Explosive DeFi: Where we are and where we’re heading

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The entire cryptocurrency space is growing rapidly, surpassing $ 3 trillion market capitalization for the first time in 2021. In addition, global blockchain spending has increased seven-fold in the last four years to an estimated $ 6.6 billion in 2021, exceeding the estimated $ 6.6 billion. Triple by 2024. It is impressive to see that the seeds of the crypto industry were sown just a decade ago with the launch of Bitcoin.

Today, we, the blockchain industry, have come a long way from just peer-to-peer transactions, as various sectors such as NFTs, GameFi, metaverse and decentralized finance (DeFi) have emerged. But no one has attracted the attention of traditional financial industry like DeFi.

DeFi = decentralized finance

DeFi is an eclectic mix of blockchain technology, digital assets and financial services that seek to disrupt finance. The market experienced an explosive growth in 2020, which many call the “DeFi Year”. That said, it is still in the early stages of its maturation.

According to Defillama, the total value lock (TVL) in DeFi increased from $ 625 million in April 2020 to over $ 211 billion so far but below the peak of $ 255 billion in December 2021. Currently, it dominates. DEX prefers Curve, which owns 9.6% of this TVL, stacking platform Lido, Money Market Anchor and lending protocol Aave.

DeFi is revolutionizing finance, starting with exchanges, derivatives, asset management, credit, insurance and stablecoins. Unlike traditional finance, which relies on intermediaries to manage and process financial services, DeFi operates in a decentralized environment. Decentralized applications (dApps) are built on public, unauthorized blockchain and services are typically encoded in open-source software protocols and smart contracts.

As a result, investors are putting more cash into DeFi and Web3-focused startups, according to a report by deal-tracking firm Pitchbook. Young Web3 and DeFi startups have jointly invested $ 1.26 billion in Q3 2021, which is seen as the “highest growth opportunity”.

Fundamentals

In the DeFi sector, dApps provides financial services without the need for central intermediaries or institutions. Here, open protocol allows services to be connected programmatically and flexibly. This is in stark contrast to what traditional markets stand for. In traditional financial markets, intermediaries serve as agents of trust, liquidity, settlement and security, further complicating the current system. The 2008 global financial crisis actually highlights the shortcomings, inefficiency, structural inequalities and hidden risks of these mediated financial systems.

In addition, legacy financial infrastructure is further complicated by slow settlement cycles, inefficient price discovery, liquidity challenges and a lack of confidence around the underlying assets. The solution is the emergence of decentralized finance, which aims to address these challenges using blockchain technology to facilitate traditional service providers and market structure options.

In addition to using distributed ledgers as its settlement layer for transactions, DeFi takes advantage of a variety of other technologies, such as smart contracts, programs that run when predefined conditions are met. Here, digital assets represent a value that can be easily transferred. In DeFi, governance systems give token holders of the protocol the right to vote on its future.

Wallets, meanwhile, are used to manage assets stored on a blockchain. While custodial wallets are easier to handle and interact with other applications, non-custodial wallets allow special control of funds through their private key.

Good and bad

The opportunity presented by DeFi is very straightforward, and has been much debated. It eliminates the heavy fees charged by banks, brokerages and other financial institutions. DeFi allows for faster and more efficient transactions, reduces counterparty risks, increases functional inter-efficiency for transparency, improves accountability, controls more stakeholders, and offers unlicensed and faster innovation.

In addition, having an open-source protocol means that anyone can build on the platform, while offering opportunities for additional lucrative yields on investments that greatly outweigh the benefits offered in legacy markets.

DeFi has many potentials in terms of efficiency, innovation and financial inclusion, but at the same time, it also has its risks. Some of these are scalability, throughput, transaction fees, limited interoperability in blockchains, over-collateralization and regulatory challenges.

Its early growth phase means that DeFi is currently promoting short-term returns and attracting unscrupulous artists. For example, rug pools, scam projects, bad guys and hacking are also very common in DeFi. The numbers speak for themselves.

According to Elliptic, DeFi users actually lost ચોરી 10.5 billion in theft in 2021. Some of the biggest DeFi hacks include the poly network, which lost 611 million. Then there was the cyber attack on the bridge over Ax Infinity’s Ronin protocol, where hackers drained $ 522 million. The most recent DeFi hack was on April 17. Beanstalk, a stablecoin protocol, lost $ 182 million in a flash loan attack. Then comes the infamous 326 million wormhole hack.

These are just some of the cyber attacks that have hit the media and become the talk of the town on social media platforms. The actual number is much higher. Such examples show that the DeFi sector is far from an easy and safe way for people to use their capital.

The latest developments

Despite the risks of using DeFi, the sector continues to grow and innovate, with many new trends emerging.

Liquidity mining is one of the hottest trends in DeFi, where the protocol enables users to provide liquidity and get beautiful rewards in original tokens. Yield farming is another popular combination that combines stacking, lending and borrowing to optimize earnings.

The rise of nonfungible tokens (NFTs) has paved the way for the introduction of new products in the market that combine NFT with DeFi, such as GameFi or play-to-earn games such as Decentralland and The Sandbox. DeFi is also expected to benefit from the advent of 5G as it will provide significant high-speed connectivity.

Then there are decentralized autonomous organizations (DAOs), the growth of which can be attributed to the rise of DeFi innovations, which are gaining a ton of traction as they reach mainstream consciousness. DAO is used for everything from arts and sports to crowdfunding and finance.

Some of the most compelling DAOs include BeatsDAO, which collectively focuses on buying music-based NFTs; Constitution DAO, a mass attempt to purchase a copy of the US Constitution; FriendsWithBenefitsDAO, a social club for crypto only members; And RaidGuild, a web 3 marketing and design agency.

However, the discussion on DeFi is incomplete without Ethereum, on which most of these applications are built due to its capabilities and developer adoption. Ethereum is currently shifting to ETH 2.0 to improve its scalability. But with the adoption of other Layer 1 blockchains such as Terra, Avalanche, Solana, BSC and Polygon and Layer 2 solutions such as Arbitrum and Optimism in 2022, cross-chain technology has emerged to enable smooth movement of information across different networks.

For example, DEX Mangata Finance is built on the Polkadot network and has partnered with Ethereum to provide low fixed fees and MEV-free trading.

Final word

Overall, DeFi has immense potential for users as it is available to everyone 24/7 worldwide. This decentralized protocol offers new and diversified investment opportunities. Not to mention the double-digit interest rates that many DeFi protocols offer, which are much higher than the rates below -1% of regulated banks.

These are, of course, giants like Morgan Stanley who call the DeFi industry to stay “fairly small.” But DeFi, though still new, is growing rapidly, attracting investments and users, and working on banking for billions of people without a bank.

Peter Chris is the CEO of Mangata Finance,

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