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While 2020 will become one of the toughest the world has collectively faced in many years, the success of the decentralized finance industry stands out as an important milestone for the cryptocurrency community.
In the midst of the ongoing COVID-19 pandemic, economies have shivered and governments and financial institutions have had to introduce drastic monetary policies and stimulus packages to revive the global market. As a result of this uncertainty and monetary policy, alternative asset classes such as cryptocurrencies have become an attractive target for investors, companies and institutions.
2020 has been an important year for Bitcoin (BTC) in particular, with the preeminent cryptocurrency reaching levels not seen since its infamous bull run in late 2017. Perhaps more significant is the fact that Bitcoin has beaten a new one. record for overall market capitalization.
This successful period was accompanied by a boom in DeFi, which drew some parallels to the initial coin offering craze that accompanied when Bitcoin first approached $ 20,000 around three years ago.
DeFi is its own beast, however, and has set some impressive numbers in 2020. Its popularity has increased due to a wave of activity and value shift in the Ethereum ecosystem and the wider blockchain space and cryptocurrency. At the same time, it is feared that the DeFi space will lead to large numbers of users losing funds on projects that don’t work for whatever reason. This could subsequently hinder any further development potential and the overall image the industry is trying to build.
The state of space
The DeFi space recorded some significant milestones in 2020, as users clamored to take advantage of the returns touted by various platforms and protocols. August 2020 marked a significant milestone for the DeFi space, as the market has surpassed $ 7 billion in value locked in the platforms that make up the ecosystem, and is currently at a smidge of over $ 14 billion.
The rise in DeFi applications has also added some momentum to the rise in the price of Ether (ETH) in recent months as investors have surged in the yield agriculture sector. At the time, decentralized applications running on the Ethereum blockchain accounted for just under 50% of the total value of the Ethereum ecosystem.
As this data shows, the usefulness and value of DeFi platforms are clearly visible from the huge amount of value that is channeled across various platforms. With this type of interest, the relevant question is: What will drive the adoption and increased use of DeFi projects and products in the future?
Alexey Koloskov, CEO and co-founder of liquidity provider DeFi Orion Protocol, told Cointelegraph that a central cog in the future of DeFi will be integration with centralized platforms and exchanges. Koloskov believes that DeFi projects and decentralized exchanges, in particular, were born to provide traders with access to liquidity while retaining ownership of their assets, but they often lack the liquidity, trading pairs, user experience and features that traders look for:
“Crucial to the sustainability of the sector will be providing access to benefits and opportunities across the market, but in a totally decentralized way: the most valuable opportunities will come from hybrid solutions that bridge the gap between the centralized and decentralized world of cryptocurrencies.”
Ish Goel, a founding member of the DeFi PlotX prediction market, told Cointelegraph that while scaling continues to be a slowly solving challenge, two main obstacles need to be addressed to drive the use and improve offerings of DeFi projects in user experience and transaction scaling, adding: “Projects need to further simplify their app user experience to allow an average user to easily interact with non-custodial community protocols that have never existed before. A user average doesn’t want to use MetaMask. “
Coping with difficult perceptions
While the usefulness of DeFi platforms has been demonstrated by the sheer amount of value pouring into space, this has also been an area of criticism for the ecosystem. Yield farming has become a hot topic, as cryptocurrency users with significant holdings of various tokens are going to make sizeable returns by staking their holdings to earn yield.
While this has made some users a net profit on their investments, many others have been ripped off by half-finished projects and outright scams trying to capitalize on the hype of the space. It’s the proverbial dark side of DeFi and it’s not lost on our insiders. Additionally, even when DeFI projects appear to be coming from major developers or riding the wave of social media hype, investors may still end up in tears over their lost funds.
Goel provided a more optimistic view of the yield farming phenomenon, suggesting that the positives outweigh the projects that ended badly for some users: “Most DeFi projects are still very young, and at this stage, it matters to them. start up liquidity and kickstart an aligned and committed community “. He further added that “users are making money on these projects, but this plays a big part in helping bring the initial traction to the project if they have a legitimate product. It’s a win-win in most cases.”
Koloskov agreed that DeFi has become somewhat synonymous with income farming, and what began as a benefit for attracting capital into space has begun to cloud the sector due to unsavory market practices and scams: ” The execution turned out to be little more than new names, coding and viral marketing – focused on the speculative value of the price with little consideration for the real value of utility through useful technology. ” Koloskov noted that this was similar to what led to the end of the initial coin offerings and that is slowly happening to the DeFi space:
“The open source nature of DeFi has allowed for a number of ‘me too’ projects, but with the goal of exit scams instead of building a decentralized future of finance. But while the “bubble” may show signs of bursting as a result, the underlying technology is here to stay: democratized access to global finance. “
Evaluate the hype
Having addressed the potentially negative perceptions of yield farming within the DeFi space, it still cannot be denied that the ecosystem is delivering value to users. Data from DeFiPulse estimates that the amount of value locked in various projects and platforms in the ecosystem has grown exponentially. Goel admitted that the hype surrounding DeFi may be less than the actual utility provided by various platforms and projects. He also added:
“The DeFi protocols are changing the definition of finance as it is today. People transact billions of dollars worth of digital assets on open-source protocols. Finance is democratizing and this is just the beginning of a new generation of community-led businesses. “
Meanwhile, Koloskov believes the usefulness of DeFi platforms means that anything can potentially be tokenized, which could disrupt the global financial sector and various sectors. He reiterated that collaborations between industries will be key to driving the future of DeFi and a new financial system: “A successful decentralized financial system will not be measured by its ability to exist separately from centralized financial institutions, but one that is able to act as an intermediary between the worlds consumers know and the immature world of DeFi. “
