DeFi grew 300% in 2021, but faced issues like high fees and vulnerabilities. Regulators, consumers, and competitors took notice. However, new developments emerged like TradFi-DeFi hybrids, decentralized bonds, stablecoin adoption, and MetaFi for the metaverse's economy
2020 is widely regarded as the year when DeFi had its day in the sun.
In terms of total value locked (TVL) in smart contracts alone, 2020 ended with US $86.5 billion. In comparison, by November 2021, the TVL stood at US $274 billion. With this humongous growth of 300% in TVL, , 2021 has also been an excellent year for DeFi where it built a solid foundation for itself in the financial space.
Additionally, the crypto sector performed well too. While Bitcoin continued its strong performance, Ethereum outperformed the former and registered Y-O-Y growth of 425%, thanks to its EIP-1559 update that reduced its inflation rate.
On the whole, it’s fair to surmise that DeFi enjoyed another year of expansion and thanks to the growing interest of investors in its offerings, can be considered an industry in its own right.
Before we delve into the lessons learnt over 2021 in DeFi, it would provide some context and clarity by understanding what major challenges were.
But as with any maturing industry, the shortcomings of DeFi have also received much attention, from consumers, regulators and their competitors.
In total, hackers stole almost US $4 billion in cryptocurrencies where DeFi protocols such as Iron Finance, Anubis DAO, Compound Finance and the Poly Network all experienced significant losses for a variety of reasons.
Other obstacles that hinder the growth of DeFi involve high fees, performance, vulnerabilities associated with smart contract development as well as decentralised applications failing to meet the mark in several respects. Even if some of these issues were addressed in 2021, what remains to be seen is if DeFi platforms can match their TradFi competitors in terms of high-performance trading and liquidity.
Despite these small bumps in its growth journey, exciting developments captured the hearts and minds of DeFi investors in 2021 and having solidified its position as a worthy challenger to TradFi industry, DeFi is poised to keep growing in 2022 and well beyond.
It is possible to obtain loans on collateral and otherwise in both traditional and decentralized finance. However, there are pitfalls that cause customers’ difficulties in both systems. For example, overcollateralization in DeFi occurs due to the high risk of lending associated with digital assets. TradFi, on the other hand, can be expensive, slow and exclusionary by nature.
Being able to circumvent these pitfalls while offering the combined benefits of both financial systems can change the way lending & wealth management practices have evolved over the years and spur industry growth as a result. Despite being a new area, the potential for TradFi-DeFi hybrid solutions is great. Much like Bru’s offering, such a hybrid solution will offer the best of both worlds to banked as well as unbanked/underbanked borrowers.
With DeFi enjoying a big year in 2020, it was also the first time secured bonds worth 40 million Euros were tokenized on the Ethereum blockchain and offered to investors too. Now, a host of decentralized bonds have been made available to investors that also offer attractive returns periodically.
In 2022, this trend of offering decentralized bonds to investors will only expand as an offshoot of trend #1 of TradFi & DeFi coming together. With the benefits of smart contract based auto payments, ability to raise money in any currency including cryptocurrency and a global pool of capital, both structured and sovereign bonds will also become an integral part of DeFi even though both structured and sovereign bonds have been offered to TradFi investors for decades now. El Salvador’s bitcoin bonds, proceeds whereof will be used to create an entire city, will be pioneering this trend in 2022.
With stablecoins limiting volatility largely by pegging its value to the fiat currency so far, 2021 saw the value of stablecoins on the whole rise above US $26 billion. Even if USDT is the largest stablecoin by market capitalization, there are others that have joined in the effort to help financial organizations and payment providers adopt crypto payments from consumers.
Given its success, experts believe that stablecoins will move beyond DeFi and actually serve as the foundation for new global payment services as they come with the benefits of being faster, efficient and resilient in nature. Even if government oversight might change the way business is conducted, stablecoins will enjoy widespread adoption well beyond 2022.
While DeFi & NFT were being built in 2021 by scrappy, new age operators of Web3 Space, what stole the limelight was big giants, both traditional and internet ones, entering into Metaverse. Whether it was rebranding of FaceBook to Meta or Microsoft readying its MESH platform or Tinder jumping to the bandwagon, metaverse is emerging as the new frontier for both the tech giants of yore and crypto community.
As metaverse grows, there will be need of financial tools that can transfer value from one metaverse to another, there will be need of an economic layer of metaverse that will allow the participants to exchange good and services creating a parallel economic system which is decentralized, composable, and above all digital-first. This will give birth to Metaverse Finance (MetaFi) with its own set of tokens, collaterals, derivatives with underlying being entirely digital assets.
BrúDespite the tremendous growth of last two years that catapulted DeFi from a non-entity to a global force to reckon with, it’s still a very nascent ecosystem with less than 5% of total digital assets being collateralized and also compared to the scale of TradFi, DeFi is a very small vertical.
This creates tremendous opportunities for growth, both in the digital-first and digital-to-real financial space. As discussed, innovative TradFi-DeFi hybrid solutions, stablecoins, sovereign and structured bonds and MetaFi will grow beyond 2022. This will effectively set the efforts of all stakeholders in DeFi — retail and institutional investors, developers (BUIDLERs), the creator economy, platform providers and consumers, on a trajectory that will make the overall ecosystem inclusive and innovative.
So, are there any other emerging DeFi trends that will go the distance? Let us know in the comments below.