Figuring out where decentralized funding began almost always ends in a rhetorical debate. Some argue that the invention of Bitcoin (BTC) a decade ago marked the beginning, as the main cryptocurrency was the first peer-to-peer digital money and represents the conceptual core that underlies DeFi. Others say – and this would be technically correct – that DeFi was launched back in December 2017 when the Ethereum-based MakerDAO protocol was launched, followed by Compound Finance and Uniswap, which were released in September and November 2018, respectively. On the other hand, it wouldn’t be difficult to say that DeFi’s real rise began this year.
The monumental spike in DeFi’s total value, which began this summer and topped $ 16 billion this month, has undoubtedly made the sector one of the most debated topics of 2020. And as expected, there are those who support him and those who criticize him.
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Although DeFi is among the hottest topics this year, they still argue that DeFi remains largely a niche financial tool in the world of global finance. Unsurprisingly, the rapid growth in money pouring into space resulted in some DeFi comparing to the initial boom in coin supply of 2017 and predicting its possible failure. In the meantime, others claim that multiple projects in the room are not really decentralized and do not represent the true idea of DeFi.
Other concerns are heavily related to transaction fees on the Ethereum network, which has peaked several times this year and calls into question the long-term sustainability of the network. However, it would be wrong to hold DeFi solely responsible for high gas charges, as these are also influenced by the way institutions store and secure digital assets. One of the solutions could be to unlock Bitcoin’s $ 250 billion treasure chest for DeFi products.
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While the concept of DeFi looks promising, there are some pitfalls, obvious financial risks, and a number of technical risks. It just seems necessary that the underlying infrastructure be improved for most of the distributed applications.
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In the long run, decentralized funding has the potential to change our world, where 1.7 billion people still do not have access to traditional financial services. Returning to the rhetorical debates about the origins of decentralized funding, DeFi could be said to complete the job started by Bitcoin, making it the second step in decentralized evolution with the potential to solve the financial inclusion problem.
Towards the end of 2020, Cointelegraph reached out to experts in blockchain technology and the crypto space for their opinion on a “DeFi Year”.
How did DeFi impact the crypto industry in 2020 and what can we expect from the DeFi space in 2021?
Brendan Blumer, CEO at Block.one:
“The decentralized financing was certainly one of the most important features of the year. The billions of dollars in funds poured into the ecosystem underscore the widespread interest in DeFi. However, this surge in attention has also sparked the skepticism of regulators who want to understand the limitations and feasibility of DeFi applications.
At Block.one we believe that there has to be a DeFi development in order to achieve a sustainable connection to the old economy and the creation of a more open financial system. We call it Open Programmable Finance or ProFi. We see ProFi as a bridge between the transparency and integrity of the EOS blockchain and the regulated financial world.
A key differentiator between DeFi and ProFi is that ProFi companies include risk-based, approved access to transactions based on regulations and compliance. Crypto compliance and regulatory frameworks are taking shape and are rapidly maturing. The real winners in the digital economy will be those who think long term and take the time to ensure their products meet legal and professional service requirements. “
Brian Brooks, Acting Auditor of Currency for the U.S. Treasury Department’s Auditor of Currency:
“Decentralization is one of the two great forces reshaping financial services. Along with the unbundling of the three traditional core banking activities of lending, payments and deposit making, decentralization is changing the way we consume financial services and how banks operate. In my opinion, we are still in the first quarter of a longer game and many of the greatest benefits and advances are yet to come. “
Da Hongfei, Founder of Neo, Founder and CEO of Onchain:
“While blockchain-powered financial solutions are not new, this year at DeFi we have seen exciting and innovative breakthroughs ranging from exciting new protocols to improved cross-chain asset bridges.
I believe that the blockchain space encompasses both decentralization and interoperability, and I am confident that both will move forward rapidly in the coming year. With the most modern interoperability protocols such as Poly Network, we create the basis for the intelligent economy of the future, a world that is truly globalized and without borders. “
Dan Simerman, Head of Financial Relations at the Iota Foundation:
“I agree that 2020 was a ‘DeFi year’, mainly because DeFi projects dominated in terms of technical innovation and development. I would also say that DeFi has shown the crypto world that innovation is still possible and that new projects can fuel liquidity, funding and engagement in novel ways. After the ICO craze ended in 2017, it was believed that new projects would find it difficult to break into a market where private funding takes precedence over crowdsourcing innovation. Thanks to the tools developed in the DeFi bubble, we will see a lot more innovation in the months ahead.
