DeFi and Crypto: A Retrospective and Analysis of the 2022's Developments and Trends
Thoughts, perspectives, and outlook on the future of DeFi.
Who Am I?
Hi, my name is Jack Lipstone and I am an investment partner at Chapter One, an early stage fund. I focus on searching and investing in innovative, high-growth startups with the potential to disrupt their respective industries, predominantly decentralized internet. I have a strong passion for meeting and working with ambitious entrepreneurs to help them bring their ideas to life.
Introduction
Decentralized finance (DeFi) is a relatively new phenomenon in the world of finance, but it has already made a significant impact on the economy and has the potential to revolutionize the way that financial services are provided and consumed to the masses through a new type of technology. DeFi refers to financial protocols that are built on blockchain technology and operate in a decentralized manner, without the need for intermediaries such as banks. Since its inception, DeFi has grown exponentially, with the total value locked in DeFi protocols reaching over $100 billion in 2021. Since all time highs, DeFi total value locked (TVL) has retraced back to $42B in circulating value at the end of November 2022.
At Chapter One, we believe that DeFi has the potential to democratize access to financial services and increase transparency and efficiency in the financial system. In this publication, I will explain the history, potential, and impact of DeFi on the financial system, as well as the challenges and opportunities that this industry displays.
2022 DeFi in Review
DeFi thrived continuously throughout 2020 and 2021. Billions of dollars entered protocols and the mainstream began to hear about high yield opportunities and niche forms of opportunistic investments. The core lending protocols (Aave, Compound Finance, and MakerDAO) saw increases from ~$5B all the way to ~$45B. Towards the end of 2021, DeFi had reached Its peak of $199 billion of locked value inside all of the smart contracts.
In 2022, economic uncertainty and fears of recession emerged due to the Federal Reserve's efforts to manage inflation and maintain employment levels, while also supporting the long-term growth of the US economy. During times of uncertainty, it is common for the most volatile and emerging asset classes to be impacted, such as crypto. For example, the total value locked in DeFi saw a decrease to around $40 billion and value in smart contracts has remained stagnant since then. The crypto markets have experienced notable declines due to centralized failures, the FTX craze, and the LUNA/UST collapse, in addition to other global tensions.
Although the TVL in DeFi protocols has decreased significantly from its 2021 peak in terms of dollars, the number of cryptocurrency tokens being held in these protocols has increased.1 This suggests that users are more interested in holding their tokens for the long term and earning rewards through staking, rather than quickly buying and selling (farming and dumping) as is often the case during bull markets.
However, some DeFi protocols that have gained significant traction and adoption include:
MakerDAO: MakerDAO is a DeFi protocol that allows users to collateralize assets, such as cryptocurrency, to borrow stablecoins, such as DAI. MakerDAO has generated significant revenue through the issuance of DAI and through interest and fees charged on loans. As of December 30, 2022, the TVL in MakerDAO's stablecoin system was approximately $5.9 billion, reflecting the activity of the DAI stablecoin and confidence from investors in decentralized currencies.
Compound Finance: Compound is a DeFi protocol that allows users to lend and borrow assets, such as cryptocurrency, using smart contracts. Compound generates revenue through interest and fees charged on loans.
Uniswap: Uniswap is a DeFi protocol that allows users to exchange assets, such as cryptocurrency, using smart contracts. Uniswap generates revenue through fees charged on trades.
With regards to DeFi protocols and their incentive models, some that have succeeded include:
Governance tokens: Many DeFi protocols issue governance tokens, which allow token holders to participate in the decision-making process of the protocol and to share in the revenue generated by the protocol. Governance tokens can provide strong incentives for users to engage with and support the protocol.
Staking: Staking provides incentives for users to support and secure the protocol and distributes rewards for doing so.
Yield farming: Some DeFi protocols offer yield farming opportunities, which allow users to earn rewards by providing liquidity to the protocol or by holding certain assets. Yield farming can provide strong incentives for users to engage with and support the protocol.
There is a wide array of DeFi protocols that have created systems to engage users and build this new financial ecosystem. Some examples include:
Compound: Transparent interest rate model based on supply and demand allows users to earn interest through peer-to-peer lending and the ability to borrow from individuals without knowing their personal information.
