The DeFi space is clearly at an interesting point in time.
On the one hand, DeFi tokens have lost up to 95% of their value during the current inter-market cooldown, with NFTs and the Metaverse in focus, and DeFi 2.0 lost its initial momentum. There are also plenty of exploits, regulatory uncertainty, an unprecedented cult of personality, and some questionable hiring.
On the other hand, established mature DeFi protocols have been supporting a large number of daily activities. DeFi is just getting started at L2 (Layer 2 Network) . Multi-chain DeFi and DeFi on other chains are also going through a phase of rapid growth.
With all that said, is the worst over? Are we on the brink of a DeFi renaissance? You will find answers to this and more questions in this article.
The market has not been kind to DeFi since the beginning of 2021.
Despite the phenomenal innovation and growing TVL (total value locked) in DeFi protocols, the price of DeFi tokens does not reflect this.
Even as DeFi tokens appreciate in value along with the overall market, they still underperform ETH in most cases.
Attention is focused on other things: NFTs , Meme coins, the Metaverse , alternative L1 chains , etc.
DeFi 2.0 brought a little hope, but ended up with an overblown market and painful price corrections.
The Ethereum L2 scaling did not come as quickly as most expected, creating a huge opportunity for other L1 chains. Due to the ease of deployment to other EVM-compatible L1 chains, forked versions of many well-known DeFi protocols such as Uniswap and Aave are deployed on these L1 chains .
Olympus is probably the most forked of all DeFi protocols, pushing a seemingly never-ending Ponzi game on all possible EVM-compatible chains.
An unprecedented cult of personality doesn’t help either. Perhaps, in this crypto space where code written in an anonymous way can process billions of dollars worth of transactions, we should focus less on the individual and focus on what really matters: the code and the community.
History has proven time and time again that the cult of a person can dissipate as quickly as it heats up.
There is also a lot of discussion about morality in DeFi. Should a criminal convicted of fraud be allowed to build a protocol anonymously without anyone else’s knowledge?
This question may not be as easy to answer as we think. For some, especially those from the traditional financial industry, this is unacceptable. And for others, being a good contributor to the ecosystem is what matters, arguing that people should be allowed to “clean up.”
One thing is clear, anyone working on a DeFi protocol should not be able to get people’s money on their own — no matter who it is.
The DeFi space is also not very good when it comes to attacks and vulnerabilities . DeFi protocols such as Poly Network, Compound, Cream Finance, Badger, etc. have all been attacked.
Rug Pulls isn’t slowing down either, with hundreds of forks of DeFi protocols being created with the sole purpose of stealing users’ funds.
The Wormhole (cross-chain protocol) vulnerability alone caused a loss of $326 million, which was fortunately made up for by Jump Crypto (an investment firm), one of the largest players in the Solana ecosystem.
From early 2021, the total amount lost to hacking and exploits is about $ 2 billion .
There are also a few very thrilling times.
A vulnerability discovered in the Sushiswap protocol by DeFi researcher and white hacker Sam Sun could lead to massive losses of up to $350 million. Kudos to Sam Sun for disclosing the vulnerability in a professional and timely manner.
The unclear regulation surrounding DeFi and cryptocurrencies is another widely discussed topic that creates a lot of uncertainty for users, investors, and founders.
Including countries banning and lifting cryptocurrency bans, draconian laws trying to incorporate DeFi into existing financial rules that are being voted on, and more.
While regulatory uncertainty has not completely disappeared, the other things mentioned above can be considered relics of the past and certainly worth learning from.
Now, let’s discuss the current state of DeFi.
According to DeFi Llama, the total value locked in DeFi is around $215 billion . That’s down slightly from $255 billion at the end of 2021, but still high.
In the case of decentralized exchanges (DEX), the monthly trading volume is around $50-60 billion . That’s down from more than $100 billion at the end of 2021.
Despite some newcomers to the DeFi AMMs (Automated Market Makers) space, Uniswap ‘s market share remains high at around 75% of total trading volume.
In terms of DeFi lending, the liquidity of the Aave protocol across 7 different blockchain networks hovers around $20 billion at the time of writing. That’s down from $31 billion at the end of 2021, with fewer networks.