In 2021, some of the core innovations, like pool lending and liquidity mining, will infiltrate applications that we would not consider “financial”. Entrepreneurs, developers and companies looking to choose a blockchain will expect these core components to be available as part of their DApp toolbox. What we saw as radical financial instruments in 2020 will become a de facto requirement for blockchain and ecosystem selection in 2021. We may even see some of DeFi’s core innovations find their way into the world of centralized finance. “
Denelle Dixon, CEO and Executive Director of the Stellar Development Foundation:
“I’ve seen growing focus and headlines about DeFi in our industry in 2020. But even if the term is ubiquitous these days, I think DeFi means many different things to people and translates into many different and existing projects that are emerging. As a result, I find it hard to classify the year as a whole as a DeFi year, but I think the DeFi craze of blockchain and crypto has brought in a lot of new talent and interest, which is good for the whole industry. There’s already a lot you can do on Stellar that falls within DeFi’s realm.
Still, I think this creates important considerations for all of us as to why DeFi has a focus and whether we can make adjustments to ensure we meet those requirements. “
Emin Gün Sirer, CEO of AvaLabs, Professor at Cornell University, Co-Director of IC3:
“DeFi on Ethereum has skyrocketed this year, building a vibrant community of applications and users. At the same time, the hacks and scams we’ve seen underscore how much work is left to harden the community while enormous amounts have exposed the limits of DeFi for Ethereum 1.0.
The congestion on the network pushed fees to new highs, creating systemic risk as much of the market was driven by high leverage and secured credit. In the event of a price volatility, which can normally be absorbed by the system, domino effects have been triggered by liquidations that were triggered because users cannot provide collateral or leave their position.
The main problem here is that Layer 1, on which the DeFi activity takes place, is too congested. I believe the introduction of new, scalable layers like Avalanche will change that. We’ll see DeFi expand even further. “
Heath Tarbert, Chairman and General Manager of the US Commodity Futures Trading Commission:
“DeFi is a growing global trend and its emergence shows how innovations keep reinventing the financial services sector. By combining multiple technologies to deliver financial services in new ways, DeFi could potentially provide an opportunity to expand access to the financial market to a wider range of individuals and businesses. It’s a new way of looking at finance that uses and reflects the new ways of interacting.
We can’t just think of the previous way of going to a bank or broker that you have known for years, especially if you want to expand access to financial markets and services. In the past, innovation has driven our markets and has been the linchpin of their success.
I think as a regulator we should expect DeFi to keep evolving and growing. Each regulator needs to figure out how DeFi affects their own jurisdiction. In the absence of regulation, industry must figure out how to ensure market integrity and consumer protection – all areas on which regulators will focus in the future. “
Jimmy Song, Lecturer at Programming Blockchain:
“As for the new scam vehicle, that is absolutely correct. Such scams have not increased since the ICOs of 2017-2018. Of course, this is nothing new, as evidenced by altcoins from 2011 and token sales from 2013 to 2014. I have serious doubts about the ecosystem. In three years it turns out that DeFi Not To be a zero sum game that will benefit the people who create the tokens, I’ll reconsider.
I assume 2021 will be more of the same as people have a hard time learning that all of these things are minimally useful at best. I assume that 2022 will be the year when it finally comes to a standstill. “
Joseph Lubin, Co-Founder of Ethereum, Founder of ConsenSys:
“The fact that the value attributed to the DeFi protocols has increased from $ 675 million to nearly $ 15 billion in one year is evidence that DeFi, or what I call it, is ‘open decentralized funding’ has great year. However, this is not just a new exciting use case for crypto, but the coming together of an entire decentralized financial ecosystem, the components of which have been around for several years. Many in our field refer to these as Lego blocks, or composable open source systems that enable more complex financial applications that anyone can access. It started with a collateral-backed stablecoin (DAI), the borrowing and lending of these stablecoins and opportunities for efficient trading without a centralized exchange (automated market makers such as Uniswap and 1 Zoll). We’re now seeing insurance protocols, wealth management platforms, and even new financial innovations like flash loans.