Uniswap: Uniswap users provide liquidity to token trading pools and earn rewards for bolstering markets.
MakerDAO: Users mint DAI against their crypto collateral through the user of collateralized debt positions, which increases liquidity and preserves crypto capital.
Overall, DeFi protocols that offer strong incentives and reward mechanisms have proven to be effective at driving user adoption and engagement. These incentives can help to scale DeFi protocols and to drive their long-term growth and success by rewarding both early and current users for their financial participation.
In 2022, DeFi protocols faced several challenges, particularly those that were led by decentralized autonomous organizations (DAOs) or heavily relied on liquidity mining rewards influenced by token price movements as participation began to drop heavily once prices and value declined. While token incentive models can foster community and create synergistic relationships, these communities are most successful when token prices are increasing.
During the bull market, there was a lot of asset re-hypothecation to take advantage of all the available rewards. However, the bear market has shown that DeFi can no longer rely on food tokens, generous liquidity rewards, and gamified financial applications to sustain itself.
DeFi will need to adapt and evolve to compete with traditional finance and recent events, such as centralized lenders and exchanges experiencing outages, highlight the need for decentralized systems, particularly in the financial sector. This market has the potential to bring transparency and innovation to finance and empower individuals who lack financial independence.
DeFi Trends Since the Beginning
DeFi, although relatively new, has already taught its users valuable lessons. By studying the early experiences with DeFi protocols, we can improve the growth and adoption of the DeFi ecosystem, making it more attractive to both traditional and decentralized finance market participants. As institutions and investors become more aware of the risks they are willing to take, DeFi is increasingly seen as a secure place to store wealth worldwide in a permissionless manner without the reliance on wealth managers.
During the recent bull market, both established and new DeFi protocols benefited greatly. The top-performing protocol in 2021 was Uniswap, a decentralized exchange that generated approximately $154 million in protocol-based revenues for its liquidity providers (LPs). This bull market provided an ideal opportunity for new protocols to launch and quickly gain adoption.
However, the focus on DeFi protocols and their financial success brings to light the ongoing issue of financial inclusion and the amount of people who remain unbanked and lack the financial custody that many people in this world have access to. Roughly 4.5 billion people do not have access to formal financial services such as bank accounts, loans, and insurance and are actively searching for help.
Most people believe that the concentration of wealth in the hands of institutions is harmful for the following reasons:
Lack of transparency: Lack of transparency and centralized point of authority can make it terrifying for individuals to understand how their money is being managed and invested, leading to mistrust and lack of confidence in the financial system.
Risk of misconduct: Centralized parties can partake in fraud, insider trading, and money laundering.
Dependence on intermediaries: Custodians charge fees for their services.
Potential for bias: Racial discrimination affects people’s abilities to open up financial accounts.
One of the main ways DeFi removes centralized control in financial power is by allowing users to have more control over their assets and financial transactions through the use of distributed ledgers. Through DeFi, users can hold and manage their own assets directly on the blockchain, rather than relying on intermediaries to hold and manage their assets for them. The usage of protocols can help reduce the fees and costs associated with using traditional financial intermediaries, as well as increase the security and transparency of financial transactions as every element is traced through an open system.
DeFi refers to financial protocols that are built on the blockchain which operate in a decentralized manner, without the need for intermediaries such as banks and centralized money managers. DeFi has seen significant growth and innovation since it first emerged in the cryptocurrency and blockchain space. Here are some major trends in DeFi since its inception:
Explosion of decentralized exchanges (DEXs): DEXs are exchange platforms that allow users to trade cryptocurrencies amongst one another in a permissionless and peer-to-peer manner. DEXs have become increasingly popular within the DeFi community, as they offer users more control over their assets and reduce the risk of hacks and other security breaches.
Rise of stablecoins: Stablecoins are cryptocurrencies that are pegged to the value of a real-world asset, such as the US dollar, and are designed to maintain a stable price over time. Stablecoins have become an important part of the DeFi ecosystem, as they provide a way to transfer value between different DeFi platforms and reduce the volatility associated with traditional cryptocurrencies. Two main types of stablecoins are fiat backed stablecoins and asset backed stablecoins. One kind is backed by US Dollars or Treasury Bills while the other is backed by crypto assets that sit on the blockchain.
