Decentralized finance (commonly referred to as DeFi) is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains, the most common being Ethereum. DeFi platforms allow people to lend or borrow funds from others, speculate on price movements on a range of assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts. DeFi uses a layered architecture and highly composable building blocks. Some DeFi applications promote high interest rates but are subject to high risk. By October 2020, over $11 billion (worth in cryptocurrency) was deposited in various decentralized finance protocols, which represented more than a tenfold growth during the course of 2020. As of January 2021, approximately $20.5 billion was invested in DeFi.
After a number of years of consolidation across the cryptomarket, new innovative protocols are drawing interest.
The interest has created a new crypto hype that is more than just reminiscent of the 2017 ICO boom.
As was the case back in 2017, there are a mass number of protocols hitting the crypto market.
Bitcoin and the broader crypto market delivered blockchain technology and decentralization. There was, however, an element of centralization in the CeFi space. Centralized finance became laden with governance and KYC/AML requirements and more in order to meet investor and government demands.
DeFi, by contrast, currently stands as truly decentralized. With an ethos of Permissionless and Trustless, there is no actual governance. And, there are no KYC/AML requirements. In fact, to access decentralized finance all a user needs is a wallet.
In concept alone, it is a mouthwatering prospect. True cryptocurrencies have yet to really make a dent in fiat money’s unwavering position as a primary payment source.
When considering the unbanked, the disgruntled, and the anonymous, however, DeFi may well give the banking sector a run for its money.
DeFi Projects On Rise
And there are other worthy protocols worth mentioning including Synthetix, Ox, Oracle, Kava, Band, and Aava
In addition to viewing the DeFi rankings by market cap, DeFi Pulse provides a platform for protocols to list. Here, you are given a brief summary of what the protocol delivers and a direct link to the webpage.
The Future Of DeFi
While a number of these protocols will likely survive the early boom days, there are many that will fall by the wayside.
Investors only need to go back 3-years to the ICO boom of 2017 to get a glimpse of what likely lies ahead.
Just like back in 2017, however, talk of 1,000% returns are drawing investors back into the crypto world. For those, who entered the 2017 boom late, it may take a little longer, however.
At present, market leaders report the large existence of scammers and Ponzi schemes in the DeFi space. The current upward trend in DeFi’s market cap suggests that investors are willing to take another bite of the cherry.
Unlike investing in CeFi protocols, however, DeFi is a Trustless and Permissionless space. This means that there is little to no governance, testing, auditing, etc. It, therefore, means that some of the protocols drawing investor money could vanish in weeks, if not days.
For that very reason, investors are seeing exception returns. The protocols are drawing investors into the DeFi space, wooing them with double-digit returns from the least risky products on offer.
These include Yield Farming and Liquidity Pooling that puts the cherry on the top for investors today.
When considering the fact the DeFi is still niche, the rally may have some way to go. This is assuming, of course, that the victims of the 2017 crypto meltdown lick their wounds and return to the fray…
With platforms such as Binance setting up US$100m funds to seed new projects and fund development, the future of DeFi does look bright. It does not mean, however, that there will not be any cautionary tales.