After the explosive growth of decentralized financing in the second half of 2020, we wonder what the next chapter will look like. What should DeFi do to bypass cryptocurrencies and communities and start taking up financial services as we know them?
The second half of 2020 exceeded many of our expectations, and since then the market has accelerated. DeFi’s total value has grown from less than $ 1 billion in early June to $ 13 billion at the end of the year and more than $ 27 billion since then. Spurred by the launch of the Compound Compound token, we saw an increase in returns and a rapid flow of assets.
On the topic: Was 2020 the “Year of DeFi” and what do you expect from this sector in 2021? Expert response
Perhaps most excitingly, we are starting to see the basis for a new financial system that has been shaped – with apps that enable everything from equity swaps to loans, loans, payments, portfolio management and insurance. New forms of value are being created: not only the promise of profitability in a low interest rate environment, but also access to financial services for companies and individuals exposed to cryptocurrency risk, as well as for people with low incomes in general.
Today, DeFi is a small group of cryptocurrency users and assets, considered by critics from the Wild West. Will this change? Here are some ideas for what to come next.
New Asset Types – New Sources of Liquidity at DeFi
The first issues of decentralized exchanges were associated with problems of liquidity. Early adopters encountered a large backlog of orders and token pairs were limited. Automated market makers and liquidity pools have become a large-scale solution to this problem: daily trading volumes on decentralized exchanges are currently in the range of $ 2 billion, and DeFi projects continue to find innovative ways to stimulate liquidity. This will go on. We believe that there is still a clear need for borrowers to reduce collateral requirements and use alternative forms of collateral.
Perhaps the greatest opportunity lies outside the realm of cryptocurrency origins. There are trillions of dollars in potential collateral that can be obtained from real assets: Users will borrow against assets they already own and often cannot access the cash they need from regular money. Real estate coding can dramatically increase the size of the DeFi world.
Measurement problems are solved in Level 1 and / or Level 2
Ethereum’s scalability restrictions are often cited as limiting DeFi adoption. Higher gas prices and higher ether (ETH) prices can make lower value transactions inconsistent. This limits the attractiveness of important token markets and other retail-focused services. Meanwhile, professional high-frequency trading requires other step-by-step solutions due to the limited throughput of chain transactions.
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It is likely that we will see a solution to this problem in 2021 using at least three possible paths:
Successful implementation of Ethereum 2.0.
The emergence of Ethereum’s dominant second phase scaling solutions.
Widespread use of interconnection solutions.
These three phenomena don’t have to be mutually exclusive, and together they give us optimism that 2021 will be the year of great progress in DeFi’s scalability.
Institutional Demand – the convergence of CeFi and DeFi
We are starting to see how institutional investors using cryptocurrencies are looking for higher returns than stacking currencies. Many of these investors use centralized exchanges, at least in the beginning, but many more enterprise-oriented and self-sufficient products have emerged. Regulatory oversight over DeFi is likely to increase as these services take hold.
Meanwhile, regulators around the world have introduced stricter rules for virtual account service providers such as centralized cryptocurrency exchanges. The FATF Travel Rule for Financial Action and the Fifth European Anti-Money Laundering Directive contradicts stricter Know Your Customer standards for cryptocurrencies, and allegations against BitMEX in October significantly softened the situation. Ultimately, this will affect DeFi: in the near future we expect to see enterprise products implementing pseudonymized / zero-name knowledge solutions for sovereign identity.