DeFi market analysis
In 2020, the growth of DeFi took the crypto world by storm. The first quarter of 2021 was an eventful period for the DeFI world. From January 1st to the end of March, the ‘Total Value Locked’ (TVL), the amount of capital that is being stored in DeFi protocols, rose from roughly $16 billion to more than $49 billion. One of the main reasons for the attractiveness of the DeFi market is the higher transparency and trust that large institutions have contributed to turning it into a crowdfunding platform — a more mature evolution of initial coin offerings (ICOs).
Simultaneously, a number of DeFi assets have continued to perform incredibly well. According to Data from Messari, at least 74 DeFi assets have increased their value by more than 100% since the beginning of the year. Seven of these assets have increased their value by more than 1000%.2]
Record sums have been pouring into DeFi protocols for over a year as investors chase the generous returns afforded by lending, borrowing, decentralized trading, and synthetics protocols. DeFi's unsecured lending has helped popularize the market by making loans more flexible. It's common knowledge that one of the original goals of DeFi was the simplification of relations between credit institutions and borrowers.
Ultimately, the next phase of DeFi should make the industry more accessible to everyday users while building even greater trust through better protocol and product transparency that clearly identifies risks to it users. In the short-term, policy makers and regulators will be keen to “look through” DeFi protocols and products to ensure no undue harm is presented, especially to retail consumers.
Shaping Movements for 2021
The DeFi sector is growing with no signs of slowing down and the following developments are forecasted to be the shaping movements for 2021:
1. Users Embrace AMM-based DEX’s
Automated Market Makers (AMMs) provide a completely new model for decentralized exchanges (DEXes), using liquidity pools and pricing set by an algorithm rooted in supply and demand instead of conventional order books. Effectively, users trade with a smart contract-based liquidity pool rather than directly with other users.
2. NFTs
Non-fungible tokens (NFTs) are indivisible blockchain tokens that represent a unique real-world or digital item. They’re quickly gaining popularity, as they prove authenticity and ownership of digital art, collectibles, in-game items, and even parcels of virtual land.
3. Cross-chain Technology
One of the problems associated with such rapid growth in the DeFi ecosystem is the increasing transaction costs. In addition to rising transaction costs, the number of new users using DeFi applications on the Ethereum blockchain has made the entire network slower. To address this issue, many projects in the crypto space are starting to offer cross-chain functionality.
Basically, cross-chain technology hopes to allow transactions and smart contracts to cross over from one chain to the next. It’s hoped that this interoperability will allow DeFi platforms to scale much easier than they do on the Ethereum network alone.
4. Governance Tokens
These tokens are different than typical cryptocurrencies. Their general purpose is to provide the token-holders voting rights with regards to an underlying DeFi protocol. Token holders vote on initiatives, and the value of their tokens generally rises when the DeFi protocol gains more users or increases its TVL.
And if the price is any indication, governance tokens have become very popular in 2021.The collective market cap for the governance tokens of some of the top DeFi platforms (like Curve Finance, Uniswap, Compound, and Yearn Finance) has grown to over $50 billion. Traditional financial institutions are also starting to notice the value of owning governance tokens[3]*
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