Development of decentralized lending and borrowing protocols: DeFi protocols have enabled the creation of decentralized lending and borrowing platforms, which allow users to lend and borrow cryptocurrencies directly with each other in a peer-to-peer way. These protocols have provided a new way to lend and borrow, while giving more opportunity to earn/pay interest.
Emergence of decentralized insurance: Decentralized insurance protocols have emerged within the DeFi ecosystem, which allow users to purchase and manage insurance policies using smart contracts. These protocols offer users more control over their insurance coverage and can potentially lower the cost of insurance.
Demographics of DeFi Users
The unbanked population refers to individuals who do not have access to traditional banking services, such as checking and savings accounts, loans, and credit cards. Reaching these emerging markets is not an easy challenge for the DeFi ecosystem as as many unbanked individuals may not have access to the internet or may not be familiar with blockchain technology or cryptocurrency.
Here are a few steps that DeFi could take to reach the unbanked population:
Partner with organizations that serve this audience: DeFi could partner with organizations that work with the unbanked population, such as non-profit organizations and community development organizations, to provide financial services and education.
Offer low-cost or free services to people in need of financial independence: DeFi could offer low-cost or free financial services to the unbanked population, such as peer-to-peer lending and borrowing, to make it more accessible and affordable for this group.
Provide education and support through interactive tutorials: DeFi could provide education and support to the unbanked population to help them understand how to use DeFi services and the benefits of using them. This could include providing in-person training and support or developing educational materials and resources.
Build trust and credibility to support the thesis of decentralization: DeFi will need to build trust and credibility with the unbanked population in order to gain their adoption. This can be achieved by demonstrating the security and reliability of DeFi services and by building relationships with the unbanked community.
Reaching the unbanked population is a significant challenge, but it is an important one for DeFi to address in order to achieve its goal of democratizing access to financial services and opening up these financial services to everyone.
Macro Finance Trends
It is important for individuals to be aware of potential macroeconomic and financial trends and to take steps to manage their wealth in a way that is appropriate for their personal financial situation.
Cryptocurrencies and DeFi protocols can provide individuals with alternative ways to store and manage their wealth in the face of macroeconomic and financial trends, such as recession fears. Here are a few ways in which crypto and DeFi protocols can provide benefits to individuals looking to store money on the blockchain:
Increased security: DeFi protocols are built on decentralized and tamper-proof distributed ledgers.
Greater control and ownership: DeFi allows individuals to have full control over their assets and can manage them directly without interfacing with an exchange.
Increased transparency: Everything done in DeFi is fully transparent and found on the blockchain.
Diversification of investments: DeFi provides a wide range of investment opportunities that were once restricted to certain demographics
In order for DeFi to reach its full potential and to become a mainstream financial solution, it will be important to consider key trends and developments such as the integration of artificial intelligence, the increasing use and adoption of stablecoins, the growth of open finance-based payments and mobile solutions, the expansion of decentralized utilities, and the continued adoption and integration of open finance by traditional finance companies.
DeFi Overpowers Centralized Authority
One of the main advantages of DeFi is that it is decentralized, meaning it is not controlled by a single entity or organization. This can make DeFi more resistant to censorship, fraud, and other forms of manipulation compared to centralized systems.
In addition, DeFi protocols are often open source, which allows for community involvement and transparency in the development and operation of the platform. This can help to build trust and confidence among users, as anyone can review the code and see how the system works.
Decentralization refers to the distribution of power and control among multiple parties rather than being concentrated in a single entity or organization. In the context of financial systems, decentralization can refer to the use of blockchain technology to enable peer-to-peer financial transactions without the need for intermediaries.
If a financial system is decentralized, it means that it is not controlled by a single entity or organization, but rather is operated by a network of participants who work together to validate and record transactions. This can make decentralized systems more resistant to censorship, fraud, and other forms of manipulation compared to centralized systems.
As we reflect on the numerous failures of centralized cryptocurrency entities this year, it is clear that the importance of self-custody and decentralized control of wealth cannot be underestimated. It is crucial that individuals take control of their own financial assets and rely on decentralized systems to ensure the security and integrity of their wealth.
