DeFi’s biggest moment yet to come: 3 trend predictions for 2021
DeFi drew massive attention and billions of new capital inflows during 2020. June to September in particular experienced exponential growth across lending, borrowing, liquidity mining and yield farming platforms. The DeFi craze has slowed down since late September, but it is far from being dead. In fact the total locked value (TVL) reached a new high of $15 billion on December 29.
As Bitcoin achieves new all time highs, the rest of the crypto market including the DeFi segment, is expected to follow. Here are 3 hot DeFi trend predictions for 2021:
Decentralized Insurance
Smart contracts are bullet proof right? Not exactly. For one, a majority of DeFi apps are built on Ethereum with immutable contracts. Meaning that once deployed, it generally can’t be fixed easily even if a bug is found. Yes, there are upgradable contracts and other workarounds, but the majority of existing contracts are simply immutable.
It comes with no surprise that many DeFi projects were hacked and exploited. Ironically, one decentralized insurance platform was hacked. Together, more than $69 million worth were subject to such incidents in 2020.
Ethereum smart contracts can be audited, but hackers will find loopholes. Many DeFi platforms are like intricate Lego blocks that call different smart contracts, adding vulnerabilities as the combinations become complex. In general, DeFi is becoming much more sophisticated with the caveat of increasing security concerns at the same time.
Just like traditional industries, insurance creates confidence and lowers the barrier to entry for many who aren’t willing to take high risks (but are still attracted to the high returns). Decentralized Insurance can solve this problem which introduces many benefits over centralized insurance.
Highly customizable and composable
First, Decentralized Insurance allows users to customize their insurance plans with greater flexibility and composability. Premiums, or the cost you pay for protection, can be highly customizable to meet the exact needs of coverage. Insurance can cover against smart contract failure, hacks, losses or anything that can be programmed into a smart contract.
There are no salesmen in DeFi land trying to upsell you. Rather, you choose exactly what you need and exercise bold control over your protection plan.
New market opportunities
Second, the concept of Decentralized Insurance creates a huge market opportunity which can attract capital influx into DeFi.
Similar to the rise of conglomerate insurance companies for homes, health, and motor vehicles, Decentralized Insurance can become a multi-billion dollar market in DeFi. This will create new monetization models for businesses and simultaneously bring improved financial products to end-users in the crypto space.
Reducing processing inefficiencies
For those who’ve had to make claims with typical insurance companies, you know it’s a real pain. One of the greatest benefits of Decentralized Insurance is the non-custodial transfer of funds and self-executing contracts. Decentralized Insurance eliminates a majority of the middle-layer processing, so when a claim is made and protection triggers are met, the contract will automatically execute to cover your position.
Gone are the days where you have to spend stressful times getting to the right support team and resolving your claim. In terms of savings, you don’t need to overpay for plans you never wanted. Even better, transactions are recorded on-chain meaning that every claim processing, protection purchase and rewards are recorded with a high degree of transparency on the blockchain.
Bringing derivatives on-chain
A conservative figure estimates that the traditional derivatives gross market value of all contracts is around a whopping $12 trillion. Derivatives by simple definition are a contract between parties in which the underlying asset determines the value of the contract.
Creating on-chain representations of real-world objects, referred to as Synthetic Assets, is a prime example of DeFi’s vast potential for unlocking liquidity of various assets. Synthetic Assets are tokenized representations of objects or contracts whose value is derived by the asset backing up the token.
Synthetic Assets bring numerous benefits:
Broadening accessibility
Since anyone can construct Synthetic Assets using smart contract platforms, Synthetic Assets bring far greater accessibility for anyone in the world to create, issue and trade. Smart contracts developed by various platforms allow users or developers to customize how Synthetic Assets are created.
Unlocking liquidity for illiquid assets
Despite having value, many real world objects are highly illiquid when trading on the open market. Cars and high-end artwork for example cannot be easily transferred and sold. With Synthetic Assets, the digital representation can be issued in minutes and then traded on decentralized exchanges.
By combining other DeFi solutions, Synthetic Assets can generate interest through collateralized lending platforms. Overall, this increases liquidity and creates new exposure to a global market.
Trustless by design
Smart contracts significantly reduce centralization risks. Synthetic Assets are backed by a transparent mechanism to prove that the underlying asset is indeed backing up the token. This encourages the creation and secondary trading of Synthetic Assets on a borderless scale.
Regulatory pressure on DeFi
The rise of crypto in 2020 has garnered increasing attention from regulators — all with varying perspectives.
The US for example has introduced more than 32 blockchain and crypto bills to date. The STABLE Act proposal introduces strict regulations that would treat stablecoin issuers under similar treatment as traditional banks. Proposals around deanonymizing crypto transactions over a certain threshold, where the recipient and sender info will be required has also surfaced raising much concern for the crypto community.
Due to rapid technological advancement, regulators around the globe are still trying to understand how to instill AML measures in a decentralized ecosystem. Lawmakers worldwide will be expected to further analyze the nature of DeFi and how to best regulate it.
Overall, regulation enhances trust and creates a safer environment for innovation, but too much regulation can stifle progress. Hot debates around crypto compliance will no doubt make important headlines for 2021.
DeFi is a hotbed for innovation
A Chinese proverb says that “When the winds of change blow, some people build walls and others build windmills.” DeFi is becoming the “windmill” to adapt and innovate in today’s financial infrastructure. Stay on your toes for another great year in crypto to unfold.
Follow me on Twitter: @HikaruKasai