Our wallet and portal to every DeFi application, MetaMask, have improved the user experience over the past few years, making it easy for anyone to switch accounts and grant permissions only to apps and websites they trust. Their mobile app also makes it easier for DeFi apps to reach a wider audience, which is estimated to employ nearly 2 billion people, or about 60% of the internet connected population. Over 65% of MetaMask Mobile beta users were outside of North America and Europe, where mobile is widespread. We heard from users that using MetaMask Mobile came in handy for individuals to exchange crypto tokens, sell NFT art, and earn an interest in providing collateral – all through a mobile phone.
ConsenSys started when there was no real ecosystem, no infrastructure, and no developer tools. Now our developer tools like Truffle serve millions of developers looking to build their own applications. Infura supports more than 130,000 developers by providing a node-optimized cloud infrastructure that makes it easy to deploy applications without running infrastructure. And with millions of dollars at stake, our audit team, ConsenSys Diligence, ensures that smart contracts are tested and secure prior to deployment. All of these contribute to the rise of DeFi as it is easier for developers to start a project based on a vibrant open source ecosystem.
One trend that I expect to gain momentum in 2021 is that institutional funds and professional traders increasingly want exposure to DeFi. That is why we have created an institutional version of MetaMask and are starting to integrate custodians and professional traders to incorporate MetaMask into their technology so they can be seamlessly known.
I think the macroeconomic trends of lower (and even negative) interest rates worldwide will make DeFi increasingly relevant to ordinary people. It’s not just the technical and financial nerds who find this interesting. If bank accounts offer many different functions that make it easier to borrow and lend, give more people the opportunity to participate in the uptrend in the markets, and even generate more returns, more people could switch to the decentralized financial lines. As long as the old financial world collapses, people will be pushed in our direction.
I am also watching how gaming will act as a catalyst for the adoption of Ethereum-based NFTs for consumers. “
Mance Harmon, Co-Founder and CEO of Hedera Hashgraph and Swirlds Inc .:
“The rise of DeFi in 2020 laid the foundation for companies to embed component finance directly into their business processes. While the DeFi bubble of 2020 is in some ways similar to the ICO craze of 2017, the fundamentals of the DeFi movement will change the face of finance going forward.
DeFi will make traditional financing operations faster and cheaper for businesses, government agencies and individuals. It will transform every financial transaction we undertake as an organization as well as in our personal lives. “
Meltem Demirors, Chief Strategy Officer at CoinShares:
“Much of the financial industry is based on two core concepts – securitization and lending. The crypto industry has been concerned with securitization and credit since its inception. With the advent of colored coins for Bitcoin and the ERC-20 standard, this securitization became much more accessible, enabling securitisations through tokenization as well as the growth of asset-backed credit markets where holders of Bitcoin and other highly liquid cryptocurrencies could leverage their holdings access cash and get extra leverage. In 2020, securitization and leverage have found new media in the form of DeFi, effectively migrating these activities, traditionally coordinated by trusted intermediaries such as banks, brokers and asset managers, to a peer-to-peer blockchain. native medium that effectively replaces trusted intermediaries with verifiable technology in the form of open source code, i.e. the contracts that govern DeFi projects.
DeFi is a step in a path that many of us in the industry have seen as inevitable – securitization, lending, and many of the core funding functions of banks and other intermediaries can be effectively migrated to low-trust crypto-basics. With millions of people around the world having billions in crypto assets, it is only inevitable that a market will develop to make those assets financially productive. We have invested time, energy and capital in the DeFi space and we look forward to doing the same in 2021.
The institutes are not quite ready for DeFi yet, but they are not making a mistake. They will try to replicate their existing business models (and associated revenues) using crypto as security. We expect more regulatory pressure and therefore more anonymous developer-founded projects, as well as the emergence of stablecoins that don’t have a single checkpoint, like Empty Set Dollar (ESD) or Basis Cash (BAC), two early leaders in this space. We expect more assets to be “packaged”; H. Securitized and provided as collateral in the chain, and we look forward to a more resilient rate market starting to assess risk and duration across the DeFi space.
Ultimately, leverage is a hell of a big drug, and the industry will continue to innovate to keep the flow of capital free. Without access to a money printer, innovation will continue to fuel liquidity in the trading ecosystem, where the demand for cash and leverage will continue to outpace supply, which will lead to further securitization and tokenization of assets as companies start creating more esoteric types of collateral and sub- Investigate secured or possibly even unsecured loans. “
Michael Zochowski, Head of DeFi at Ripple:
“2020 may not have been the year of DeFi, but it certainly served as a coming-out party. Within the crypto community, DeFi was the most talked about topic when we started to see its potential, but we haven’t seen it jump to mainstream yet as most of the current users are those who have already looked into crypto . In order for DeFi to break out of its bubble, we need a strategic partnership with a conventional player such as a financial institution or fintech.