Real World Assets
Real-world assets (RWA), such as real estate, art, and commodities, are becoming increasingly popular within the DeFi ecosystem for a few reasons:
Ability to tokenize assets: One reason for the popularity of real-world assets in DeFi is the ability to tokenize them. Tokenization refers to the process of representing a real-world asset as a digital token on a blockchain. Tokenization allows assets to be easily transferred, tracked, and managed using smart contracts, which can increase efficiency and reduce the risk of fraud and errors.
Increased liquidity: Tokenization can also increase the liquidity of real-world assets, as it allows them to be easily bought and sold on DEXs and other DeFi platforms. This can make it easier for individuals to access and trade real-world assets, which can increase their appeal as an investment option. Increased liquidity can help attract more users to the DeFi ecosystem and can help DeFi protocols and applications scale.
Diversification of investments: Real-world assets can provide individuals with an opportunity to diversify their investment portfolio and reduce risk. By investing in a variety of asset classes, such as real estate, art, and commodities, individuals can spread risk and potentially achieve better returns over the long term.
Potential for passive income: Some real-world assets, such as rental properties, can generate passive income for investors. DeFi protocols have enabled the creation of decentralized lending and borrowing platforms, which allow individuals to lend their assets and earn passive income. This can make real-world assets an attractive investment option for those looking to generate additional income.
Overall, the ability to tokenize real-world assets, increased liquidity, diversification of investments, and potential for passive income are some of the reasons why real-world assets are becoming increasingly popular within the DeFi ecosystem. The tokenization of real-world assets can help scale DeFi by increasing liquidity, diversification, transparency, and accessibility. It can also make the DeFi ecosystem more stable by reducing reliance on any single asset class and increasing the number of participants.
Scaling and Liquidating Real World Assets
In DeFi, RWA that have been tokenized can be used as collateral to secure loans or other financial debt instruments. If the value of the RWA (in the real world) falls below a certain threshold, it may be subject to liquidation either on-chain or in real life.
Liquidation of RWA in DeFi can be triggered automatically by smart contracts or manually by the lender or other parties. It is important for individuals who use RWA as collateral in DeFi to understand the terms of their loans or other financial instruments and to be aware of the potential for liquidation if the value of their RWA falls below the required collateralization ratio.
DeFi protocols can use smart contracts to automate the process of liquidating physical artifacts, such as art or collectibles. Here is a general outline of how this process might work:
Tokenization of the artifact: Tokenization refers to the process of representing a real-world asset as a digital token on a blockchain.
Use of the tokenized artifact as collateral: Once the physical artifact has been tokenized, it can be used as collateral to secure a loan or other financial instrument.
Automatic liquidation if the collateral value falls below the required ratio: This could involve the sale of the tokenized asset in order to pay off the loan.
Transfer of ownership of the physical artifact: Transfers all happen on the blockchain.
DeFi automates the process of liquidating physical assets and transfer of ownership.
Private Blockchains
Private blockchains, also known as permissioned blockchains, are distributed ledger technologies that are used for secure and efficient data sharing within a specific group or organization. Private blockchains differ from public blockchains, such as Bitcoin and Ethereum, in that they are not open to the public and access is restricted to authorized participants.
One way in which private blockchains can scale the use of crypto and DeFi is through the use of app-specific chains. An app-specific chain can be a private or public blockchain that is tailored to the needs of a specific application or use case such as a platform for trading or storage of information. For example, a DeFi protocol could create an app-specific chain to manage the issuance and exchange of tokens on a layer separate from the native base chain.
App-specific chains can provide a number of benefits for DeFi protocols that range from increased security and scalability, as well as the ability to customize the blockchain to meet the specific needs of the application. By creating app-specific chains, DeFi protocols can better scale to the needs of their users and expand the use of crypto into niche areas.
DeFi & AI
Artificial intelligence (AI) has been used in finance for many years and the history goes back to the 1960s. Early signs of adoption were decision based softwares that scaled financial models.
AI has the ability to completely enhance the financial industry by increasing efficiency, reducing costs, and improving the accuracy of financial decisions.
