For the majority of 2020 and 2021, DeFi dominated the crypto industry. The total value locked (TVL) across DeFi protocols went from under USD 1 billion in June 2020 to over USD 250 billion at its peak. This growth did not happen in a single wave of events. There were multiple periods impacting the whole ecosystem.
In the beginning, Bitcoin and Ethereum laid the foundation and provided the required architecture for DeFi applications. With the architecture ready, it enabled developing the first level of trust, i.e., to execute value-based transactions. When these transactions were made using a smart contract, we saw the emergence of different DeFi models.
The applications of DeFi then started addressing key areas of traditional financial markets, such as loans, savings, trading, insurance, and payments. As a result, the DeFi landscape evolved rapidly, adding over a dozen verticals with hundreds of projects in development. We now have many “next-generation networks” expanding on the functionality created by Ethereum’s smart contracts.
DeFi Evolution — How We Got Here
The DeFi ecosystem evolved in multiple stages, with different projects identifying market inefficiencies and making significant changes in the industry. In the early stages, we majorly saw lending and borrowing platforms like Aave and Compound. Lenders earned rewards for providing liquidity, and borrowers got their required capital at lower interest rates than traditional banks.
The next significant change to DeFi that fueled its growth were decentralized exchanges powered by automated market makers or AMM. DEXs like Uniswap and Sushiswap helped find the balance between decentralization and capital efficiency. They enabled users to benefit from the arbitrage and gave users access to new projects with sufficient liquidity. To take it a step further, DEX aggregators emerged. By routing liquidity from different exchanges, aggregators can provide deep liquidity and optimize swaps at less cost and price slippage.
As most of these DeFi protocols launch governance tokens, it opens up many possibilities for yield farming and liquidity mining. The estimated annual returns are extraordinary and hard to believe. We are yet to see if they are sustainable or not, but the market demand is certainly increasing every day.
Another important aspect of DeFi is stablecoins. What we also call “decentralized money,” stablecoins are being used beyond payments and stores of value. They are helping create more financial products in the DeFi space while complementing the existing ones.
Along with the aforementioned changes in DeFi, we have seen many new trends that led to new market sectors such as perpetual futures, marketplaces, synthetic assets, and reserve currency protocols.
DeFi Could be The Ultimate Hedge
Even after so much innovation over the past two years, it is still safe to say we are early. The demand will only increase for crypto-assets, and market participants want to participate in this DeFi journey. They want to invest early and hold for longer periods for greater returns.
As DeFi is now more of an investment option than the transfer of value, it can help lead mainstream adoption and act as a security to back financing. One such way to improve crypto-asset functionality in everyday life is collateralisation. By using crypto assets as collateral, users will be able to borrow at no added interest. This gives them access to capital without liquidating their holdings.
One example of a Fintech company creating collateralisation products, among others, is Baanx. Baanx has developed a unique, next-generation crypto-swap product called Cryptodrafts. With approval from the FCA, one of the top regulatory bodies in the UK, to carry out crypto activities, Baanx’s Cryptodrafts offer users a secure way of extending a credit line on their cards. Unlike a fixed-term loan, Baanx offers more flexibility with partial repayments and zero paperwork requirements.
Currently, Baanx is offering Cryptodrafts for the collateralisation of top coins like Bitcoin and Ethereum. Users will get interest-free loans for the first 10% of the staked amount. In the future, if users stake Baanx’s native token, BXX, they can claim up to 50% of the value at zero annual interest. With such a high-level product, users can finally leverage their crypto assets to explore other opportunities. This will ultimately bridge the gap between DeFi and the real world.
When regulatory bodies give a green signal, it is a very good sign for mainstream acceptance of crypto and DeFi. With Baanx, people don’t need to worry about the market conditions on their long-term holdings. They can simply use those assets to receive capital at zero or minimal interest. As Baanx already has debit cards, people can use that capital for everyday purposes. Moving forward, with more assets added for collateralisation, we will see rapid growth of DeFi adoption in the real world.