With an explosive growth that has brought DeFi on the verge of the mainstream, the year 2020 came with a new wave for financial innovation. So much so that the total investments locked in the DeFi industry broke records with a massive value of $16 Billion in December. An invincible surge that started in early 2020 came with an increase of about 2000% in the total value locked by the end of 2020.
Multiple DeFi projects contributed to this monumental rise and crossed $1billion in total value locked. Lending protocols emerged as the drive for this growth by accumulating maximum investments in the whole crypto space. The lending protocols Maker, Aave, and Compound ascended to become the leading projects of the DeFi ecosystem with respective TVLs of $3 billion, $2.08 billion, and $2.07 billion.
Here are some of the important events to happen in decentralized finance in 2020 that accelerated the adoption of DeFi in 2020:
- Control Distribution by Compound: Compound, one of the biggest lending protocols in the DeFi space today, distributed its COMP token and gave governance control over to its users.
- SushiSwap Dawns Vampire Mining: In August, SushiSwap was launched as a fork of Uniswap, a popular decentralized exchange. By incentivizing Uniswap’s liquidity providers with its governance tokens, SushiSwap took liquidity away from Uniswap, and the concept of vampire mining was born.
- Yearn.Finance and the Farming Craze: Yearn.Finance, launched in July 2020, set in motion a yield farming frenzy by establishing a protocol to find the best returns in the DeFi ecosystem by investing deposited funds through different DeFi protocols.
- UNI Token Launch: Uniswap, a leading decentralized exchange, launched the UNI token. The UNI token was Uniswap’s governance token which led to a large increase in volumes that rivaled various centralized exchanges like Coinbase.
- Wrapped Bitcoin Crosses $1 billion: Wrapped Bitcoin (WBTC), an ERC-20 token that lets bitcoin investors access the Ethereum-based DeFi ecosystem, crossed the $1Billion mark on August 15, 2020.
There were many events as well that made it apparent that the theme of crypto space in 2020 was “The exponential rise of DeFi”. But what caused the average investor to be interested in the DeFi space? Was it the continuous innovation and increasing use-cases? Or the Global uncertainty in traditional financial products because of the pandemic? Let’s take a look.
Reasons for Unstoppable Growth in DeFi in 2020
The year 2020 was as dramatic as it could be for the DeFi ecosystem. Waves of new users, favorable changes in the monetary policies of central banks, and the pace of innovation have all contributed to the rise of DeFi.
Let’s take a look at some of the primary reasons for DeFi’s unstoppable growth in 2020:
The performance and utility of DeFi projects have always been one of the key factors that determine its success in the DeFi space. In 2020, many DeFi projects like Aave and Uniswap were seen to release newer versions of their protocols that featured much higher complexities than their previous versions.
A higher level of complexity promises greater performance and utility and offers higher yields for investors which sparked competition. DeFi platforms became progressively creative and designed instruments that delivered higher returns.
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- User-Centric Improvements
A fair amount of acceleration in DeFi adoption in 2020 was caused by user-centric improvements in DeFi projects. Leaders of decentralized finance realized the importance of user experience, cost efficiency, and education as the three drivers of platform growth and adoption. Improving user-experience, promoting a better understanding of DeFi among users, and showing the cost-efficiency of DeFi instruments comparing to traditional finance caused the enormous increase of users in 2020.
- Rise in Global Uncertainty
Finance witnessed multiple failures of traditional financial systems while dealing with the pandemic. The economic slowdown brought on by the COVID-19 pandemic and unprecedented changes in the monetary policy increased uncertainty among people. People started looking towards alternative financial products and services to protect their savings.
Experts believe that while the overall interest in DeFi has experienced a steep rise over time, the response it has received is magnified because of mistrust and uncertainty in traditional financial instruments due to the pandemic-induced economic fallouts. This has allowed more and more people to see value in using more transparent and efficient solutions for finance.
Rapid innovation has been the biggest contributor to the market developments in DeFi. A dramatic number of DeFi projects or their new versions, powered by new protocols and cutting-edge technology, were launched in 2020. All of these DeFi protocols promoted the central idea of providing value to users.