AI has the potential to change DeFi in a number of ways, by improving efficiency, accuracy, and security. Here are a few examples of how AI could be used in crypto and DeFi:
Trading: AI could be used in crypto and DeFi to improve the accuracy and efficiency of trading decisions. For example, AI algorithms could analyze market trends and patterns in order to make informed trades on behalf of users. This could help users maximize returns and minimize risk.
Fraud detection: AI could be used to detect and prevent fraud in the crypto and DeFi space. For example, AI algorithms could analyze transaction patterns and flag suspicious activity, helping to reduce the risk of fraud and other security breaches.
Credit scoring: AI could be used to evaluate the creditworthiness of individuals or organizations in the crypto and DeFi space. By analyzing data such as transaction history and credit ratings, AI algorithms could help lenders make more informed lending decisions and reduce the risk of default.
Customer service: AI could be used to improve customer service in the crypto and DeFi space and reduce the need for human capital.
The combination of AI and DeFi protocols has the potential to be very powerful. By leveraging the capabilities of AI and the security and transparency of DeFi protocols, organizations and individuals can improve the efficiency, accuracy, and security of financial transactions and decisions.
As AI and DeFi continue to evolve, we will see tremendous amounts of innovation that automate systems and build software that was once unforeseen by humans.
Stablecoins
Stablecoins are digital assets that are pegged to the US Dollar or traditional assets. These currencies are designed to provide stability and reduce price volatility that is often found with other cryptocurrencies.
Since then, stablecoins have become increasingly popular in the cryptocurrency market, with a wide range of stablecoins being launched to serve different purposes and markets. Some stablecoins are pegged to a single asset, such as the US dollar, while others are pegged to a basket of assets or are algorithmic in nature.
According to data from CoinMetrics, over $7 trillion in value has been settled with stablecoins in 2022. This is an increase from the $6 trillion transactions in 2021 and the $1 trillion transacted the year before. This trend suggests that stablecoins are becoming increasingly popular as a means of exchange and a unit of account, and are being used to facilitate a growing volume of transactions.
Comparing the usage of stablecoins to traditional finance, it is important to note that the traditional financial system is much larger and more complex, with a wide range of different asset classes, financial instruments, and market participants. The $7 trillion in value settled with stablecoins in 2022 represents a small fraction of the overall volume of transactions that take place in the traditional financial system.
To become more composable within the traditional financial system and DeFi protocols, stablecoins will need to meet certain standards and requirements. This could involve obtaining regulatory approvals, demonstrating transparency and security, and establishing relationships with traditional financial institutions. By meeting these standards and requirements, stablecoins can potentially become more widely accepted and adopted within the traditional financial system and DeFi protocols.
Payments
DeFi payments have the potential to stand out within third world countries, as they can provide increased accessibility, security, and transparency in financial systems. DeFi payments can enable peer-to-peer transactions and reduce the need for intermediaries, such as banks, which can make financial services more accessible and affordable for individuals and organizations in third world countries.
Here are some statistics and data that support the global need for DeFi and how it could improve a global transparency financial system:
Financial inclusion: According to the World Bank, 1.7 billion adults globally are unbanked, meaning they do not have access to formal financial services. DeFi payments boost financial inclusion by providing a secure and transparent open financial environment.
Remittance fees: According to the World Bank, the global average cost of remittance fees is around 6.8%, which can cut into the value of the transferred funds. DeFi payments could help to reduce remittance fees by enabling peer-to-peer transactions and reducing the need for intermediaries as there are no costs associated with transfer of funds.
Transparency: Traditional financial systems can be quite difficult to understand under the hood, while DeFi payments can provide increased transparency by using blockchain to create an immutable record of transactions and by providing a glimpse into the underlying assets.
The global payments industry has experienced significant growth in recent years, with the volume of non-cash payments increasing by 6.2% per year between 2012 and 2020, according to the World Bank. This trend has been driven by the increasing use of electronic payments, mobile payments, and other innovative technologies.