Although on the surface, DeFi seems to have been stagnant for a while. In fact, this is far from the truth.
Some major DeFi metrics, such as Total Value Locked (TVL) across all DeFi protocols or Decentralized Exchange (DEX) volume, don’t tell us the whole picture, as they are always related to current market conditions.
We have to take a closer look inside DeFi to understand what is being built and how it affects the future.
The L2 (Layer 2 network) scalability scheme is clearly a significant development that could significantly increase DeFi adoption by reducing costs and increasing transaction speeds.
Optimism and Arbitrum are improving their code to make them less expensive to use.
Polygon already has a number of scaling solutions including ZK Rollup technology such as Hermez, Nightfall and Maiden.
After successfully extending single-purpose protocols like dYdX, DeversiFi, and Immutable X, StarkWare is developing a more general ZK Rollup network called StarkNet.
Meanwhile, other L1 chains have not slowed down .
DeFi on other L1 chains such as Avalanche, Fantom, Solana, Terra is also going through a phase of rapid growth.
Although at present, the DeFi protocols on these alternative L1 chains, especially those on EVM-compatible chains, are mostly forked versions of the DeFi protocols originally built on Ethereum, there are also many new things being tried and built. .
Despite initially facing some criticism, we can see the multi-chain theory in action and bearing fruit.
In the search for DeFi yields, users are keen to bridge their assets into other chains.
This all looks exciting, but we need to remember that cross-chain bridges are inherently problematic. Transactions between two different chains protected by different consensus mechanisms cannot simply be performed as an atomic operation, soassets cross-chain either need to trust a more centralized “bridge” or rely on a relay network instead of us Consensus of the two chains being bridged is being achieved .
Bridging assets to an L2 network (like Optimistic Rollups or ZK Rollups) is a bit more secure , as most L2 networks have escape mechanisms that allow funds to be withdrawn directly from Ethereum L1 in the event of a problem .
Projects that focus on multi-chain, like Cosmos and Polkadot , could also be interesting solutions, since in such networks bridge transactions are usually secured by 1 consensus mechanism , but this does not solve the problem of bridging between two different L1 chains cross-chain issues.
When it comes to DeFi 2.0, some of the mechanics of this paradigm shift (primarily around incentivizing liquidity) are likely to prevail despite the market’s overexuberance.
DeFi protocols like Tokemak maintain over $1 billion in TVL and introduce new and useful features to the entire DeFi ecosystem.
It remains to be seen whether other DeFi 2.0 protocols , such as Olympus , will be able to shine again and regain their original power.
Currently, the market capitalization of the Olympus protocol token OHM is largely supported by the value of the vaults controlled by its underlying protocol, so to a certain extent, the protocol is working as intended at worst.
Other more mature DeFi protocols have not stopped short of their achievements.
Aave recently launched V3 of its protocol, which introduced better capital efficiency and improved risk management.
Bancor also announced V3 of its protocol, which reduces transaction costs, allows unlimited deposits, and provides instant impermanent loss protection.
Thorchain has recovered from the hack and recently introduced synthetic assets designed to increase network usage, network TVL and depth of liquidity pools. This also allows it to offer cheaper token swaps and higher income for liquidity providers (LPs).
MakerDAO is discussing a new, aggressive growth strategy, including expansion into more real-world assets (as DAI collateral).
Sushiswap is working on Trident, a framework for creating AMMs and Shoyu 2.0 (an NFT marketplace).
The Curve protocol, which drives most of the stablecoin swaps in DeFi, isn’t slowing either. Curve’s token economics model incentivizes many other DeFi protocols (like Yearn Finance, Convex Finance, [REDACTED] Cartel, etc.) to compete to capture CRV token yields. Because of the competition involved, this competition is known as the “Curve War”.
The CRV model has become so popular that it is being replicated by many other protocols in the DeFi ecosystem.
In the case of Ethereum itself, EIP-1559 , despite some initial concerns, the proposal has been running steadily since its implementation, with daily ETH burns. In total, over 2 million ETH has been burned recently since this change was deployed.