Not just the new projects that provide unique features for a specific use-case and spark competition, DeFi’s growth can also be attributed to the increasing number of use-cases for DeFi platforms. For instance, DeFi allows users to generate credit and creating a loan for themselves wherein the users are their bank and use their assets as collateral. DeFi platforms can also be used to store or transfer credit.
One of the fairly new use cases is one where the DeFi platform allows its users to invest in assets that were completely unavailable to consumers in the traditional landscape.
- Yield Farming and Staking
Before 2020, DeFi was just about replicating traditional financial services in a decentralized format and offering it to users. The year 2020 also came with new applications of DeFi that revolve around provide new kinds of earning opportunities for their users.
Yield farming emerged as a great earring opportunity for cryptocurrency traders, after Yearn.Finance was launched in July, which helped them garner higher returns on their investments. Platforms like DMM also become a phenomenon that enabled users to mint tokens and pool them together with preexisting tokens on Uniswap to create a secondary market. These tokens could then be staked by users in the liquidity pools to earn more of the protocol’s control governance tokens.
It is pretty evident that a variety of factors weighed in to ensure incredible growth for DeFi. But these factors weren’t the only ones that caused DeFi to boom in 2020. Various DeFi projects contributed notably as well.
The Most Notable DeFi Projects of 2020
Lending platforms, decentralized exchanges, and liquidity protocols led the rise of DeFi in 2020 with innovation and improvements. Many of these DeFi projects went through wild fluctuations in terms of investments and price action of their digital tokens.
Lending protocols are undisputedly the most popular DeFi projects. They grew astronomically in 2020 with industry leaders like Maker, Aave, and Compound with TVLs that went as high as $3 billion, $2.08 billion, and $2.07 billion respectively.
Decentralized exchanges were revamped with a new range of DeFi protocols that transformed them into high-volume, high-yield exchanges that promised high returns regularly. Uniswap and EtherDelta are the most prominent examples of such decentralized exchanges.
The yield farming mania reflected the radical nature of DeFi space. Some DeFi projects took the advantage of new investors that feverishly invested in them to chase the yields where in fact, they were the source of the yield. But, yield farming also encouraged the emergence of many top-notch DeFi projects that offered new and revolutionary financial concepts that deliver higher returns to the investors.
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Take a look at some of the most successful DeFi projects of 2020:
Aave, an open-source and non-custodial borrowing protocol, emerged as one of the most successful DeFi projects in 2020. It is used to earn interest on deposits and borrow assets. The decentralized money market was launched in January 2020. It grew to a market size of over $2billion with innovations such as flash loans, stable rates, credit delegation, among others. The second version of the protocol was launched in December 2020 with far-reaching improvements in user experience.
It won’t be wrong to say that Uniswap laid the foundation in accelerating the DeFi boom in 2020. The decentralized exchange provided a new platform where anyone could create and list a token on the Ethereum blockchain without a worry of listing fees or exchange incubation programs. Investors have been turning to Uniswap for the past year because of its flexible crypto strategies such as yield farming.
With a daily volume averaging less than $1million in the first half of the year to accruing billions in liquidity with daily volume peaking at $1billion, Uniswap became the most popular decentralized exchange in 2020. Uniswap’s volume and liquidity figures consistently rival established centralized exchanges.
Yearn.finance features various services such as money lending, liquidity provision, and insurance. The main reason of glory for Andre Cronje’s Yearn.finance was the rising popularity of the governance tokens of DeFi projects like Aave, Compound, and Balance.
The project saw multifold growth in capitalization after the launch of its governance token YFI in mid-July as investors started taking interest in the protocol and began to pour liquidity. The Yearn.finance market cap sits at around $734 million as of mid-December 2020.
Compound emerged as one of the leaders among money-lending protocols in the DeFi space in 2020 as it rose rapidly with the launch of its own governance token COMP. The governance token allowed people to get amazing returns by benefiting from the liquidity locked in the protocol and mining the YFI. Compound’s market cap sits at around $660 million as of mid-December 2020.
