In mid-February 2020, the amount of funds locked in DeFi applications exceeded $1 billion for the first time. Fueled by the “Summer of DeFi” in 2020, in less than a year, the number has grown 20 times to $20 billion. In the ensuing 10 months, $20 billion once again reached an unprecedented 10-fold increase: $200 billion. With such a crazy growth rate, it is not difficult to imagine that the DeFi industry will once again achieve a growth rate of 100 billion in the next 1 to 2 years.
Such a milestone growth is inseparable from a core – liquidity. Looking back, the growth of the DeFi industry can be divided into three eras, each of which has made a huge contribution to the work of lowering the liquidity threshold, making the market more efficient and more fascinating.
DeFi 1.0: Which came first, the chicken or the egg?
As early as 2020, DeFi protocols have emerged, but they have all encountered the problem of “the chicken or the egg” when it comes to liquidity. In theory, users can provide liquidity to a lending platform or DEX, but there is not enough incentive to incentivize liquidity providers until there is enough liquidity to attract traders or borrowers willing to pay fees or interest .
Compound was the first DeFi protocol to come up with a solution to the egg problem, and in 2020 they launched their own platform token. On top of the interest provided by the lender, the borrower can also receive Compound’s platform token COMP as a token while lending money.
This move kicked off the summer of DeFi. SushiSwap’s vampire attack on Uniswap provided inspiration for subsequent developers, so that it began to reward the liquidity providers on the chain with its own platform tokens, thus printing a boom in liquidity mining.
DeFi 2.0: Improve capital utilization
The above is the era of DeFi 1.0, an era in which the amount of funds locked in DeFi has grown from $1 billion to $20 billion. DeFi 2.0, seeing the hope of reaching the sea of stars from $20 billion, has made major improvements in capital utilization. This era saw the growth of Curve, which polished Uniswap’s AMM model to provide more concentrated trading pairs and lower slippage for stable assets.
Curve also provides the industry with innovations in the vote-escrowed (ve) token model, encouraging liquidity providers to lock up their platform token rewards for a long time, thus making liquidity more reliable and long-term.
Uniswap V3 also brings improvements in increasing capital utilization, introducing customizable range liquidity. Outside the Ethereum network, DeFi developers have drawn inspiration from their predecessors and thrived on blockchains such as BNB Chain, Avalanche, and Polygon.
So, what factors will propel DeFi to trillions and more in the next phase of growth? I believe there will be the following four key developments.
Decentralized Exchanges (DEXs) Towards a Hybrid of Order Books and AMMs
Under the slow speed and high fees of the Ethereum mainnet, the order book model does not survive well on-chain, and the automatic market maker (AMM) model is favored in the DeFi field.
However, with today’s mature blockchain technology, high-speed and cheap blockchain network brings hope for us to introduce order book model in DEX. High-speed operations can reduce slippage, and market makers can also benefit from lower transaction costs.
We can already see the order book model in action on several decentralized exchanges — Serum on Solana, Dexalot on Avalanche, and Polkadex on Polkadot, to name a few. The order book model can also make it more convenient for institutional professional investors, who are more familiar with the limit order model.
The proliferation of DeFi protocols outside of the Ethereum network has allowed liquidity to be dispersed across blockchain networks. Developers are trying to use cross-chain bridge technology to realize the flow of funds on different blockchains, but the recent hacking attack on Solana’s cross-chain bridge Wormhole has made users concerned.
In order to unlock the liquidity scattered on different blockchains, improve capital utilization, and attract more investors, safe and reliable cross-chain interoperability has become a rigid need. We can see a lot of positive progress, such as the recent announcement of Binance’s strategic investment in Symbiosis, a cross-chain liquidity protocol. Similarly, Thorchain, another cross-chain liquidity protocol, has also attracted great attention from users and investors.
Large-scale NFT financialization
Over the past year, NFTs have helped push cryptocurrencies into the mainstream, thanks to high-profile art sales and celebrity obsession with blue-chip NFT projects like BAYC. But DeFi protocols are ready to offer innovative financial products based on NFTs.
One such example is iZUMi Finance. It provides financial services for NFTs received by liquidity providers on Uniswap V3. The customizable liquidity function of Uniswap V3 necessarily means that liquidity providers will receive NFT as their proof of liquidity, which limits the liquidity mining income of Uniswap V2. iZUMi Finance’s answer is programmable Liquidity as a Service (Laas), allowing the protocol to distribute rewards based on price ranges.
Similarly, Sold Protocol launched Vouchers Financial NFT, which is used to represent a certain share of the amount of cryptocurrency.
Blockchain and DeFi begin to integrate with the real financial market
Now, cryptocurrencies are becoming a globally recognized financial asset. Over time, the lines between traditional finance and blockchain and DeFi begin to blur, which is likely to go in both directions. First, by bringing the liquidity of the established global financial system on-chain, and second, by institutions adopting cryptocurrency-related decentralized financial products.
Several cryptocurrency projects have launched institutional-oriented products, and many more are in the pipeline. There is already an institutional wallet for MetaMask, while Aave and Alkemi operate KYC pools for institutions.
On the other hand, Sam Bankman-Fried is raising the banner of bringing the financial system to the chain. In March, speaking at the Futures Industry Association in Florida, he suggested to U.S. regulators that risk management in financial markets could be automated using practices developed for the cryptocurrency market. The Financial Times report shows that, far from the contempt or even contempt of the traditional financial media in the past, it is more full of surprise and interest.
Everyone is guessing when DeFi will reach the trillion-dollar milestone. But those of us who follow the current pace of growth, investment and innovation are hopeful that we will get there sooner or later.
(The above content is excerpted and reprinted with the authorization of our partner Mars Finance, link to the original text | Source: Planet Daily)
Disclaimer: The article only represents the author’s personal views and opinions, and does not represent the objective point and position of the block. All content and opinions are for reference only and do not constitute investment advice. Investors should make their own decisions and transactions, and the author and blocker will not be responsible for the direct and indirect losses caused by investors’ transactions.
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