The summer of 2020 belonged to decentralized finance (DeFi). Since its breakout, investment in DeFi applications has snowballed. Today, as bitcoin’s rally brings more confidence to the cryptocurrency market, the stage is set for DeFi to deliver on its promise in 2021.
The excitement surrounding DeFi and its various tokens have seen some of the biggest movements in the cryptocurrency marketplace also. For all of the furore at bitcoin breaking its all-time-high in December, yearn.finance, a DeFi token that blinked into existence in July 2020, took less than two months to skyrocket to a value of $43,337 in a move that illustrates the excitement that the technology holds among investors.
(Image: DeFi Pulse)
Here we can see that the total value locked in DeFi accelerated rapidly between June 2020 and the end of the year. With very few signs of the technology slowing down, could 2021 be the year that decentralized finance makes its mark on the world of blockchain? Let’s take a deeper look into one of the most exciting developments in the crypto landscape:
What is DeFi?
DeFi is built on blockchain, a form of technology that allows several entities to hold a copy of a history of transactions, ensuring that it’s free from the control of a single, centralized source. The distributed nature of blockchain is vital because centralized systems can limit the speed and efficiency of transactions while providing an altogether lower level of control over finances.
Blockchain is the driving force behind bitcoin and many other cryptocurrencies. Digital coins stand out from the crowd of payment methods because they remove the middlemen from any transactions that are made. For instance, when you use a credit card to buy groceries from a supermarket, a financial institution controls your transaction while retaining the authority to stop or pause a payment at any time while recording it in a private ledger. Through blockchain-driven finance, these centralized powers are cut out entirely.
Direct purchases aren’t the only transactions overseen by centralized companies. Financial transactions in the form of loans, insurance, derivatives, crowdfunding and gambling among others are in the control of these middlemen. DeFi acts as a solution in cutting out the centralization from all of these transactions, paving the way for truly decentralized financial management.
Building Into 2021
DeFi promises a brand new suite of applications that can automatically execute financial agreements between parties without the need for any centralized mediation. One of the biggest developments has arrived in the form of smart contracts, where complex agreements can be brokered between individuals or organizations where transactions are instantly triggered and recorded on blockchain when certain requirements are met.
While 2020 was certainly a breakthrough year for DeFi, the technology is expected to become more sustainable in the coming months and years, pointing to an even more prosperous 2021 and beyond.
Some financial analysts anticipate that DeFi applications could soon begin to replicate more traditional services but with greater levels of transparency due to their respective blockchain frameworks.
As the DeFi ecosystem grows at speed, here are some of the key developments we can expect to see emanating from decentralized finance in 2021:
More Widespread Exchange Accommodation: As the DeFi market continues to grow at an astonishing pace, the centralized market will begin to try its hand at adapting to accommodate the exciting new arrival on the crypto scene. Notably, Bitrue and Okex have already announced hybrid services in a bid to cater to DeFi and more centralized finance markets.
Financial Products Pegged to DeFi: As the benefits of DeFi become more accessible with accommodation, more efficient decentralized services and products will emerge as the market hits new peaks.
Initial DeFi Offerings: We may see another ICO boom in the crypto landscape, this time coming in the form of initial DeFi offerings. While ICOs have a chequered past in the world of crypto, with decentralized finance creating a greater volume of tangible products, the approach may yield some success in 2021.
The Necessity of Cooperation
Despite the future looking bright for DeFi, in order to reach its full potential, it’s vital that blockchain platforms unite and cooperate with each other.
In traditional finance, it’s hard to imagine payment transfers between two banks being rendered impossible due to a lack of interoperation. It’s this technical issue that needs to be addressed before DeFi can really start to see some form of emergence into the wider financial world. While each blockchain platform undoubtedly carries its own benefits, today they remain largely separated from their counterparts within their own silos.
The benefits of decentralized finance are clear, and with a wider range of popular cryptocurrency exchanges working to accommodate DeFi tokens - and with the meteoric early success of tokens like yearn.finance, as well as the promise of others such as Uniswap - 2021 looks set to be a bright year for DeFi. However, if blockchain networks can interoperate to overcome their silos then we may be looking at a truly transformative year for digital finance.
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