To onboard third world countries into DeFi, there are several things that need to be done to ensure security, compliance, and accessibility. Here are a few examples of what needs to be done and what applications must be built:
User-friendly interfaces: In order for DeFi to be accessible and user-friendly for a wide range of users in third world countries, user-friendly interfaces and onboarding tools need to be built. This could involve developing easy-to-use mobile apps and web-based platforms that are optimized for low-bandwidth environments and that provide clear instructions and guidance for users.
Robust security measures: Strong security measures need to be implemented, such as multi-sig wallets and audited smart contracts.
Accessibility: DeFi must cater to large audiences through the improvement of mobile-optimized apps and web-based platforms and developing partnerships with mobile carriers and internet service providers.
Financial education: Improvements to basic financial literacy and how DeFi works, as well as providing guidance on how to use DeFi protocols safely and effectively.
Mobile
Mobile financial applications, including those for DeFi, have become increasingly popular in recent years, as more and more people use their phones as their primary way of access to financial services and fintech applications.
Here are some statistics on mobile financial application usage, how many people use their phones, and why the future of DeFi could be mobile:
Mobile usage: According to data from the World Bank, there are approximately 7.1 billion mobile phone users globally, representing more than 90% of the world's population. This suggests that mobile phones are a widely accessible and widely used platform for financial services.
Mobile financial application usage: According to data from the World Bank, there are approximately 2.6 billion mobile money accounts globally, which represents more than one-third of the world's adult population. Mobile financial applications, including those for DeFi, have become increasingly popular in recent years, as they provide a convenient and secure platform for financial transactions.
Accessibility: Mobile phones are particularly accessible in third world countries, where traditional financial infrastructure may be limited or unavailable. According to data from the World Bank, the number of mobile money accounts in low- and middle-income countries has more than doubled since 2014, reaching 1.7 billion in 2020.
Future of DeFi: The future of DeFi could be mobile, as mobile phones provide a convenient and widely accessible platform for financial transactions. DeFi protocols and applications that are optimized for mobile devices could help to increase the adoption and usage of DeFi globally.
The Solana phone is a smartphone that is built specifically to use Solana, a decentralized, high-performance blockchain platform. The Solana phone is designed to be a fully functional smartphone with the added ability to access and interact with DeFi protocols and applications on the Solana blockchain.
The Solana phone is expected to launch in the near future and will come with a suite of pre-installed DeFi applications, including Mirror, anchor, and SolFlare. These applications are designed to provide users with a convenient and user-friendly way to access and interact with DeFi protocols and applications on the Solana blockchain.
The Solana phone and its applications have the potential to supercharge mainstream adoption of DeFi on mobile, as they provide a convenient and user-friendly platform for accessing and interacting with DeFi protocols and applications. By building mobile apps that are optimized for low-bandwidth environments and that provide clear instructions and guidance for users, the Solana phone and its applications can help to increase the adoption and usage of DeFi globally.
Utilities
There are many things in our world that could benefit from decentralization disruption, meaning the use of decentralized technologies, such as blockchain, to disrupt traditional centralized systems and processes. Some examples of things that could potentially benefit from decentralization disruption include:
Financial services: DeFi protocols have the potential to disrupt traditional financial services, such as banking and lending, by providing a more secure, transparent, and efficient alternative. DeFi protocols can enable peer-to-peer transactions and reduce the need for intermediaries, such as banks, which can reduce costs and increase accessibility.
Supply chain management: Decentralized technologies, such as blockchain, can be used to improve the efficiency and transparency of supply chain management. By using blockchain to track the movement of goods and materials, companies can improve the accuracy of their records and reduce the risk of fraud and errors.
Identity verification: Decentralized technologies can be used to improve the security and accuracy of identity verification. For example, decentralized identity systems can allow individuals to securely and privately share their identity information with organizations, reducing the risk of identity theft and fraud.
Data privacy: Decentralized technologies can be used to improve data privacy by enabling individuals to control who has access to their personal data. For example, decentralized data storage systems can allow individuals to store and share their data on a peer-to-peer basis, rather than relying on centralized data storage providers.
Energy: Decentralized technologies, such as blockchain, can be used to improve the efficiency and transparency of energy systems. For example, decentralized energy exchanges can allow individuals and organizations to buy and sell renewable energy on a peer-to-peer basis, reducing the need for intermediaries and improving access to clean energy.