History will repeat itself – as we saw with the altcoin boom in 2017-2018, many projects, including some of the 2020 darlings as we are already seeing, will stall, consolidate, or be acquired. Those with real utility have earned a spot in crypto. The simpler applications that replicate basic financial services such as packaged assets and decentralized exchanges are likely to be most successful.
New DeFi platforms will gain in importance as it becomes increasingly clear that performance and costs need to be improved significantly. Expect more sidechain projects, bridges between networks, and smart contracts that get new networks going – as these new systems emerge, interoperability and efficiency will become more important. With Eth2 still years away, I assume that by the end of 2021 at least 25% of the value provided in DeFi will be in networks alongside Ethereum. Strong momentum will emerge through 2022 when Ethereum continues to fall behind on its upgrade plan. “
Mike Belshe, CEO at BitGo:
“That year DeFi became a household name, or at least a recognized term, in most financial circles. BitGo has long been involved in DeFI and one of our products – Wrapped Bitcoin (WBTC) – launched in January 2020 and is now widely used in DeFi. In less than a year, the market cap for WBTC has grown to $ 1.6 billion.
BitGo has the role of sole custodian for WBTC. This means that we secure every bitcoin deposited with Mint WBTC. For every 1 WBTC there is 1 BTC in BitGo’s vaults, which are kept safe.
The core strength of WBTC is the transparency and verifiability of the system which, combined with BitGo’s track record in security, has made it possible to attract DeFi’s institutional and retail users and build a significant amount of liquidity as its market capitalization continues to grow.
We are confident that DeFi applications and use cases will continue to gain momentum in 2021. We will see innovations from decentralized lending to collateral and insurance that can build on the DeFi infrastructure even without our involvement. The diverse blockchain community identifies exciting use cases that go well beyond what the technology was originally designed for. This untied potential for new developments is the reason why we are so passionate about building in this space. “
Paul Brody, main and global innovation leader for blockchain technology at Ernst & Young:
“DeFi is great and exciting because the truth about smart contracts is that most of them aren’t very smart. In the past they were little more than registers of ownership of assets. With the introduction of DeFi, we’ve moved from thing to thing and we’re much closer to actually achieving the goal of smart contracts.
We are now entering the exciting and scary era where smart contracts move, hack and exploit assets and money in an automated manner and we are learning how to deal with these risks while creating value. We’re already seeing a bit of that, but it will go much further in 2021.
For 2021, I hope not only that the DeFi contracts are mature, but also that we move from DApps to something we call Zapps – knowledge-free applications – privacy-focused versions of DApps that can be used by businesses. I think we’re going to see a much more serious approach to testing and safety as well.
Finally, I hope that in 2021 decentralized applications beyond finance will emerge. Decentralized processes, business systems and infrastructures lie ahead of us. You take the concepts first implemented in DeFi and apply them to a much wider range of services and systems, from inventory to manufacturing to procurement. “
Roger Ver, CEO at Bitcoin.com:
“Like cryptocurrency in general, DeFi is just getting started. It’s just one more area that Satoshi Nakamoto’s invention made possible.
Cryptocurrency, tokens, decentralized crowdfunding such as Flipstarter, ICOs and much more are now possible. The ecosystem is just beginning and we are all happy to be part of it. “
Samson Mow, Chief Strategy Officer at Blockstream:
“2020 was a DeFi year if we define a year based on hacks and mistakes. Much like Ethereum, DeFi has helped enrich some insiders and make many others lose money. I would expect 2021 to be just more of the same. “
Scott Freeman, Co-Founder and Partner at JST Capital:
“2020 was a remarkable year for all of cryptography, not just DeFi. Even so, we have found that the institutional growth within DeFi is remarkable and perhaps even more surprising than the institutional adoption of Bitcoin. We have also seen that liquidity on decentralized exchanges and credit platforms has improved dramatically.
We assume that DeFi will continue to grow in 2021 as we see more solution-oriented projects instead of interesting technologies looking for a problem to be solved. “
These quotes have been edited and compressed.
The views, thoughts, and opinions expressed are the sole rights of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.