Decentralized finance (DeFi) has become an exciting, highly regarded movement in the blockchain space, with impressive innovation and increasing traction over the past two years. In February, Total Locked Value (TVL) in DeFi projects surpassed $ 1 billion for the first time. This value rose again next month, but DeFi TVL is now once again flirting with that milestone. While $ 1 billion is a relatively modest amount by conventional financial industry standards, decentralized technologies clearly have the potential to power diverse products and services, and creation. And Protocol Maker is front and center.
The Maker Protocol gained popularity as Dai became DeFi’s most used cryptocurrency. But DeFi is a fast-growing field, even for blockchain technology, so the question is not simply what protocol is building a foothold for DeFi, but also what existing services are being used. How, where are the new products headed and which trends are holding?
5 Decentralized finance trends worth watching
Many trends and themes have appeared in the DeFi movement. Here are five things to look out for over the coming months and beyond:
1. Ethereum continues to lead
The Ethereum blockchain continues to dominate the DeFi landscape despite losing some market share to other smart contract and DeFi platforms (including Tron, Binance Chain, Neo, Waves, and others). Every major DeFi protocol, except Bitcoin’s Lightning Network, is built on the Ethereum blockchain, and new projects are always involved. Even with the volatility of ETH, TVL’s long-term uptrend at DeFi remains intact. ETH locked in DeFi, arguably a great measure of acceptance as it signals the percentage of all ETH used for DeFi instead of its volatile USD equivalent, is around 80% of all-high age.
Furthermore, complex DeFi transactions have increased fivefold in the past two years. Ethereum analytics firm Covalent predicts a “slippage” event where DeFi transactions surpass simple ETH transfers.
Ultimately, thanks to the combined capabilities of the Ethereum blockchain and Maker Protocol, new solutions built on both these platforms make the DeFi ecosystem incredibly valuable. Collaboration helps to create a ‘network effect’, a powerful phenomenon in which the value of goods or services increases as the number of users increases. It is due to the network effect that Maker Protocol accounts for more than 50% of TVL in DeFi. To date, more than 600 projects have integrated Maker’s Dai into their applications built on the Protocol.
2. Stablecoin interest rate increases
There is a huge and growing demand for stablecoins as traders look for on- (block) chain ways to protect and store value. Tether (USDT), a centralized stablecoin with the majority of the supply stored on Ethereum, still maintains its billion-dollar dominance. But other centralized and fiat-backed alternatives are gaining ground — and they all take the form of ERC20 tokens:
- Circle’s USD coin
- TrueUSD of TrustToken
- Paxos standard
- Gemini dollars
Although the Ethereum blockchain itself is decentralized and all of these tokens are transferable and publicly traded, they are centralized on how they store value. Because they are run by institutions that hold the funds that support them in one or more bank accounts, their value can be frozen or even confiscated. Simply using a decentralized infrastructure doesn’t eliminate all the points of failure.
Dai stable copper is different. Dai is unbiased — available to anyone, anywhere — and is not bound by the parameters of a central party. While there is a considerable interest in centralized stablecoins, Dai is the leading decentralized stablecoin and the most popular stablecoin in the DeFi space. Thanks to its openness, stability and resistance to censorship, Dai has also gained traction in Latin America as a tool to survive in hyperinflation.
The trend of decentralized finance (DeFi) is hot across Latin America — especially in Brazil, Colombia, Venezuela and Argentina.
3. New innovative products
What started off as a handful of DeFi projects gave way to a wave of experimentation and innovation in the space, including the provision of decentralized versions of mainstream financial products. Think of Dai as the financial “glue” that connects many of these services.
Dai allows anyone to approach the stability of the US Dollar (which is not always easy for those outside the US) and deploy it worldwide. At one end of the spectrum, this includes simple services like fast, low-cost international money transfers (Dai is ideal for money transfers). At the other end of the spectrum, Dai has been integrated into more complex products, including:
Insurance (example: Nexus compatibility)
Prediction market (ex: Augur and others)
Decentralized leverage trading (ex: dYdX)
Loan protocols (e.g. Compound, Aave, InstaDApp, etc.)
Aggregate content (example: UMA)
All of the above gives users access to products that would otherwise be out of reach. The DeFi space will almost certainly welcome more and more new and experimental projects in the coming months and years.
4. DeFi “Lending” prominently
“Decentralized loan protocols” are a hot new area in the DeFi space, although it doesn’t look like unsecured lending in the regular world of finance. DeFi “borrowers” do not sign a ton of paperwork to guarantee repayment — instead they offer collateral with crypto through smart contracts on blockchain. This allows them to cash out daily expenses or transactions without selling cryptocurrencies they believe will appreciate in value. If they allow collateral to become insufficient due to market movements, loan protocols liquidate the collateral immediately. This area of DeFi is gaining in popularity.
5. Exchange is developing
Exchanges are moving beyond the separate, completely centralized or decentralized services model, with the new platforms covering the best of both. DeFi’s combined capabilities allow businesses and users to take their cake and eat it.
The growth of exchanges has been a notable decentralized finance (DeFi) trend that simplifies the trading experience for users.
Aggregate services — linking traders to different DEXs — provide easy access to liquidity from multiple sources at the same time. Peer-to-Contract (P2C) platforms, such as Uniswap, are complementing the traditional Peer-to-Peer (P2P) approach. In the P2C model, users buy and sell from a smart contract that automatically calculates prices based on supply and demand. This eliminates the need to order books, reduces complexity, and simplifies the user experience.
Additionally, exchanges are integrating other services, so that users can purchase cryptocurrency and then deploy it instantly. In December 2019, an update to decentralized exchange infrastructure’s 0x protocol enabled ZRX token staking. Kyber’s liquidity aggregation protocol is now doing the same. And Oasis.app provides a unified DeFi hub, providing an easy-to-use interface for users to create Dai and exchange it for other tokens on the built-in DEX, or otherwise get Dai on the DEX and earn money by locking it in the Dai Savings Rate (DSR).
Meanwhile, centralized exchanges are integrating decentralized protocols. The Coinbase wallet gives users access to Compound (loan) and dYdX (margin trading), and OKEx has integrated Dai Savings Rate (DSR). All of this leads to further convergence and fuzzy edges as centralized services facilitate access to decentralized opportunities.
DeFi is tackling its path
DeFi is a promising movement, now one where Bitcoin discovered five years ago: Gaining traction but still establishing its most compelling use cases. While specific trends have emerged in DeFi, evolution, experimentation and, ultimately, consolidation may be many years away.