Power: Decentralized technologies can be used to improve the efficiency and reliability of power systems. For example, decentralized power grids can allow individuals and organizations to generate and sell excess power to their neighbors, reducing the need for centralized power plants and improving the resilience of the power grid.
Trash: Decentralized technologies can be used to improve the efficiency and sustainability of trash management systems. For example, decentralized waste management systems can use blockchain to track the movement of waste and to incentivize the recycling and reuse of materials.
Internet: Decentralized technologies, such as decentralized internet protocols, can be used to improve the security, privacy, and censorship resistance of the internet. Decentralized internet protocols can enable peer-to-peer communication and data sharing, reducing the need for centralized internet service providers.
Cloud: Decentralized technologies, such as decentralized cloud storage systems, can be used to improve the security and privacy of cloud services. Decentralized cloud storage systems can allow individuals and organizations to store and share data on a peer-to-peer basis, rather than relying on centralized cloud storage providers.
Voting: Decentralized technologies can be used to improve the security, transparency, and accessibility of voting systems. For example, decentralized voting platforms can use blockchain to create an immutable record of votes, reducing the risk of fraud and errors.
Healthcare: Decentralized technologies can be used to improve the security, privacy, and accessibility of healthcare information. For example, decentralized healthcare records systems can allow individuals to securely and privately share their healthcare information with healthcare providers, reducing the risk of errors and improving the quality of care.
Education: Decentralized technologies can be used to improve the accessibility and affordability of education. For example, decentralized educational platforms can use blockchain to create and track the issuance of educational certificates and credentials, reducing the need for intermediaries and making it easier for individuals to access education.
Real estate: Decentralized technologies can be used to improve the efficiency and transparency of real estate transactions. For example, decentralized real estate platforms can use blockchain to track the ownership and transfer of real estate assets, reducing the need for intermediaries and improving the accuracy of records.
Decentralized databases: Decentralized databases, also known as distributed databases, are databases that are distributed across a network of computers, rather than being stored on a central server. Decentralized databases can provide increased security, transparency, and scalability, as data is distributed across multiple nodes and is less vulnerable to cyber attacks or data loss.
Decentralized development stacks: Decentralized development stacks are software development platforms that are built on decentralized technologies, such as blockchain. Decentralized development stacks can provide a secure and transparent platform for the development and deployment of decentralized applications (DApps), enabling developers to build and test DApps in a more efficient and secure manner.
Regulation: Path to Adoption
DeFi has the potential to bring significant benefits to individuals and organizations around the world, including increased accessibility, security, and transparency. However, DeFi has also faced challenges in terms of regulatory guidance and institutional access, which have limited its mainstream adoption.
To allow the next billion people globally to participate in DeFi, there are several steps that need to be taken to facilitate regulatory guidance and institutional access. Here are a few examples of what needs to be built in DeFi to support mainstream adoption:
Regulatory clarity: In order for DeFi to reach mainstream adoption, regulatory clarity is needed to ensure that DeFi protocols and activities are compliant with relevant laws and regulations. This could involve working with regulators to establish clear guidelines for DeFi and engaging in dialogue to address any concerns or questions.
Institutional access: To attract institutional investors and enable mainstream adoption, DeFi protocols need to provide institutional-grade security and infrastructure. This could involve implementing robust security measures, such as multi-sig wallets and audited smart contracts, and building relationships with institutional partners.
User-friendly interfaces: In order for DeFi to reach mainstream adoption, it needs to be accessible and user-friendly for a wide range of users. This could involve building user-friendly interfaces and onboarding tools, such as wallet integrations and educational resources, to make it easier for users to get started with DeFi.
Traditional Finance Entering DeFi
DeFi is continuing to increase its market size and adoption by traditional finance companies in recent years. Between investments and partnerships, traditional finance companies are starting to explore the use of DeFi as a viable financial solution. This trend is reflected in a number of statistics, such as the more than $1 billion invested in DeFi protocols and projects by traditional finance companies, as well as the growing number of partnerships and integrations between traditional finance and DeFi.
Companies like Robinhood, Fidelity, Square, and Visa are among the traditional finance companies that are moving into crypto and DeFi, bringing DeFi to a wider audience and facilitating mainstream adoption.
