The growth of decentralised finance (DeFi) has been taking the crypto world by storm, with the value of transactions more than doubling in 2021 to a total of $37.67 billion. These are the five key trends to watch in the DeFi space.
- Traditional financial products
In traditional financial markets, financial derivatives are estimated to be worth 10x more than global GDP. Comparatively speaking, the DeFi derivatives market is still a baby at $2.78 billion, about 7.4% of the total market for DeFi. However, its growth has been exponential, an incredible 210x just in the past year.
Synthetix is far and away the biggest player, making up 83.73% of this market. It creates Synths, which mimic the price actions of other assets commodities like gold or Bitcoin, allowing users to get exposure to them without exposure to an intermediary.
Other derivatives that are growing in popularity include Wrapped Bitcoin (WBTC), which effectively allows owners to farm bitcoin on the Ethereum blockchain, and even wrapped Ethereum (WETH).
And derivatives aren’t the only traditional financial product gaining momentum in crypto. Option contracts are another, with Hegic providing the premier marketplace for crypto option trading. It expects the daily trading volume of Ethereum and Bitcoin options to reach around $9.2 billion – 10x their current value – by 2023.
Another traditional financial product gaining ground is tranche lending, which allows lenders to fund riskier loans by diversifying exposure among groups.(tranches) of investors with different levels of risk appetite. Protocols like Saffron Finance and BarnBridge are leading the way.
Relatedly, DeFi insurance is also on the rise, operating in a decentralised way by matching DeFi Users who want to mitigate risk with those looking to earn some extra income. Nexus Mutual and Bridge Mutual are fast-growing players in this space.
- Monetisation of blockchain gaming
The worldwide gaming industry is worth over $159 billion a year, and with numbers of gamers past the 2 billion mark and rising, both gamers and creators are looking for ways to make more money from the trend.
Blockchain gaming involves video games run on a blockchain rather than on a central server. Players “mine” tokens via in-game tasks. In-game transferability will require popular DeFi protocols – not to mention that many players will probably want to earn a return on their game-based cryptocurrencies.
- Cross-chain technology to solve scalability issues
The booming growth in the DeFi ecosystem is pushing transaction costs up, and the rush of new users on the Ethereum blockchain using DeFi applications has slowed the whole network. Many projects are now looking to solve this through cross-chain technology, which could relieve the pressure by letting transactions and smart contracts cross over from one chain to another.
- DEXs and AMMs driving growth
One of the challenges facing DeFi is how to balance decentralisation with efficiency. Centralised crypto exchanges like Coinbase have the efficiency but not the decentralisation. Decentralized exchanges (DEXs), on the other hand, let crypto owners interact directly, without an intermediary. Dominated by Uniswap and Sushiswap, the DEX platform market is growing exponentially. There was more DEX trading in the first two months of 2021 than in the whole of previous history.
The main innovation behind this growth is automated market makers (AMMs), which provide liquidity pools on DEXs, where crypto asset holders lend their assets to the pool in exchange for interest. 93% of DEXs now use AMMs.
- Governance tokens grow in importance
DeFi platforms offer their own tokens – governance tokens – which are different from typical cryptocurrencies in that they provide the holders with voting rights on a DeFi protocol. Holders can vote on initiatives, and will see the value of their governance tokens rise if their DeFi protocol gains more users or a higher TVL.
These tokens are central to a wider ecosystem of decentralised crypto platforms called decentralized autonomous organizations (DAOs).
Governance tokens are experiencing a surge in popularity in 2021, with the most popular token, MakerDAO’s MKR, rising around 237% so far this year alone. Even traditional financial institutions are taking notice: the three biggest holders of Compound’s COMP governance token are Andreeson Horowitz, Polychain Capital, and Bain Capital Ventures.