In 2020, DeFi’s growth has stunned the financial world. Total blockchain value (TVL), a measure of transaction volume in DeFi, grew 14 times during that year. In 2021, TVL is more than four times the previous figure, peaking at $112.07 billion.
If you’re wondering what trends will be key for DeFi in the coming years – read on.
Traditional financial products are entering DeFi
In traditional finance, the derivatives market is estimated to be about 10 times larger in volume than the entire global GDP. That’s a huge scale, and the DeFi derivatives market is still just developing. The TVL of DeFi derivatives is currently around $180 billion, which is already impressive considering it was around $25 billion at the end of 2020.
The biggest players in this market are MakerDAO and Uniswap. Uniswap’s popularity has grown 17 times in five years, and Wrapped Bitcoin (WBTC), an Ethereum-based bitcoin derivative, has grown from 600 to 124,000 BTC since launch.
An important innovation is becoming “tranche lending” – dividing loan portfolios into risk levels. In DeFi, this is implemented by BarnBridge and Saffron Finance projects, allowing investors to choose the degree of risk and receive the corresponding income.
DeFi insurance is also gaining popularity, offered by the Nexus Mutual and Bridge Mutual platforms. They allow users to obtain insurance to protect their funds on smart contracts and crypto exchanges without intermediaries.
DeFi aims to monetize blockchain gaming
There are more than 3 billion gamers in the world who spend more than $159 billion annually, a market that could grow to $256 billion by 2025. Developers and players are interested in new ways to make money – and blockchain games are the perfect solution.
In such games, in-game tokens are “mined” for completing tasks, and the popular DeFi protocols allow in-game assets to be traded and invested. Ubisoft was one of the first to create a blockchain game called HashCraft.
The BitSport platform offers the ability to bet on cyber tournaments via steaking, allowing players and sponsors to earn tokens.
Crosschain technology solves the scalability problem
DeFi’s rapid growth is accompanied by rising transaction costs, especially on Ethereum. The average transaction fee reached $69 in May 2021, negatively impacting users and leading to record liquidations.
The solution is crosschain technologies that allow assets and smart contracts to be transferred between different blockchains. The leader in this direction is Polkadot, which enables the interaction of several parallel chains.
Other projects – Avalanche with Ethereum Bridge and Poly Network – are also contributing to a more scalable and cheap infrastructure for DeFi applications.
Decentralized exchanges (DEX) and automated market makers (AMMs) are driving the growth of DeFi
Decentralized exchanges allow users to trade cryptocurrencies directly with each other without intermediaries. The largest DEX, Uniswap, accounts for more than 76% of the total trading volume on DEX.
To ensure liquidity and increase efficiency, DEXs utilize automated market makers (AMMs). These algorithms create liquidity pools where users deposit their assets and receive commissions.
Curve Finance, the largest AMM on TVL, specializes in stable coins, which attracts investors looking for stable income.
The growing role of Governance Tokens
DeFi platforms are actively issuing their own governance tokens, which give their holders the right to vote on key protocol decisions. These tokens differ from regular cryptocurrencies in their role in project governance.
Examples include Compound with the COMP token, MakerDAO with MKR, Uniswap with UNI, and Curve Finance with CRV. Token holders participate in voting and influence the development of the platform.
The popularity of such tokens is growing, and major investors from the world of traditional finance are also actively investing in them.
Conclusion
The main common trend of all these trends is becoming the desire to increase the efficiency and scalability of DeFi. While Ethereum is experiencing congestion, new solutions such as Polkadot offer alternatives and opportunities for growth.
DeFi is a dynamic industry that should be closely monitored in the coming years.