Here are some additional statistics on the adoption and usage of DeFi by traditional finance companies:
Investment: According to data from DeFi Pulse, traditional finance companies, including venture capital firms and investment banks, have invested more than $1 billion in DeFi protocols and projects. This reflects the growing interest and acceptance of DeFi by traditional finance companies as a viable financial solution.
Partnerships: Traditional finance companies have also entered into partnerships with DeFi protocols and projects. For example, Coinbase, a cryptocurrency exchange, has partnered with Circle, a peer-to-peer payment platform, to launch a USDC stablecoin on the Ethereum blockchain. This partnership demonstrates the growing convergence between traditional finance and DeFi.
Integration: Traditional finance companies have also started to integrate DeFi protocols and applications into their products and services. For example, PayPal, a payment processing company, has announced that it will allow its users to buy, sell, and hold cryptocurrency, including Bitcoin, Ethereum, and Litecoin, using the PayPal app. This integration demonstrates the growing mainstream acceptance of DeFi as a viable financial solution.
Other traditional finance applications that are moving into crypto and DeFi include:
Square: Square is a financial services company that offers a range of products and services, including a mobile app for buying and selling stocks, ETFs, and other financial instruments. Square has also made moves into the cryptocurrency space, offering a range of crypto trading options to its users. The company recently reported processing approximately $110 billion in gross payment volume (GPV) through its point-of-sale systems in the third quarter of 2022.
Visa: Visa is a financial services company that offers a range of payment processing products and services. Visa has also started to explore the use of cryptocurrency and DeFi in its products and services, including by integrating cryptocurrency payment options into its platform. Visa processes an average of approximately 65,000 transactions per second, or approximately 5.4 billion transactions per day, according to data from Visa. This volume of transactions is facilitated by Visa's network of over 40 million merchants and over 3 billion Visa-branded cards in circulation around the world.
Robinhood has more than 13 million users as of 2021. In recent years, Robinhood has made moves into the cryptocurrency space, offering a range of crypto trading options to its users.
In addition to Robinhood, other banking businesses, such as Fidelity, have also started to use DeFi more in their products and services. Fidelity has launched a number of DeFi-related initiatives, including a DeFi index fund and a DeFi research team.
The increasing use of DeFi by companies like Robinhood and Fidelity reflects the growing popularity and mainstream acceptance of DeFi as a viable financial solution. By offering DeFi-based products and services, these companies are able to provide their users with increased accessibility, security, and transparency in financial transactions.
Overall, the wide audience reach of companies like Robinhood and Fidelity, along with their recent moves into DeFi, highlights the growing mainstream acceptance of DeFi as a viable financial solution. By offering DeFi-based products and services, these companies are able to bring DeFi to a wider audience and facilitate mainstream adoption of DeFi.
DeFi & Gaming:
DeFi and gaming can work together in a number of ways:
In-game assets: DeFi protocols and applications can be used to manage and trade assets.
NFTs: Non-fungible tokens can be used to represent in-game assets and can be traded on DeFi protocols
Governance: DeFi protocols can be used to govern in-game economies and communities
Gaming platforms: DeFi protocols can be used to build decentralized gaming platforms that allow players to buy, sell, and trade games and in-game assets.
Overall, DeFi and gaming can work together to create more secure, transparent, and accessible gaming experiences. By leveraging DeFi protocols and applications, players can manage and trade in-game assets, participate in governance, and use decentralized gaming platforms.
Closing:
The growth of DeFi in the past few years has been nothing short of insane, with the total value locked in DeFi protocols reaching all-time highs and new innovations and projects continually emerging. It is clear that the future of this industry is extremely powerful, with endless potential for growth and disruption.
If you are building anything in the DeFi or technology space, or if you simply have ideas and thoughts to share, I would love to speak with you. Let's work together to shape the future of this exciting and rapidly-evolving industry.
I would like to express my huge thanks to Jeff Morris, Alex Labossiere, and Jamesin Seidel for their valuable feedback and assistance with revising my work.
Email: Jack@Chapterone.com
https://cointelegraph.com/news/total-value-locked-in-defi-dropped-by-66-but-multiple-metrics-reflect-steady-growth