Decentralized finance (DeFi) is no longer just a buzzword. DeFi protocols are bringing a wide range of financial products and services at a breakneck pace, providing real-world utility to end-users.
DeFi bypasses the centralized intermediaries that slow down the process and add to costs in the traditional financial system.
Smart contracts replace intermediaries to facilitate low-cost, secure, and high-speed transactions without any restriction.
It’s one of the reasons Defi will eventually find its way into the existing financial infrastructure to facilitate services like lending, borrowing, remittances, etc.
The total value locked in Defi protocols has shot up from $17.3 billion in September 2020 to $94.2 billion on September 07, 2021. Defi experienced its first major boom with the rise of smart contracts-based lending, borrowing, and flash loans.
Flash loans are not secur loans that require no collateral or credit checks. But the loan must be paid within a single Ethereum transaction, else the transaction won’t go through.
Delivering on its promise
Despite such phenomenal growth, there is still plenty of room for growth and innovation. Decentralized finance’s promise is to make itself accessible and usable for everyone. That includes institutions as well as everyday people.
Institutions have begun to acknowledge its potential and benefits. They are embracing the decentralized financial railroads rather than watching it from the sidelines.
The current protocol models still have inefficiencies (why aren’t there single token liquidity pools instead of liquidity pairs?) that new DeFi initiatives will solve to ensure that the space becomes more attractive for institutions.
However, bringing everyday users into the DeFi ecosystem could prove challenging for a couple of reasons.
First, they are deeply entrenched into the traditional financial ecosystem. Second, they get overwhelmed figuring out the wallets, protocols, token swapping, yield farming, and other things they find complicated.
The DeFi ecosystem has to nurture greater trust and security while making it easier for people to transact across different blockchains seamlessly.
In recent times, we’ve seen blockchain protocols like Reef Chain giving decentralized app developers all the tools along with assistance in business development and marketing to build and scale dApps that even noobs will find easy-to-use.
Reef Chain is a one-stop cross-chain DeFi operating system built with Polkadot Substrate to make Defi easy to use for newcomers.
Its Global Liquidity Aggregator, Smart Yield Farming Aggregator, and Smart Asset Management make it easy for noobs to get started with yield farming.
Reef Chain has built-in AI tools that allow for asset management based on each individual investor’s plans, goals, and risk appetite.
If DeFi delivers on its promise, we’ll see institutions and everyday users flocking to the DeFi ecosystem, and eventually there will be a full-fledged integration of DeFi into the existing financial infrastructure.
Besides the obvious ones like liquidity mining, stablecoins, and the monetization of the gaming industry, DeFi is witnessing some more exciting trends.
For instance, social tokens are here to stay. RealVision CEO Raoul Pal predicts that social tokens would be the next big thing, disrupting all kinds of traditional industries in the next 5-10 years.
Social tokens have the reputation of a brand, individual, or community whose work you might want to support.
The token holders get exclusive perks from the token issuer, which could include exclusive content, digital merchandise, group chats, and more. The social tokens are decentralized and run on the blockchain, much like NFTs.
In another development, Bitcoin could enter the Defi club in a big way, all thanks to the Lightning Network. Unlike Ethereum, Bitcoin doesn’t support the smart contract functionality.
It;s meant to be “peer-to-peer digital cash” that would make payments faster and cheaper. But Bitcoin holders often struggle to make fast transactions with the OG cryptocurrency.
Lightning Network, a Layer-2 scaling solution for Bitcoin, brings the smart contract functionality to Bitcoin. It means Bitcoin would behave the same way Ethereum does.
Until now, Bitcoin owners were creating wrapped tokens (WBTC and others) to interact with Defi apps.
As an L2 scaling solution, Lightning Network moves some of the transactions off-chain to reduce the load on the main blockchain. Bitcoin is no longer just digital gold. Lightning Network has opened up new possibilities.
Institutions have become quite serious about gaining exposure to digital currencies and Defi assets. Everyday users will also embrace DeFi in a big way once it becomes easier to use.
In its next phase of growth, Defi would bring a flood of new users into the ecosystem by delivering on its promise to make itself accessible to everyone.