The Future of Decentralized Finance (DeFi): Trends to Watch

5 DeFi Projects to Keep an Eye on for Mass Adoption

5 DeFi Projects to Keep an Eye on for Mass Adoption

Decentralized Finance has led the financial world to go through a significant level of transformation. In this article, future trends of DEFI to watch out for will be brought to the limelight.

 

Since mid-2020, Decentralized Finance (DeFi) has grown very quickly. DeFi is still in its early stages, but it has already shown that it is possible to decentralize banking services on a large scale.

 

What is Decentralized Finance (DEFI)?

Decentralized Finance, or DeFi, uses blockchain technology and smart contracts to make financial systems that are open, transparent, and don’t need approval. 

 

Unlike traditional financial systems, which use banks and other financial institutions as middlemen, DeFi protocols use the power of decentralized networks to allow peer-to-peer transfers and do away with the need for middlemen.

 

DeFi’s central tenet is transforming complicated financial services and products offered by legacy financial institutions into self-executing code, complete with all the necessary rules and procedures.

 

What Makes DEFI Stand Out?

The potential for the blockchain to make the financial sector accessible to anybody is a significant selling point for the concept as a whole. 

 

Composability, which allows anyone to use parts of different DeFi services to create their own, is another selling point. 

 

Smart contracts regulate the interactions between nodes on the network, and the network’s modular design implies that new developments and requirements in the financial sector may be readily constructed on top of it and plugged in.

 

Since smart contracts are essential to DeFi applications, most DeFi projects are being implemented on the Ethereum network. 

 

This is owing to the widespread availability of developer capabilities to work with Ethereum’s Solidity programming language, which allows for generating required smart contracts. 

 

However, many other blockchain networks are now allowing DeFi applications as well.

 

It is no longer a doubt that DEFI is soon going to be one of the biggest things in Finance. Let’s take a look at the DEFI trends to watch out for.

 

Trends to Watch out for in DEFI

It is no longer news that DEFI is set to be the next big thing in the world of Finance. Here are some trends to watch out for that will keep you updated with the future of DEFI;

  1. Layer 2s gaining more ground
  2. Advancement in DEX and AMM
  3. Governance Tokens will gain even more importance
  4. The integration of Traditional Finance in DeFi
  5. Liquid Staked Derivatives (LSDs)
  6. Stablecoins are the latest buzzwords in the DEFI industry
  7. Making money off the gaming industry
  8. The Emergence of CBDCs 

 

Layer 2s gaining more ground

Layer 2 (L2) rollups are essential to any discussion concerning app chains. 

 

When Ethereum’s network is particularly busy, gas prices spike to over $200 per transaction, and confirmation times might extend to several minutes, necessitating L2 rollups as a solution. 

 

Rollups handle transaction execution and ordering, whereas Ethereum (L1) handles consensus and data availability. 

 

There has been a rise in TVL and DeFi operations throughout L2 ecosystems since the debut of Optimism’s OP token, with Arbitrum presently at the forefront. 

 

The current cost of an L2 is only a few cents, while the price of Ethereum gas has decreased, but it is still several dollars for most DeFi operations. 

 

In addition, it is possible that L2 ecosystems will continue to flourish in 2023 as trading activity and TVL from Ethereum L1 and other capital that resides in EVM chains because of high ETH gas costs continue to shift to L2.  

 

Advancement in DEX and AMM

Decentralized exchanges witnessed great success, with a trading volume of more than $60 billion in early 2021. 

 

The difficulty for DEXs as they grow is maintaining these transactions cost and time-efficient. AMMs, or automated market makers, have fueled growth. 

 

Consensys estimated towards the end of 2020 that 93% of all DEXs employ AMMs to boost market liquidity. Curve Finance is the largest AMM, growing to $11 billion TVL in less than two years. 

 

Uniswap is another well-known DEX, with $2.93 billion in total value locked in. It will pair any Ethereum-hosted coin and is an excellent choice for individuals who enjoy Ethereum yield farming.

 

Governance Tokens Will Gain Even More Importance

All of these rapidly expanding DeFi sites, you may have observed, also feature their very own coins. These coins are known as Governance Tokens.

 

When compared to conventional digital currencies, these tokens stand out. The primary function of these tokens is to grant their owners a voice in the governance of the DeFi technology upon which they are based. 

 

Using native tokens for various farm or rent income mechanisms is one use case for a DeFi project like Compound. 

 

The Compound, however, also has its token (COMP). This token controls how far the Compound DeFi protocol can go. 

