Since 2019, decentralized finance (DeFi) has been one of the most rapidly developing areas in the blockchain space. During the Covid-19 pandemic, interest in crypto, blockchain and DeFi skyrocketed, and the investments increased. Although DeFi is still in its early stages, the total value has risen from less than $1 billion in 2019 to over $90 billion in early June 2021. At the time of writing this article, according to DeFi Lama, the Total Value Locked in DeFi is $198.4 billion.
Investors began seeking better transparency, control, and efficiency for their assets perceived as an alternative to traditional finance and banking services. The emergence of incentive structures, such as yield farming, governance tokens, together with the development of decentralized stablecoins played important factors in the 2019-2022 DeFi boom.
The decentralization of finance was viewed as the logical next step for users who wanted to opt out of “the system”. The idea of vesting trust in computer code and mathematics made more increasingly sense in a world rampaged by ever-increasing inflation and reduced belief in the democratic process, and central authorities.
Allowing users to deal directly with one another without the use of centralized systems became increasingly appealing. DeFi accomplishes that by utilizing self-executing software protocols that cut out the middle man. As a result, DeFi promised to return the money and asset ownership to users by allowing them to trade, borrow, and lend money from anywhere, at any time as long as they have an internet connection.
Here are some DeFi trends to watch in 2022:
DAOs
Decentralised Autonomous Organisations have a long and colourful history in the world of blockchain. A DAO is much like a corporate governance structure, albeit managed in a decentralised fashion using blockchain technology without the oversight of government regulation (for now).
But how can this help the DeFi space?
DeFi app users “self-custody” their assets in their wallets, where they are protected by their private keys. By eliminating the need for trusted intermediaries, DeFi apps dramatically increase the speed and lower the cost of financial transactions.
DeFi apps require DAOs, to operate. DAOs manage DeFi apps through the individual decisions made by decentralized validator nodes who own or possess tokens and give them the right to vote or approve. Unlike joint stock companies, corporations, limited partnerships and limited liability companies, DAOs have no code (although, ironically, they are creatures of code). In other words, there is no “Model DAO Act” the way there is a “Model Business Corporation Act.” They are fundamentally unprecedented in law.
2021 saw some big moves in the DAO space. Wyoming became the first state to formally recognise DAOs, granting them the same legal status as limited liability companies.
What we can expect in 2022 is for DAOs to soar to new highs, with many DeFi protocols now using DAOs to govern their future. Meanwhile, a host of new NFT DAOs are emerging to support collective investment in NFT art. Tokens owned in DAOs like FingerprintsDAO, SquiggleDAO, and FlamingoDAO give the holder voting rights in the DAO.
Self-repaying loans
One of the most interesting features of digital money is the ability to create new technology and use cases for blockchain technology. Self-repaying loans are one of the newest ideas found in DeFi.
Essentially, when a user takes out a self-repaying loan, they are using yield on a deposit to pay for a loan they’ve taken against that deposit. In order to take out a self-repaying loan, a user first deposits capital into a given protocol, which allows you to borrow up to 50% of your deposit instantly. This is possible because of the high yields found in crypto lending. The 50% of the deposit that stays in the protocol is used to pay back the 50% that was taken as a loan. As the principal pays back the borrowed money, the rate at which the loan is paid back accelerates.
To understand this, let’s walk through an example. A user holds DAI (a stablecoin), in their crypto wallet like MetaMask. The user connects their wallet to a protocol like Alchemix. The user deposits DAI into Alchemix via the website and can immediately borrow up to 50% of the deposited funds via the alUSD (Alchemix stablecoin). The user can then sell their alUSD for fiat currency, ether or other cryptocurrencies. The DAI still held with Alchemix are left generating a yield and are paying down the balance of the loan. As the balance of the loan gets smaller, the balance of collateral is increasing. The interest rate is static, thus, the rate at which the balance is paid down accelerates.
Investors must trust the Alchemix smart contract when taking out a self-repaying loan. Many investors are attracted to this idea because they are able to keep their cryptocurrency, and this is a tax-efficient way to borrow against an appreciated crypto position. Again, this is an emerging technology, so the security mechanisms are not perfectly considered.
Synthetic assets
One fastest-growing sections of DeFi are synthetic assets.
Smart-contracting technology allows developers to create synthetic securities that trade on blockchains instead of via traditional exchange networks. That means it’s possible to create a synthetic stock of a company whose shares trade on the Stock Exchange or Nasdaq.
On Terra’s Mirror Protocol, for example, it’s possible to purchase synthetic stocks, such as Apple. These “synthetic stocks” are simply tokenized derivatives that track the value of an underlying security, as well as the price of the actual underlying asset.v
While not yet popular and highly regulated in the United States, this trend is rapidly growing, attracting more and more new users. Users enjoy trading synthetic stocks because they provide users with tremendous liquidity, borderless transfer of ownership and protection against censorship. One of the fastest-growing aspects of synthetic securities are synthetic funds, which are securities that track exchange-traded funds, such as S&P 500.
Monetization of Gaming Sector
Nowadays, the global gaming sector registers almost $159 billion in expenses by gamers annually. With ~ 2 billion players in the game industry, the sector has grown profoundly as a source of entertainment. However, DeFi trends can also reflect on how the gaming industry would interact in 2022. Players and creators spending endless hours in gaming seek opportunities for further monetization of assets and time in the industry.
DeFi protocols have the opportunity to play a crucial role in the monetization of the blockchain gaming industry and support in-game asset transfers.
In addition, the latest DeFi trends would also emphasize game-based cryptocurrency owners seeking returns on their assets. A survey study reported that almost 82% of developers and 62% of gamers have interest in developing and investing in digital assets with in-game transferability.
Clarity in DeFi Regulations
As of this day, one of the biggest setbacks for DeFi is the lack of clarity regarding regulations. Institutions and users are apprehensive of DeFi due to ambiguous regulations. Generally, regulations are one of the foremost highlights in discussions on “what’s next for DeFi” and are a key highlight in DeFi trends for 2022, as people with financial responsibilities could not access DeFi through unregulated services and platforms.
Regulators will play a crucial role in shaping DeFi trends for the future by tailoring the industry to meet expectations of investors. The regulatory implications of DeFi will continue their dominance in discussions around the growth of DeFi in 2022.
In addition, the DeFi market must also look forward to upcoming regulations such as the EU’s Regulation of Markets in Crypto Assets (MiCA).
Furthermore, rising scrutiny by the US Government and the US Securities and Exchange Commission also emphasizes the need for better compliance with DeFi protocols and platforms. Therefore, you can look at new DeFi solutions in 2022 with KYC/AML frameworks, clear guidelines, and competent cross-border regulatory compliance.
