Upcoming DeFi Trends: IdeaSoft Overview
2020–2021 saw the rise of decentralized finance. DeFi has opened up a lot of advantages for us in the areas of investing, building capital, and managing crypto assets. Therefore, the question of what’s the next DeFi trend is of interest to users of decentralized platforms. In this article, we will look at the major DeFi market tendencies and discuss the upcoming DeFi trends predicted by industry experts.
DeFi market overview 2020–2021
DEX volumes continued to show explosive growth in the second quarter of 2021, reaching $405 billion for the quarter. That’s 117 times more than last year and 83% more than the previous quarter of this year. The month of May alone accounted for more than half of the quarterly volume. Not surprisingly, this month also saw a local market high.
At the same time, the stablecoin sector has continued to show steady growth, and the second quarter of 2021 was no exception. During this period, the monetary base of stablecoins reached more than $107 billion. This is 70% more than in the first quarter and 803% more than last year.
USDC, BUSD, and DAI were the largest stablecoins this quarter, with market shares rising by 23%, 9%, and 5%, respectively. Although USDT is still the most popular stablecoin, its dominance is gradually weakening.
Despite the fact that DeFi activity has been negatively impacted by a shift in market sentiment and falling asset prices, the sector is still many times larger than it was even earlier this year. The coming months are likely to see a new wave of DeFi growth. It will be fueled by the introduction of scalability solutions, growing interest among various institutions in DeFi protocols, and the further development of ecosystems that can provide users with enhanced security. Below you will find DeFi trends to watch out for in 2021.
Top DeFi trends
DefiPulse charts show that since 2019, the volume of the decentralized finance market is growing, and in 2020 there was a real DeFi explosion. There are many types of DeFi projects but no more than 30% of them are trending. Today’s top DeFi trends are Ethereum, stablecoins, and yield farming. Let’s drill down into the details.
The rise of Ethereum
Ethereum is one of the most popular blockchain projects because of its flexibility and multifunctionality. It can perform the same functions as Bitcoin, Litecoin, and other cryptocurrencies. It can be a tool for transferring user funds as well as an investment and savings asset. But more importantly, it is possible to create other decentralized blockchain projects based on Ethereum with a wide variety of themes.
This capability is available because the Ethereum Virtual Machine supports a wide range of programming languages for compiling smart contracts uploaded to the blockchain. It is this functionality that has made Ethereum the most popular platform for issuing tokens (ERC-20) and conducting initial coin offerings. Its emergence was the reason for the 2016–2018 ICO boom.
In addition to the already mentioned versatility (it is both a cryptocurrency network and a platform for creating dApps), we can highlight the following advantages of the Ethereum blockchain:
- A decent speed of transaction processing by the network.
- Support for smart contracts.
- Regular technological updates.
- Accessibility (anyone can create decentralized applications based on Ethereum).
- Publicity and openness of the project team.
Essentially as a platform for creating dApps and working with smart contracts, Ethereum can be used in a very wide range of industries (international supply chains, voting, finance, insurance, computer games, real estate leasing, etc.). DeFi will continue to be most closely associated with the Ethereum platform because of its advantages.
You can also read our article “How to start a successful DeFi project” to find out more about DeFi development.
Stablecoins
A stablecoin is a digital coin backed by a certain traditional asset. Fiat currencies (dollar, euro, yuan, dirham), precious metals (gold, silver, bronze, aluminum), energy resources (natural gas, oil) can be used as assets backing the stablecoin rate. Stablecoins are growing in popularity and acceptance for several reasons:
- They’re easy to use as a means of payment, given that all you need is an address on a public blockchain.
- They run on a global public infrastructure that operates 24/7 year-round, making them incredibly affordable and reliable.
- They offer users greater autonomy, privacy, and interoperability than existing payment solutions that require KYC and often restrict access.
- Their programmability makes it easy for developers to build and run applications with them, with capabilities for global distribution and instant access to capital.
Stablecoins are universal. For example, they could be introduced into the sphere of buying/selling real estate through smart contracts. This method of calculation will save both parties from doing paperwork and spending time on banking operations.
At the same time, we should not forget that the popularity of stablecoins in any case depends on traditional cryptocurrencies. If people’s interest in this sphere suddenly fades, even the most promising projects will fade into history.
Yield farming
Yield farming is the process of generating additional profit (usually in the form of governance tokens) by DeFi protocol users for lending and providing liquidity to decentralized exchanges (DEX). Yield farming works through DeFi system applications and in general the results depend on it.
It all started with the fact that crypto traders were offered a small commission percentage for each transaction to increase the liquidity of a particular app (for example, Uniswap or Balancer). With yield farming, you can make money by investing in certain projects.
Decentralized derivatives platform Synthetix is considered the first successful farming project, but the yield farming boom began after the launch of the Compound protocol management token (COMP). With its distribution, the project attracted many liquidity providers, and the price of the token increased significantly. Almost immediately, other projects followed Compound’s example.
