are talked about a lot, not many people are using them. 

Part of the reason for this is that, from the consumer’s point of view, CBDCs and digitalized fiat currencies are very identical. Both are fast and free to use, and their governments support them. 

CBDCs are helpful because people who don’t have a bank account can still use them as long as they have a phone and access to the internet. 

Blockchain technology also makes it possible for foreign transactions to be made instantly. 

There are also some worrying ways to get governments to adopt, like Nigeria’s plan to charge high fees for cash withdrawals from ATMs.

CBDCs give governments more power over their people’s money, which most people might not like unless the benefits are much greater than the negative effects.

In 2023, it’s possible that CBDC technology will get better, and we’ll know more about how different groups of people use and react to CBDCs. 

Also, both centralized and decentralized stablecoins already exist, are widely used in DeFi as the main price unit, and are very liquid. 

Users like them, and they are known to have one of the best product-market fits. So, it’s not likely that CBDCs will replace stablecoins in the near future.

Governace Token

Governance tokens have been a key part of DeFi because they give users a say in how the program makes decisions. In the future, governance tokens will likely be used even more to decide the direction of DeFi projects. 

More and more DAOs (Decentralized Autonomous Organizations) will be run by token holders, giving users more power over upgrades, project proposals, and project funding.

Conclusion 

The last few years can be seen as the first cycle for DeFi. Just like the internet took time to grow and was even called a fad before it became widely used. 

DeFi is expected to go through multiple cycles of innovation and failure before it has a chance to become the transformative technology that is hoped for.