 

Token holders have a voice in the effort, and if DeFi protocol adoption grows or TVL rises, so does the token’s value. 

 

If the market price is any indication, governance tokens were hot commodities in 2021. 

 

Since the beginning of 2021, the value of governance tokens on the three largest TV DeFi platforms has increased dramatically. 

 

Since the beginning of the year, the largest MakerDAO has raised its tokens (MKR) by around five times. Since January 1st, CPI has grown by a factor of 1.5.

 

The value of Governance Tokens (AAVE) on Aave, the third largest DeFi lending platform, has increased by a factor of four since the beginning of 2021. 

 

The Integration of Traditional Finance in DeFi

With DeFi’s traditional finance integration, real-world assets like real estate, mortgages, swaps, and security bonds can be turned into digital assets. 

 

This is the best time for financial companies like banks to switch to a digital business. 

 

With this, blockchain networks make the traditional banking system safer, more open, and more efficient.

 

On the other hand, the DeFi ecosystem could get more assets, increasing liquidity, speeding up transfers, and making the system run better. 

 

But if you’re an investor, you might have a lot of chances to make money in service-based businesses like banks.

 

Liquid Staked Derivatives (LSDs)

Regarding liquidity, one of the subsequent essential events following the Ethereum Merge is the Shanghai upgrade for Ethereum in 2023, which will restore the ability to withdraw staked ETH as liquid ETH. 

 

There is currently no way for staked ETH to be liquid until the Shanghai upgrade is complete. 

 

Therefore, Lido popularized liquid staking derivatives (LSDs) based on ETH. 

 

Users who deposited ETH with Lido were eligible to obtain stETH, a liquid currency representing the value of their staked ETH tokens, as staking rewards. 

 

Instead of ETH lying inert while staked, it can be used for trading, lending, borrowing, and liquidity provision in DeFi using stETH. 

 

Several liquid staking providers have emerged, making liquid-staked copies of ATOM, OSMO, and other well-liked Cosmos proof-of-stake (PoS) assets as this derivative trend spread.

 

Stablecoins Are The Latest Buzzwords in the DEFI industry.

The business of stablecoins is another area where DeFi is growing quickly. 

Over the past year, stablecoin has grown by $ 20 billion, and the amount of stablecoin being offered has risen to over $ 26 billion. 

 

About 79% of the market is the most important, and the most important player is TetherUSDT.

 

The US dollar is still the most popular stablecoin on the market, and CircleUSDC is another well-known number. 

 

But as the industry grows and government steps to boost the economy are implemented, fat stablecoin will likely lose market share. 

 

Making Money off the Gaming Industry

Around the world, more than 2 billion people play games and spend about US$159 billion each year. 

 

As more and more people spend time on this type of entertainment, the blockchain gaming business will proliferate in DeFi.

 

The basic idea behind the blockchain game is that a player has to do a certain job to mine a token. 

 

If your business makes money, you will need the DeFi protocol to ensure games can be moved from one place to another.

 

Last year, BitSport, a platform for crypto games, made it possible for crypto owners to fund tournaments of games. 

 

This type of tournament and other gaming platforms are likely to grow again this year and become one of the best DeFi projects in 2021.

 

By making money from the game industry, DeFi can set new and exciting trends for retailers.

 

The Emergence of CBDCs

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

 

A central bank, not a private bank, issues a CBDC, 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.

 

Many countries, including China, India, and Thailand, are still in the pilot stage of their CBDC programs, while others, like Nigeria and the Bahamas, have already launched theirs.

 

China’s digital yuan has been the most successful, accounting for almost $14 billion in trades. 

 

Volumes as a whole have slowed considerably, growing by a record 154% in 2020 but barely 14% in the years since. 

 

With the introduction of the e-rupee, India has become one of the more recent participants in the CBDC race. 

 

India, the world’s largest democracy and home to a sizable crypto community can serve as an example of how to roll out a comprehensive CBDC program. 

 

Although CBDCs have received a lot of attention, few people use them. 

This is partly because CBDCs and digitalized versions of fiat currencies look and feel incredibly similar from the average consumer’s perspective. 

 

Both are reliable, accessible without cost, and supported by official institutions. 

 

The CBDC technology is anticipated to improve this year, and we will know more about how diverse groups of individuals use and react to CBDCs.

 

Final thoughts

DeFi is one of the most exciting developments in financial technology presently. It could help create an alternative financial hub with high levels of security, openness, data integrity, and access. 

 

The past few years have seen rapid developments in DEFI, and we are optimistic that even more remarkable progress will be made in the future. 

 

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