DeFi was once the hottest crypto trend of 2020, but the sector’s recent slowdown has some wondering whether the boom times are over. While Bitcoin’s taken the spotlight for now, crypto enthusiasts take heed: it would be unwise to count DeFi out.
The decentralized finance (DeFi) sector started out as a relatively niche market before gaining steam in this past summer, propelled by decentralized apps (DApps) and tokens that have attracted crypto speculators and traders alike. After a strong run of record growth, the DeFi sector pulled back in recent months due to a variety of factors, which I’ll outline below. However, despite this cooldown in interest, I believe that all the indicators for DeFi are points towards strong, continued growth over the coming months.
Bitcoin Has Taken the Spotlight, But Not For Long
If DeFi was the story of the summer, then autumn was undoubtedly the season of Bitcoin. Economic instability brought on by the ensuing waves of coronavirus cases and political turmoil caused traders to hedge against the dollar. This time, traders didn’t back gold, the asset that is traditionally negatively correlated to the US dollar. Instead, they turned to Bitcoin (BTC).
Some cryptocurrency exchanges, ours included, experienced record transaction volumes as more people looked to buy Bitcoin. Major traditional financial players also made timely entrances into the crypto space, further contributing to the spike in interest for the world’s most popular cryptocurrency. This snowball effect pushed Bitcoin prices to an all-time high on November 30.
However, as the economy (hopefully) settles over the next few months, helped in part by a number of vaccines that are currently in development, traders may rebalance their portfolios, and return their attention to the DeFi sector for higher yields.
Ethereum 2.0 Will Introduce Scalability, Raising the Ceiling for the DeFi Sector
The upcoming Ethereum 2.0 update will arrive in phases, but its eventual launch will increase the size of the DeFi market. Many of today’s DApps and protocols run on the Ethereum network, and during periods of peak congestion, fees skyrocket and transaction times slow, creating bottlenecks that negatively impact usability. With lower fees and faster transaction times, more people will look to participate in the DeFi space, and these network improvements will improve almost every DApp within the existing ecosystem as well.
My prediction is that Ethereum 2.0 will bring another wave of DeFi related innovation, paving the way for more mainstream adoption to take place.
It’s Not About the Destination, It’s About the (User) Journey
The barriers to entry are daunting for first time users entering the DeFi ecosystem. In order to use a DApp, users must first create their own digital wallet and buy whichever tokens the DApp requires. Users typically choose to buy tokens from an external cryptocurrency exchange, which adds an additional layer of friction to the onboarding experience. Compare this to the last social media account you created. What was the sign-up process like?
Mainstream users want a one stop solution where they can buy tokens, create a digital wallet, and participate in their favorite DApps with a single login. While it’s not an easy hurdle to clear, there will soon be a day where DApps are as user friendly as the centralized applications they’ll be replacing. This is firmly a matter of when, not if.
Today, the DeFi ecosystem is a little bit of a walled garden, which is counterintuitive, seeing as all anyone needs to get started with DeFi is an internet connection and mobile phone or computer.
In the interim, it’s up to centralized exchanges like ours to bridge the gap between centralized and decentralized finance, and provide simple and intuitive products that anyone can use.
The DeFi Ecosystem Will Diversify Its Offerings
Bitcoin was arguably the first DApp. As an application, it allowed users to lend their computing power to verify transactions and “mine” cryptocurrency, which could be stored independently, without passing through a centralized institution. From there, the DApp ecosystem has expanded rapidly, as developers build more financial products to attract users.
In truth, any one of today’s DApps can be the next “killer app”. Success will come down to the teams that can best execute on a proven idea that has the runway for growth. While an outsize share of recent DApps are centered around lending and borrowing applications, this is just the tip of the iceberg: DeFi will continue to challenge the entire traditional financial system, and one can easily trace its pathway from first creating a viable decentralized, digital currency, to stablecoins that mimic aspects of fiat currencies, to the borrowing and lending applications of today.
Each time the DeFi ecosystem creates a viable decentralized alternative to existing applications, it enters a new market as a challenger—which brings me to my next point.
DeFi Is Unstoppable—By Design
At its heart, DeFi isn’t powered by sky-high yields or the proliferation of protocol-of-the-week lending and borrowing applications. It’s powered by the promise of decentralization, which returns control to users rather than institutions. Everyone deserves access to financial services with secure, low cost transactions that are governed by fair operating principles.
DeFi technology adds functionality that can’t be found in centralized institutions: it provides fully permissionless access for global audiences with no single source of failure. In addition, non-custodial protocols give users full control over their assets.
In the meantime, existing institutions must be willing to disrupt themselves in order to keep up. Those who embrace decentralization will be in a better position to maintain their relevance. That’s one of the reasons why we committed $100 million to an accelerator fund that encourages developers to launch DeFi projects on our smart contracts enabled blockchain.
The writing is already on the wall: the future is decentralized, and the DeFi is not just the next big thing in crypto. In fact, it may be the big thing come 2021.
Changpeng Zhao, Founder & CEO, Binance
Changpeng Zhao, known as CZ, is a serial entrepreneur with an impressive track record of successful startups. He launched Binance in July 2017 and within 180 days, grew Binance into the largest cryptocurrency exchange in the world. An expert in blockchain and trading systems, CZ has built Binance into the leading blockchain ecosystem, comprised of Binance Exchange, Labs, Launchpad, Info, Academy, Research, Trust Wallet and Charity Foundation.