Profits from yield farming are calculated in the form of annual interest, like at a bank. The most common metrics are annual percentage rate (APR) and annual percentage yield (APY). The difference between them is that the APR does not take into account compound interest accrual. In this case, compound interest accrual means direct reinvestment of income in order to get a higher return.
Read also about DeFi Staking Platform Development
Upcoming DeFi trends
Emerging DeFi trends are no less exciting than the existing ones. Among the upcoming DeFi trends are blockchain gaming monetization, automated market makers (AMMs), and governance tokens.
Blockchain gaming monetization
The gaming market has been waiting for a long time for blockchain development as this technology solves a number of problems, especially in free-to-play games.
If we are talking about a game that needs to be purchased, the main problem is attracting users, and a large part of the audience is eliminated. On average, about 7% of gamers pay, and others don’t want to. That is why the free-to-play model is so popular.
Most people believe that the success of a game is largely determined by the popularity of the game and the number of players. One way to attract new users is to reward them for their success in the game. Blockchain games allow you to reward participants with tokens that can be used in the game or exchanged for real money. Developers are willing to pay not only for game results, but also for participation, performing certain actions, developing add-ons, and installing software.
This motivation encourages players to keep playing, get game content, and attract other people, which helps developers promote the game.
Through an ICO, developers can also release their digital currency and sell it not only during the game but in advance. Players or investors can buy project tokens in order to use them as a means of payment on the platform after its launch or in the hope of making money on resale. If you don’t have enough money to launch a project, this is a good opportunity to get funding and build a community before release. People who bought tokens at the ICO are interested in promoting the project.
For instance, active users write and discuss it a lot, make posts on social networks, tell their friends, make videos, which helps promote the game. Over time, the growing popularity of the game provides an increase in the liquidity of the cryptocurrency. This is why blockchain gaming monetization is one of the fastest-growing DeFi trends.
Automated market makers (AMMs)
AMM has changed the way traders interact with coin swaps. They allow easy exchanges between different types of coins in a peer-to-peer smart contract mode. These exchanges are fully decentralized and run using liquidity pools, algorithms, and arbitrage. AMMs emphasize the robust nature of trading in a decentralized environment. AMM also allows users to create a market by providing liquidity to liquidity pools of protocols.
The largest AMM is Uniswap, an Ethereum-based DEX platform, which allocates 0.3% of trading fees collected to liquidity providers (LPs). Payments are allocated based on user share.
Binance Smart Chain (BSC)-based AMM platforms such as PancakeSwap reward liquidity providers with about 0.17% in trading fees. In addition to this distribution of fees, users are rewarded with liquidity rewards. These rewards are fueled by the CAKE block reward, which gives out 25 CAKE tokens per block and distributes them to liquidity pools.
Overall, AMM revolutionizes the traditional market maker structure, which relies on human interaction, working with huge resources and complex strategies to provide tight bid-ask spreads. AMM technology automates the entire process, allowing users to interact directly with the smart contract.
Governance tokens
A governance token is a token that allows its owner to participate in the governance of a cryptocurrency project. With governance tokens, users can propose, discuss, and make changes to the project without having to rely on or require the participation of the project team. Also, token holders can use them to delegate voting rights to other users, experts, and even applications.
All software needs updating mechanisms. At any moment, unforeseen vulnerabilities can be discovered in a project. Additionally, it may turn out that poor technical implementation of a token or unforeseen events has made elements of the source code base irrelevant, non-functional, or even illegal. Finally, the source code usually has some parameters that need to be updated from time to time. Governance tokens provide holders with the ability to influence these issues.
Another common form of governance is to give token holders the ability to influence decisions regarding the allocation of funds. For example, DASH and Decred give token holders the ability to allocate funds from the general fund to contractors who perform various services to develop and maintain the project.
Any user with enough tokens will be able to make suggestions for the development of the main cryptocurrency protocol. For example, proposing a new asset on the decentralized finance platform (DeFi) or a change in the lending rate. What’s interesting is that such proposals themselves can be submitted in digital code, rather than messages to a development team. If approved by a community, these proposals would be automatically incorporated into the structure of the platform.
In 2020, governance tokens have become widespread due to the DeFi boom and now this is one of the bigger upcoming DeFi trends.
Wrapping up
The DeFi sector is developing at the speed of light. In this article, we discussed not only existing but also upcoming DeFi trends and we hope you filled in all the gaps about decentralized finance. Right now, those who manage to get into one of these trends will be able to make a huge profit in a year or two. If you have an idea for a DeFi project, you shouldn’t waste any more time and you should begin working on the implementation of the project.
IdeaSoft has been helping startups and enterprises empower their businesses with blockchain for over 5 years now. Our team consists of over 150 professionals who are ready to support your project at all stages from business analysis, design to development and testing. Feel free to learn more about IdeaSoft blockchain development services and contact us to discuss your business ideas.
