According to DeFi Llama, from January 2020 to December 2022, the total valued locked (TVL) in DeFi-related decentralized applications, or dApps, increased from $600 million to $260 billion. This change represents a 43,000% increase in monetary value. Today, multiple decentralized exchanges (DEXs), yield aggregators, lending applications, and many others all exist on various blockchains. As DeFi continues to grow, what is DeFi’s future after 2022?
What is next for DeFi?
- Institutional Investment — Coinshares estimated that cash inflows from institutional investors into crypto totaled $9.3 billion in 2021, $6.8 billion in 2020, and $2.8 billion in 2019. Institutional interest continues to grow, with investors seeking to take advantage of DeFi yield farming, liquidity mining, and many other opportunities. While regulation remains a headwind for institutional investment, the benefits of blockchain and cryptocurrency has more governments amenable to allowing broad crypto use by their citizens.
- Stablecoins — While DEXs and decentralized lending platforms like AAVE have been popular, DeFi’s most impactful innovation has been stablecoins. Stablecoins are cryptocurrencies whose value is pegged to another asset, like gold or the U.S. dollar. Stablecoins are utilized heavily in DEXs, centralized exchanges (CEXs), and lending dApps. In times of volatility, stablecoins are used to manage risk. Since fiat can’t trade on DEXs, USD stablecoins are heavily used, making stablecoins a key component of each public blockchain. The total supply of USD stablecoins has grown from $3 billion in January 2019 to $163 billion in December 2021.
- Decentralized Autonomous Organizations (DAOs): Some countries are pushing regulation that would implement KYC, eliminate the use of unhosted wallets, and attempt to the regulate the code of DeFi applications by targeting the developers. If successful, we can see many people again being left out of the global financial system due to governments’ compelling developers to enforce their public policy or economic sanctions. To avoid this outcome, many dApps are creating DAOs, which allow the community to control the code, use of funds, and other decisions of a protocol. For example, Project Catalyst on the Cardano ecosystem is a platform that allows ADA holders to vote on where to spend money made from Cardano’s treasury. Eventually, Cardano’s developers want to cede all control to a DAO, which will handle any updates to Cardano’s code, developer compensation, and many other aspects of the blockchain. If decision-making is spread across millions of pseudonymous international ADA holders instead of a handful of developers, the thinking is that any government would not be able to regulate the technology of DeFi applications.
- MetaFi — MetaFi has become the term that combines the capabilities of the metaverse and DeFi. The metaverse serves as an interface layer between the virtual and physical worlds, where an economic system has developed based on creators. For example, Pavia created a metaverse of 100,000 land plots, each represented by a non-fungible token (NFT). Users can create avatars to digitally explore Pavia’s digital world. Users who buy the NFT that represents a land plot will be able to create 3-D experiences on that plot of land. Users could create storefronts where others can buy items such as clothes in the metaverse and have them delivered to the user in the real world. Users could also create NFT galleries, instructional classes, or musical concerts. DeFi can be used in many of these marketplaces to buy, sell, or trade NFTs that could represent something of value in the real world like tickets to concerts or subscription to service.
- Social Media —Due to varying levels of content moderation, lack of user privacy, and a lack of user profit for their social media interactions that companies monetize, many people have coalesced the idea of decentralized social media. If a similar decentralized platform such as Twitter or Instagram was created using the blockchain, DeFi could be used to allow any user to be compensated for their interactions on the platform while retaining privacy.