There has also been significant growth in liquid staking . Lido dominates this space, with over $8.5 billion worth of ETH staked through the protocol. The protocol also supports staking on other blockchain networks, such as the staggering $7.5 billion worth of LUNA staked through the protocol.
Another liquid staking protocol, Rocket Pool , took a harder path and decided to start with a more decentralized state.The protocol has also shown impressive growth, with nearly $500 million in ETH already staked.
Although not exactly DeFi itself, NFTs , the Metaverse , and encrypted social media (including the Lens Protocol, a Web3 social protocol launched by the Aave team ), have become hot topics.
This could bring more people into the crypto space and allow them to discover DeFi as well.
Beyond that, it’s worth mentioning that even in the cooling off period when users are less willing to invest in new projects,venture capital doesn’t fall asleep and pours billions into the DeFi ecosystem and the crypto space as a whole.
That provides enough funding for early-stage projects to focus on building rather than thinking about how to survive the next bull run.
As we’ve seen, the DeFi ecosystem is thriving despite the market downturn, and it won’t stop there – let’s take a quick look at the future.
The Ethereum merger is an event that has been widely discussed and is getting closer.
The merger will allow Ethereum to transition from PoW to PoS and drastically reduce the rate of issuance of ETH, which will most likely push ETH into deflation .
Currently, the Ethereum merger is estimated to arrive between June and August of this year, but of course, this depends on further testing. This is one of the biggest changes to the Ethereum protocol ever, so it cannot be rushed.
The merger drives one of Ethereum’s current narratives and could drive the next bull run in ETH and DeFi.
There are many other improvements planned for Ethereum.
For example, EIP-4488 can reduce the transaction cost of Rollup by reducing the gas cost of calling data.
Ethereum- based L2 networks are another catalyst that could push users to rediscover DeFi.
Through the L2 network, DeFi will not only be cheaper and faster than ever, but will also enable new DeFi protocols that were previously impossible to implement on the Ethereum L1 network.
Most L2 networks also have a secret sauce. They may all launch native tokens and spur growth quickly. I wouldn’t be surprised to see some inflection point that causes all major L2 networks to launch tokens one by one within a very short period of time.
There are many teams working on L2 scaling, and one of the highly anticipated events is the general launch of StarkNet , which will provide a general-purpose ZK Rollup network.
NFTs , Metaverses , and DAOs can also drive DeFi, which could become the backbone of these emerging ecosystems.
Tokenize NFTs and trade on AMMs ? This is DeFi.
Create escrow contracts to exchange tokens between DAOs? This is DeFi.
Trading virtual parcels in the Metaverse? This is also DeFi.
Even the NFT market can be considered DeFi.
Another segment of the DeFi market that may experience rapid growth is the index .
In traditional finance, indices such as the S&P 500 (S&P 500) and the FTSE 100 have gone through a huge growth cycle and have become an important part of the overall market. This has not been fully exploited in DeFi.
I wouldn’t be surprised to see more and more focus on indices in DeFi , especially since the very nature of smart contracts allows for the easy creation of indices of all kinds, from DeFi blue chips to the Metaverse to NFTs . Smart contracts also allow for the automation of index rebalancing.
For example, Index Coop ‘s DeFi Index, Metaverse Index and others are among the standout projects in this category.
One thing we need to clarify soon is about DeFi laws and taxation. Currently unclear rules stifle innovation and create an unfriendly environment for DeFi founders and users.
Ultimately, I think most liquidity will move to on-chain and DeFi will attract most banks, hedge funds, other financial firms.
While there will be many blockchains, each with a functioning DeFi ecosystem, naturally, liquidity will be concentrated on a few .
Speaking of markets, it’s hard to say what will happen to prices in the short to medium term, but I wouldn’t be surprised to see DeFi tokens recover again when the world realizes what’s being built in the space.
Despite the current market cooling off, the DeFi space is still growing at an astonishing rate. While attention is diverted from price, long-term builders continue to create value and keep coming up with new ideas to feed the next market cycle.
During these seemingly calm times, it is extremely important to keep up with the latest trends in order to capture the greatest gains when attention finally returns to DeFi.
So, what do you think of the current state of DeFi? What are your predictions for 2022 and beyond?
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/defi-past-present-and-future/
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