The year 2020 was a remarkable one for the blockchain industry, especially for Decentralized Finance (DeFi). The meteoric rise of DeFi over the last year has surprised many. The momentum will likely continue because the DeFi ecosystem is still in a nascent stage.
While central banks around the world were flooding the global economy with fiat liquidity, the total value locked (TVL) in the DeFi ecosystem skyrocketed from $3.87 billion in July 2020 to $66.6 billion on July 29, 2021.
In simplest terms, DeFi aims to offer the same financial products and services as traditional finance, but without the intermediaries, high costs, or controlling authorities. As it keeps scaling new heights, let’s look at some of the most exciting DeFi trends that will likely accelerate going forward.
1. Traditional Assets Entering the DeFi Ecosystem
There are an estimated $256 trillion worth of assets such as real estate, privately-held companies, commodities, etc. in the traditional markets. They are mostly illiquid and beyond the reach of most small investors. The blockchain technology is helping unlock value in the traditional financial assets.
Investors have been showing greater interest in exposure to real-world assets on the blockchain. They want to own a piece of privately-held companies and other illiquid assets.
Convergence Finance is a decentralized interchangeable asset protocol that brings real-world assets into the DeFi space through tokenization and fractionalization of assets.
It enables asset owners to create Wrapped Security Tokens (WST) representing their assets to enjoy the liquidity and instantaneous trades offered by DeFi. You can also choose whether you want to sell the asset into fractional pieces.
Buyers from all over the world can buy or trade these WSTs. The tokens give you price exposure without the hassles of holding the actual asset. Convergence Finance transfers the legal ownership rights to the future WST buyers. As a result, token holders gain the real-world asset exposure from both the on-chain and off-chain perspective.
2. Monetization of the Gaming Industry
According to the market research firm Newzoo, there are more than 2.7 billion active gamers worldwide. They spent a little over $159 billion on gaming in 2020. The market research firm estimates that consumers would spend approximately $256 billion a year by 2025.
Given the massive size of the opportunity, players as well as developers have been exploring ways to further monetize the gaming industry. They have found a savior in blockchain technology.
Hoard Exchange is an NFT marketplace for players and game developers. It provides the infrastructure to integrate in-game items with the Ethereum blockchain.
Game developers use Hoard Exchange to mint NFTs for use in their games. Players can track and identify unique in-game items such as virtual real estate, weapons, collectibles, digital art, etc. They have to complete certain tasks to earn the tokens.
Players can swap their in-game items with others. They could also lend, sell or rent the items to make some real money. This is just one example of DeFi helping players as well as developers explore new monetization avenues.
3. Cross-chain Interoperability
Ethereum is still the dominant blockchain, but it suffers from scalability issues and high gas fees. So, developers have a strong reason to build their decentralized apps (dApps) on other blockchains.
Not all of them use the same blockchain. As a result, there are hundreds of blockchains, each serving a different purpose for a different set of developers. Some are consortium blockchains, others public, and yet others are private. They exist in isolation.
Users don’t want isolated blockchains. They want to access value and utility across the entire ecosystem seamlessly rather than being stuck in a cage. That’s why cross-chain interoperability is gaining momentum.
Cross-chain DeFi platforms facilitate the flow of value and data between different blockchains. Wanchain is a decentralized cross-chain interoperability solution. It builds fully decentralized bridges to connect various blockchain networks.
Earlier this year, Wanchain launched the world’s first BTC-ETH direct bridge. It also offers decentralized bridges connecting Bitcoin, Ethereum, Wanchain, EOS, Binance Smart Chain, Litecoin, and XRP Ledger to facilitate low-cost inter-ledger asset transfers.
4. Liquidity Mining on The Rise
Liquidity mining has emerged as one of the fastest growing trends in the DeFi sector. It encourages token owners to place their tokens in a liquidity pool. They are rewarded with tokens and fees for providing liquidity to decentralized exchanges (DEXs). The rewards depend on the investor’s share of the total pool liquidity.
Users earn a certain amount of interest in cryptocurrencies on a daily basis. Each liquidity pool consists of a pair of tokens. On most decentralized exchanges, a liquidity pool must have both tokens in 1:1 ratio.
The platforms use the liquidity pools to facilitate token swapping, letting users trade one token for another. Every time a user trades tokens within a liquidity pool, they pay a small fee. The platforms share this fee with liquidity providers in the form of rewards.
5. Stablecoins Gather Momentum
Cryptocurrencies are a volatile asset class. Bitcoin was trading above $62,000 in April 2021, but fell below $30,000 on July 20, 2021. The extreme volatility makes users hesitant to use cryptocurrencies to pay for goods and services.
Let’s say you buy something for $100 worth of Bitcoin. Just weeks later, the price of Bitcoin jumps 50%. Now you are going to regret it. Reverse the direction of the price movement, and the seller will be the one feeling remorseful.
Stablecoins provide the stable value of the underlying asset such as the US Dollar while offering the unrestricted nature of cryptocurrencies. That’s why they are growing in popularity.
Tether (USDT), DAI, USD Coin (USDC), and Binance USD (BUSD) are some of the most popular stablecoins out there. All four of them closely mirror the value of the US Dollar.
Tether (USDT) is the world’s third most popular cryptocurrency, right behind Bitcoin and Ethereum. It is offered by Hong Kong-based company Tether, which maintains a USD reserve equal to the amount of USDT in circulation. DAI is soft-pegged to the US dollar, and is managed by MakerDAO. The USD Coin (USDC) is offered by the Centre Consortium, which maintains a USD reserve backing the token in a 1:1 ratio. BUSD is a stablecoin offered by Binance.
Wrapping it Up
2021 is turning out to be a groundbreaking year for decentralized finance. Enterprises are also entering the DeFi and blockchain space. In light of the trends mentioned above as well as other innovations, we could see DeFi scale even greater heights in 2022.
DeFi still has a long way to go, particularly in improving liquidity and making it accessible to the masses. This is just the beginning.