Decentralized finance has long since left its mark on the crypto market. A year ago, the assets managed by DeFi protocols were around one billion US dollars, but the total value locked has now increased to 60 times. Despite some troubles, the young market has quickly become an important part of the crypto space thanks to innovative financial products and passive sources of income and is only just beginning to show its potential.
The success story of DeFi protocols can therefore be explained by the comparatively high potential for returns. According to the report, decentralized exchanges achieve an average of 46 times the return, while liquidity aggregators deliver 22 times the increase in capital employed. The liquidity on the market is also high thanks to staking offers. The automation of financial products through smart contracts also increases capital efficiency. Since no middlemen are involved, not only are fees and, ultimately, personnel costs unnecessary.
The report predicts a prosperous future for the DeFi market. It is not just the “hunt for returns” on the crypto market that will further increase the demand for DeFi offers. Interest is also growing in the traditional financial sector. This overlap will be reflected in “code-controlled, democratized asset management solutions that run on decentralized systems”. In particular, the integration of stable coins will be of great importance in the future.
Making sure users are really involved in the project and transform into a real community is key. Solid tokens, economic models, but also the issuance of incentives will be important to ensure that users care and stay true to the cause.
In this way, DeFi is also becoming more and more attractive for institutional investors who have so far steered a wide arc around the market.
There is a limited but growing acceptance of institutional investors in DeFi, but since crypto companies offer not only private customers but also professional customers attractive returns through an exposure to DeFi, it won’t be as long for institutional investors to react as they did with Bitcoin.
The linchpin remains the Ethereum Blockchain as by far the largest transshipment point for smart contracts and the leading network “in terms of assets, developer activity and users”. With the increasing establishment of Layer 2 solutions, Ethereum is getting its scaling deficit under control. Nonetheless, “living and growing ecosystems” such as Solana or Polkadot are also looking to grow.
DeFi will become the battleground for the leading exchanges thanks to their ability to attract new capital. With returns staying close to zero in traditional finance, crypto will thrive on its ability to generate attractive returns for liquidity providers.
Overall, the report attests that the market is becoming increasingly professional. The topic of regulation will play a major role in the future, especially when it comes to connecting professional investors. However, it is not primarily about legal innovation brakes, but about protecting investors.
Regulation is a key challenge as DeFi is not really on regulators’ radar yet, but initial proposals suggest they want to find ways to hold users and investors accountable when they are unable to enforce the regulation of a DeFi company due to its decentralized nature as a pure tech platform.
Since regulation and protection can be embedded in code and functionality audited, there could be a paradigm shift in terms of regulation and consumer protection. Self-regulation could develop and become the new normal,
Until DeFi has fully regulated itself, however, a lot of training money will have to be paid.
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