In 2020, Synthetix became the most popular synthetic asset in the DeFi ecosystem. Synthetic assets are derivative assets that are created through liquidity locked in different liquidity protocols. They allow investors to peg the protocol’s token to any underlying asset and thus diversify their investments with a single token. Synthetix’s reported market cap as of mid-December constitutes around $560 million.
All of these projects, and many more, have a considerable contribution in showing the potential of DeFi to the financial world.
But will this surge in public trust and interest, and hence liquidity remain invincible? Or will it fade in 2021? Let us take a look at some of the trends that are most likely going to be set in motion in the DeFi space in 2021.
Trends in the DeFi space for 2021
Even after such a successful year for DeFi, there are some people who still think of this growth as a bubble. On the other hand, the enthusiasts keep funneling money into the projects that grab their attention with the argument that people are increasingly showing interest and seeing value in DeFi projects. Which side of the argument dominates in 2021 is yet to be determined. But there are some trends that are starting to shape up in the DeFi space for 2021.
- Tranche Lending Solutions
Frequently changing interest rates in DeFi and the volatility that comes with it prevents individuals and institutions to enter the DeFi space in the hope of predictable and stable returns. Tranche lending products have recently emerged as a solution for this and have received significant interest. Being built on the existing lending protocols, tranche lending solutions exemplify the composability of these innovations.
- High Fee Challenges and Solutions
Innovation and participation in DeFi come with the challenges of high fees. The Ethereum blockchain has especially been affected adversely due to high fees caused by the rising popularity of DeFi projects. This is also one of the significant challenges in the way of DeFi adoption.
The year 2021 will see a lot of solutions for the challenges that come with the issue of this high fee. In other words, different types of blockchains might be seen trying to attract Ethereum-based DeFi applications. But it is not yet clear what the results will be since there are various scalable solutions like Layer 2 protocols built on top of Ethereum that batch transactions before attesting to the Ethereum mainnet.
The network effects of Ethereum pose serious challenges in terms of speed when it comes to DeFi applications rewriting their smart contracts in a new protocol. This has created some bottlenecks in the growth of DeFi. Many crypto assets like bitcoin (BTC) and filecoin (FIL) are being tokenized on Ethereum due to this reason. This trend of tokenization might accelerate in 2021.
2021 might also be the year of interoperability in DeFi because of the network effects and high fee challenges of Ethereum. Although interoperability between different blockchain is still being researched, more projects might consider moving to other protocols ahead of Ethereum 2.0. But it seems more likely that Ethereum will push more activity to Layer 2 protocols that already interoperable with Ethereum rather than other blockchains.
Staking was introduced last December when Phase 0 of ETH 2.0 went live which started with the launch of the deposit contract in November. At the time of writing, the amount that was staked was a massive ETH 2.84m (USD 3.6bn).
Although most of the stakers were aware of the fact that their ETH is locked there for a couple of years, many DeFi solutions came through for stakers wanting liquidity and mobility on their staked ETH. The most popular instances are LiquidStake’s USDC loan on staked ETH, Lido’s derivative stETH, and Coinbase’s derivative version of ETH.
Taking a look at the trends that are shaping up for 2021, it is evident that a better part of the DeFi projects that will rule in the year is going to be the ones that provide solutions for the challenges that are limiting the growth of DeFi.
5 DeFi Projects to be on the Lookout for in 2021
Let us take a look at some of the most promising DeFi projects that have the potential of unlocking the untapped growth opportunities in the DeFi space:
Radix is a first layer 1 protocol that aims to solve the glitches and scalability issues that persistently hinder the function of protocols like Ethereum. It tops our list because it is built specifically to solve the obstacles that are holding the rapidly growing DeFi industry back. The protocol is also receiving significant attention in the DeFi space because of unmatchable innovation with technology that outcompetes across all metrics.
DeFi experts believe that Radix will be the next “blue-chip” protocol in the ecosystem because of its ability to deliver seamless linear scaling without breaking composability. The exuberance around Radix seems rational considering that it challenges payment networks based on traditional finance like Visa, in terms of speed.
