Decentralized finance went ahead in 2020 as a rocket. What was the reason for this growth? What can we expect in the future?
Unlike many in the world, the entire crypto scene is probably grateful for the year 2020. New users, giant announcements, Bitcoin all-time high. It seems the crypto community can breathe and prepare for further growth.
However, there is a new area within the crypto space that is just beginning to unfold its wings: decentralized finance.
It is important to point out that DeFi has not even existed two years ago. Just as in the early years of the internet and the entire crypto world itself, members of a narrow community were talking about DeFi and considered it serious.
In early 2020, the huge milestone of $1 billion worth of value locked in DeFi projects was awaited by the community. By early September, it looked like this number would soon reach $10 billion. And by the end of the year at the time of writing this article, we are just a little before $17 billion.
In a recent interview with Finance Magnets, Joe Lallouz, founder of Bison Trails, highlighted that DeFi has undergone incredible development over the past year.
In his words:
“New protocols, new pieces of technology that fit into the different protocols — everything from liquidity pools to automated market-making to lending to insurance: literally everything across the board is sort of being built in the decentralized finance space.”
The development of the DeFi industry as a whole has inevitably brought with it an increase in the price of tokens. LINK, BAND, COMP all produced eye-catching movements.
What triggered this growth?
According to Steven Becker, COO of MakerDAO, there is a lot of uncertainty in the world right now. People are trying to offset the risks inherent in these uncertainties by looking for alternative solutions.
In 2020, many’s confidence in traditional financial systems has faltered. Due to the economic downturn caused by the COVID-19 pandemic, many people are looking for alternatives.
This may have been one of the reasons for DeFi’s 2020 milestones.
The name itself, decentralized finance, suggests that it is something that brings innovation over traditional finance. In this case, it decentralizes. DeFi brings the already existing financial services to the blockchain, making the system faster and more transparent.
The first function of the traditional financial system is lending. Perhaps this is why the DeFi arsenal has expanded with the provision of borrowing.
DeFi allows us to give and take out loans without banks. But also to store credit, which again takes banks out of the equation and puts a new, alternative investment in people’s hands. The first feature of the public blockchain is still significant, which is that we can send money to anyone in the world in a matter of seconds.
In addition, yield farming on decentralized exchanges is a new source of income for crypto traders.
Gregory Keough, founder and chief executive of the DeFi Money Market (DMM) Foundation says that on platforms like DMM, users can “mint tokens, pool them together with some of the underlying tokens on Uniswap to create a secondary market, and then stake these tokens in the liquidity pools to earn more of the protocol’s governance token.”
On decentralized exchanges, it is also possible to share a part of the profit generated by a trading bot between the client and the service provider. This makes a new kind of business model available.
Is DeFi ready for mainstream adaptation?
In addition to the successes, mention should also be made of flaws such as when the dForce ecosystem protocol lost 99% of its resources due to a hacker attack. Balancer was also hacked for stealing $ 500,000.
Such atrocities suggest that DeFi is not yet ready for the mainstream. Especially not to receive the money of customers who would be in serious pain and disadvantage of losing these resources.
This is not meant to undermine the authority of the whole industry. All innovation has to go through the growth process and the same is true for decentralized finance. In any case, it is clear that the blockchain is waiting to be exploited further in finance and other areas and is a technology that will always be with us for decades to come. Will the 2020s be the years of DeFi?