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DeFiJanuary 12, 2021

Outlook for DeFi in 2021

Shubham Goyal
Product Specialist
January 12, 2021

If you’ve been in the know about cryptocurrencies for a while now, you must have heard of DeFi, one of the newest hype trains within the crypto space. Indeed, the decentralized finance sector of cryptocurrency has witnessed rapid growth in recent years as the various use cases of DeFi compete with traditional banks and other centralized financial institutions.

Decentralized finance connects protocols in a simple manner, enabling dApp (decentralized application) developers to easily implement newer concepts and features that in turn make DeFi more easily accessible to the general populace. The hype surrounding DeFi originates mainly from the introduction of yield farming – an opportunity that allows crypto traders to earn passive income from the coins they already own.

2020 has been a wildly successful year for decentralized finance as the TVL (total value locked) in DeFi went from less than $1 billion in January to more than $16 billion in December 2020. In the first quarter of 2020, the TVL in DeFi went past $1 billion for the first time. However, it was in quarter three that the TVL climbed over $11 billion. This extent of consumer interest had not been seen since the Bitcoin hype of 2017.

Moreover, the dApp (decentralized application) transaction volume went over $270 billion in 2020. After the massive triumph of 2020, as per this report by DappRadar, DeFi projects will continue to remain a major part of the crypto economy in 2021 as well.

In this post, we round up a list of some of our projections for DeFi in 2021.

What’s in Store for DeFi in 2021?

1. Ethereum’s Dominance over the DeFi Space to Lessen:

At present most of the DeFi network is built on the Ethereum blockchain, largely because Ethereum brought two very essential features to the DeFi system- dApps, and smart contracts.

Ethereum is a platform where developers can create and implement dApps with relative ease, without waiting for a centralized figure to sanction them, using the Ethereum SDK (software development kit). This is mainly why Ethereum houses the greatest number of dApps and DeFi protocols as of right now. However, the flipside to this is that all the DeFi projects Ethereum hosts are subjected to the governing rules established for the Ethereum network as a whole. Plus, the sheer number of decentralized applications and blockchain projects built upon Ethereum has strained the functionalities of the network, significantly slowing it down.

The technical constraints of Ethereum have already inhibited DeFi’s success at least marginally in 2020, and unless the network is updated or Ethereum 2.0 is launched soon, there is a good chance that Ethereum would lose its superiority within the decentralized finance sector of cryptocurrency in 2021.

2. A Prospective DeFi Downtrend:

In 2017, Bitcoin and ICOs (Initial Coin Offerings) saw exponential growth, not unlike DeFi in 2020. However, both of them also faced downtrends within only a year. Since the recent DeFi spike is quite similar to those of Bitcoin and ICOs, it’s likely that decentralized finance might see a downtrend in 2021 as well.

While the Bitcoin hype simply died down with time, the ICOs saw a cool off mainly due to the countless scams and ‘hit and run’ crypto projects that resulted out of the lack of regulation in the ICO market. In 2018, about 81% of all ICOs turned out to be scams. This established ICOs as something investors instinctively began to suspect and avoid. With the current enthusiasm surrounding decentralized finance, there would inevitably be fraudsters and widespread scamming schemes within the DeFi space too. In fact, according to a report published by CipherTrace, 2020 already saw an increase in hacking attacks within the decentralized finance sector.

This can be one of the primary reasons for an upcoming DeFi downtrend, along with the yield farming returns going ever smaller, and the overpriced fees on the Ethereum blockchain.

3. More Focus on Security and Tightening Regulations:

Keeping on a par with the increasing frequency of hacking attacks and frauds in DeFi, in 2021, the regulations for decentralized finance will be more strict than ever. After the exploits in popular organizations like Harvest Finance, more intensified standards of quality would especially be demanded of companies that audit smart contracts and other codes.

Additionally, the numerous scams in DeFi also raise several questions regarding the security of customers. Therefore, it can be expected that more focus will go to consumer privacy and the security of funds in the development of the existing DeFi infrastructure. Ensuring maximum safety of the customer’s sensitive information and funds would include protection from both internal and external attacks, such as hacks and preserving all data from any unauthorized eyes – malicious or no.

4. Pioneering DeFi Projects Like YFI and COMP will Continue to Rule the DeFi Space:

As of right now, there are four DeFi tokens with a market cap of over $1 billion. While it’s pretty safe to assume that the number of billion dollar DeFi protocols will go up in 2021, the previously top DeFi projects such as AAVE, SNX, UNI, YFI and COMP will continue to rule the decentralized finance sector.

Some of the most popular DeFi protocols are:

  • Compound Finance: The very same protocol that brought yield farming to the mainstream, Compound is one of the major DeFi platforms for tokenized lending and borrowing. Any user with an Ethereum wallet can serve as a liquidity provider on Compound, and earn rewards that, as per the platform’s objectives, start compounding right away.
  • Yearn.Finance: One of the core players in the DeFi market, Yearn.Finance provides its yield farmers with the opportunity to easily automate the farming of the maximum yields while also saving up on transaction expenses. Yearn.Finance optimizes token distribution by algorithmically seeking out the liquidity pools with the highest returns.
  • MakerDAO: MakerDAO is another decentralized platform that’s best known for minting DAI, one of the most used stablecoins in yield farming. Yield farmers regularly use MakerDAO to generate DAI for farming strategies. MakerDAO also allows any user to get a loan without third party intervention at any point in time.

And there you have it – some of our predictions for decentralized finance in 2021! Even as the DeFi hype of 2020 seems to be dying down, a large portion of the global crypto community continues to enthusiastically champion decentralized finance. So it’s only natural for the DeFi sector to develop further and generate fresh opportunities and more innovative applications in 2021.

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