Over the last 10 years, blockchain technologies have evolved and developed at breakneck speed, resulting in the launches of hundreds of projects and concepts that allow leveraging decentralized and their core technologies for a myriad of purposes. The advent of the Decentralized Finance market, or DeFi, has ushered in a revolution that is set to transform the global market of financial services.
What Is Defi?
The Decentralized Finance market is embodied by the omnipresent term DeFi, which has been on air across social media and other online resources for the past two years or so. In general, DeFi is a combination of financial products and services banded together on the basis of blockchain technologies with the application of cryptocurrencies as the main value carriers within the system. DeFi includes a broad range of sectors, such as banking, lending, insurance, liquidity pooling, trading, and many others.
The DeFi market is different from the traditional market in that it is always online and does not have the highwalls and entry barriers set by traditional venues. Such decentralization allows for transactions to be always cleared and the privacy of users to be maintained.
DeFi is a powerhouse of new financial opportunities that offers users worldwide to try their hands at virtually every financial industry that is inaccessible in the traditional world without significant capital reserves. The following is a list of some of the most popular directions in DeFi space:
1) Decentralized exchanges
Decentralized Exchanges, or DEXs, provide some of the essential functions on the DeFi market and act as gateways for liquidity and protocols that attract users via their revenue-generating opportunities. DEXs provide the necessary tools and framework for DeFi to operate and interoperate with the traditional world of finance and other decentralized platforms.
2) Lending and Borrowing
Lending and borrowing have been elevated to a completely new status with DeFi, as decentralization allowed individuals and businesses to borrow funds anonymously and collateral-free on a peer-to-peer basis with automated smart contracts ensuring the trustless nature of each transaction and its execution under an “if-then” scenario.
As low-volatility assets, stablecoins are gaining popularity on the DeFi market and are starting to act as both a stable reserve currency and an asset for value-saving.
4) Asset Management
Numerous projects in DeFi space are offering diverse services for asset management to allow users to control the performance of their portfolios in real-time. With intuitive and functional dashboards, asset management services give the toolsets necessary for users to maximize their profits and stay up-to-date on the latest market dynamics.
5) Defi Marketplaces
Decentralized marketplaces offer numerous advantages for users by way of being middleman-free and by providing vast opportunities for placing any manner of digital or tokenized assets up for sale before an immense audience of crypto enthusiasts. With direct access to them via dApps, DeFi marketplaces are available worldwide and tap into most DeFi protocols for instant interoperability.
6) DAO Platforms
Decentralized Autonomous Organizations, or DAOs, are fully governed by their communities on the basis of peer voting. With no central authority, DAOs act as the basis for the formation of goal-oriented platforms or launchpads for projects of every kind that rely on the involvement of the community and their common goals and interests for advancement and development vector determination.
The TOP 5 Defi Projects
1. Established back in 2018, Uniswap is currently the leading decentralized exchange on the cryptocurrency market. The platform runs on the Ethereum blockchain. As of 2021, Uniswap is the largest cryptocurrency project by market capitalization after Bitcoin. The protocol supports all ERC-20 tokens and is completely open-source, allowing anyone willing to tap into their protocol and launch projects of their own. As of the time of writing, the UNI token had a market capitalization of $15,455,734,403.
2. Chainlink is a decentralized network of nodes that provide data and information from sources in the real world to blockchain smart contracts via a network of oracles. Chainlink is built on the Ethereum blockchain and complies with all ERC-20 standards. At the time of this writing, Chainlink had a market capitalization of $12,523,196,371 and held 14th position on Coinmarketcap.
3. MakerDAO is a decentralized protocol designed for borrowing and lending that eliminates the need for intermediaries and allows users to act on a peer-to-peer basis by relying on smart contracts for transaction execution using two native cryptocurrencies – the DAI and MKR to regulate the value of the loans. At the time of this writing, MakerDAO had a market capitalization of $3,660,153,147.51.
4. Aave is also a decentralized lending system that allows users to lend, borrow and earn interest on crypto assets without any intermediaries. The protocol is designed to allow its users to have exposure to a broad range of markets for greater liquidity and opportunity availability. At the time of this writing, the project had a market capitalization of $5,386,149,665.
5. Maker is the ERC-20 token native to the Maker Protocol, a DeFi project that is also known by its full name of Multi-Collateral Dai (MCD) system. The project allows its users to leverage assets to generate Dai – a community-managed decentralized cryptocurrency that tracks the price of USD. At the time of this writing, Maker had a market capitalization of $3,588,572,209.
The Importance of DeFi Projects
The importance and necessity of DeFi projects are being debated, but there are reasons for its prominence and applicability that cannot be overlooked in light of the overall global economic lay of the land.
The DeFi market is based on a highly scalable infrastructure that is accessible around the world and is being adopted on a massive scale by average users worldwide. If the total value locked, or TVL, of the overall amount of funds locked on smart contracts in DeFi is to be taken into account as a benchmark, then the significant growth that has been observed over the course of 2020 alone is a major indicator of adoption. The TVL amounted to a mere $0.7 billion in January of 2020, before suddenly spiking sharply in July of 2020 to over $1.9 billion, and then to $4 billion by the beginning of August of the same year. The $8 billion marks was then surpassed by September of 2020, highlighting the rapid adoption of the instruments of DeFi, and their popularity among a growing audience of crypto users.
Research by Messari indicates that the capitalization of all DeFi applications stood at around 1.5% of total decentralized market value as of July 2020. With the market itself growing by leaps and bounds on the waves of positive volatility among the most traded coins, it is only natural to assume that the DeFi market will follow in adoption and liquidity as more projects are fueled by crypto price. The underlying blockchain is of immense importance in serving scalability, as its ongoing updating and improvement on a technological level will allow new solutions to be found for speeding up the entire infrastructure and making it more accessible and convenient for a greater number of users.
There are over 1.7 billion unbanked around the world, according to figures provided by the World Bank. Considering the low entry thresholds of the DeFi market and the opportunities it provides for unrestricted access to all manner of financial services document-free from anywhere in the world, the possibilities of its penetration into new markets are immense. With only an internet connection and an account being the prerequisites for its functioning, DeFi eliminates the barriers that legislation and financial requirements place on immense strata of underprivileged populations in underdeveloped or developing countries. The only requirement that needs to be met for DeFi to become truly global as a microfinancial instrument is the availability of intuitive interfaces and proper education about relevant services and accessibility with streamlined onboarding of new users.
The DeFi sector is a major component of the new and rapidly developing digital economy, leveraging the power of decentralized infrastructures and eliminating the challenges that had previously made numerous complex and even exotic financial instruments an attribute of the affluent and the elite. The fact that numerous DeFi protocols have already attracted billions of dollars in investments and user funds is proof of their attractiveness as operable and profit-generating instruments accessible to average users who are willing to become active participants of a thriving and dynamic online economy.
Though many challenges remain in the way of making DeFi as secure as the traditional financial system, work is ongoing along with the development and perfection of the systems responsible for adding new security layers to decentralized protocols. With the global economy growing weaker and the savings of the citizens of numerous countries being devalued by economic crises, the logical alternative is the migration of liquidity into more promising assets for value-storage. DeFi, and the digital currencies involved in fueling it, can be the safe haven and revenue-generating mechanisms and assets needed in times of crises for both improving the financial situations of individuals and stimulating the evolution and improvement of both the decentralized and traditional financial systems.