Radix has its own functional programming language, a building block development environment like Legos, and various on-ledger developer incentives. This allows Radix to offer a superior level of scalability, security, and decentralization without any tradeoffs, exactly what the expanding DeFi ecosystem needs. Radix is the only DeFi project that is offering this unique, future-proof solution for scalability and composability.
Finxflo is a unique solution that provides a liquidity sponge for users and allows them to execute trades at the best prices via more than 25 CeFi and DeFi venues. The world’s first regulated hybrid liquidity aggregator compiles this liquidity through one platform without the need for multiple accounts. This not only delivers minimum slippage but also reduces risk and eliminates withdrawal fees. Finxflo users are protected from front running and can access optimal prices without limitations on liquidity supply.
The Finxflo ecosystem is powered by the native FXF token. The FXF token is a blockchain 3.0 asset that allows users to mine FXF tokens by trading on the platform. Investors with FXF holdings have access to additional features like staking, liquidity mining, governance voting rights, and reduced trading fees.
Cross-chain interoperability across the Ethereum and Tron ecosystems and access to DeFi space also enable their users to participate in yield farming, liquidity provision, and arbitrage opportunities. According to a recent announcement, their token-based capital raise will complete its final stage on Polkastarter in early February.
For unlocking the true potential of the DeFi ecosystem, new users need to be educated and familiarized with its various functions and processes regardless of their experience level. DAOVentures is a DeFi project that is going after this role and aiming to eliminate quick information cycles, challenging learning curves, and complexities that currently exist in the industry. Every novice or aspiring DeFi user wishes for a product that could provide assistance in simplifying DeFi- DAOVentures aims to do just that.
Their Robo-advisor and automated money manager are both simplifying DeFi investments for everyone from sophisticated DeFi investors to first-time DeFi users. DAOVentures offers a robust set of tools to evaluate, track, and invest in various DeFi opportunities to its users. It also offers self-custody that ensures the control and safety of funds for its users. Enthusiasts in the DeFi space are highly anticipating the token launch of DAOVentures in February.
Manta Network is a wide network of open-source, secure, and auditable protocols based on Substrate frameworks that uses zkSNARK. Manta Network will run as a layer-one Polkadot parachain which will allow it to offer complete end-to-end anonymity, high throughput, and high cross-chain interoperability.
The DeFi project enables users to swap Polkadot and its parachain tokens with corresponding privacy tokens, pay with privacy tokens, and redeem base coins from privacy tokens. Being as flexible as it can get, it also allows its users to trade private versions of tokens on the platform anonymously. This was something that the DeFi ecosystem found challenging before Manta Network.
Apart from this, Manta Network also provides solutions to front-running and unauthorized transaction or asset viewing by solving the existing pseudo-anonymity problem in DeFi transactions. The MANTA utility token holders reap the benefits of both governance and redemption value from privacy-preserving network usage and growth in DeFi, with fees collected for minting or exchanging private tokens.
e-Money is a DeFi project that is innovating by introducing a new form of multi-currency stablecoins that are fully backed by bank deposits and government bonds, such as the eEUR. Since their currency-backed stablecoins have more in common with a bank deposit than cash, they are interest-bearing and can increase in value over time.
Collaterizing the stablecoins using bank deposits and government bonds also makes them more resilient to changes in the economic climate. Hence, these fiat-backed tokens keep offering benefits to their owners with positive interest which accelerates DeFi adoption by considering the needs of investors with lower risk profiles.
Speaking with respect to the growth of DeFi, the year 2020 was about innovating and introducing new solutions, features, and practices to the DeFi ecosystem. To continue this seemingly unstoppable growth, the DeFi space needs solutions that revolve around obliterating barriers that hold it back. DeFi projects that solve the problems of flexibility, scalability, volatility, and compatibility will be paramount. With DeFi projects like the ones mentioned above, 2021 might be the year when DeFi hits mainstream and achieves mass-adoption.