2020 has been a whirlwind year for DeFi, which broke new records, surpassed new all-time highs, and garnered more headlines than any other crypto vertical. The total value of locked assets in DeFi protocols rose to $19.72 billion, having started the year at just $600M.
DEX volumes also rose dramatically: at the start of the year they captured just 0.12% of total market, but by October were soaking up over 15%, led by Uniswap, the AMM that everyone in DeFi seemed to be emulating, trading on, and LP’ing in this year.
As the cryptosphere pauses to reflect on a remarkable year not just for DeFi, but for the industry at large, it’s also an opportunity to look forward. What trends can be expected to accelerate in 2021, and which new innovations will emerge to become the next Compound, Uniswap, or Aave?
While the DeFi space is too fast paced and fragmented to cover every angle, here are three trends to expect over the next 12 months – and the three projects best placed to deliver them.
Liquidity pooling (LP’ing) is how decentralized swapping pools are seeded with tokens by community members. For pooling an equal share of ETH and USDT on Uniswap, for example, you’ll receive a share of transaction fee each time someone executes a trade.
In theory, this should provide a steady stream of revenue for LPs. In reality, liquidity providers often lose money when one of the assets they are pooling exhibits volatility, leading to a phenomenon known as impermanent loss (IL).
As the year developed, greater understanding of IL emerged, aided by a number of research papers exploring the phenomenon. Yield farmers also learned from experience, during the course of the summer, the perils of staking in ‘pool 2’ containing the native asset of new protocols, where IL invariably occurs.
To combat the problem of impermanent loss, and incentivize liquidity provision, new AMMs have emerged that promise a better deal for LPs.
xSigma Finance is the one to watch for innovation in this domain. The stablecoin DEX and liquidity mining platform has some serious clout behind it, thanks to the backing of its NASDAQ-listed parent company.
More importantly, from the perspective of LPs, it has been designed to dramatically reduce impermanent loss, giving token-holders an incentive to pool their assets and earn xSigma’s native governance token.
Tackling the problem of impermanent loss from a different angle is Peanut. The DEX aggregator sources liquidity from multiple pools, reducing LPs' impermanent losses.
It's neatest feature, though, is reducing slippage for DEX clients - traders. It achieves by correlation the price movement from large DEX trades with the corresponding asset on CEX. This prevents losses from slippage for traders and at the same time boosts LPs' profitability.
What is decentralized finance but blockchain wrapped in a consumer-friendly package? As the benefits of interacting with decentralized protocols and using them to transfer value globally have become evident, forward-thinking enterprises have taken notice.
While yield farming isn’t for them, defi’s composability and open source framework have much broader use cases. Next year, expect to see more businesses interacting with the sort of blockchain technology that was popularized by defi.
Polkadot, with its scalable and interoperable framework that unites blockchains, is likely to be favored by enterprises entering the space ahead of Ethereum.
The network effects for which ETH is synonymous are less important for businesses seeking to create a private chain or dApp that can connect to a public network; rather, they will be more interested in throughput and transaction costs, where Polkadot wins hands down.
For bridging the gap between the web3 world envisioned by the likes of Polkadot and that currently inhabited by digital businesses, look no further than Remme.
Its distributed PKI is designed to improve security standards for enterprises, and relies on a blockchain infrastructure. From passwordless authentication to IoT, Remme provides a universal authentication solution – and all built using the same technology that powers web3 and defi.
The final trend to monitor next year is for staked assets to be liberated, allowing token-holders to have their cake and eat it, as it were. At present, staking native blockchain assets enables users to earn a reward for securing these PoS networks.
However, it also ties up their assets, preventing stakers from exploring other, potentially more profitable, opportunities elsewhere. This is now starting to change thanks to DeFi platforms that enable liquidity providers to mint synthetic versions of their staked tokens, which serve as collateral, freeing the synthetic asset to be used within the cryptoconomy.
Fantom has just released Liquid Staking, which enables FTM stakers to convert their staked tokens into sFTM – the name given to the synths that are tradable on Fantom Finance, and which can be used to mint stablecoins.
Expect to see other projects following suit very soon, unlocking the liquidity tied up in “parked” crypto assets, and creating new opportunities for earning yield.
Disclaimer: This material is not sponsored by any organization mentioned in the article.