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An Outlook on DeFi – a Touch of Cool Off, Downtrend, and Evolution

Basics of Cryptocurrency
Last updated November 16, 2020

The ups and downs of the crypto world are nothing to be surprised about. And as the DeFi sector integrated well into the crypto industry, we’ve seen it go through the August hype, the October cool off, and the November revitalization.

It’s all ups and downs.

To get a better understanding of what’s going on we decided to get in touch with people who are more connected to the crypto community and the events going on, and asked their opinions on the matter.

So, we’ve addressed our questions to Cameron from Crypto Daily and to CryptoSlate.

DeFi has risen because…

DeFi has risen because

While the cryptocurrency industry is not a stranger to hype, we all know that what grows too fast does not have a stable basis and is most likely to fall just as quickly. 

Aside from that, we can’t help but notice that DeFis are disrupting the industry with new capabilities. Therefore, we first wanted to know more about the drive behind DeFi’s rise.

  1. How did DeFi take place? Why do you think that crypto projects turned from doing their own thing to a modular-framework in which dapps are supposed to work with one another?

Bitcoin was the first iteration of decentralized finance. This gave people the power of banks, to transfer money and be their own bank. With Ethereum smart contracts, we had the ability to mimic more of what banks can do, namely loans and interest-bearing accounts. Even offer financial services like market-making. 

Chainlink empowers devs to build on top of what has already been built by allowing protocols to trustlessly communicate data with other protocols. Much of this innovation would take too much time and money without this link. 

Cameron from Crypto Daily

DeFi is the inevitable evolution of the hard work being done by developers to make Ethereum smart contracts more intelligent and interoperable. As far as why projects switched to DeFi, it largely has to do with projects wanting to take advantage of the massive hype train and price increases that DeFi has brought to a number of other projects,

Crypto Slate

Besides rapid growth, the Decentralized Finance sector of cryptocurrency has made itself remarked by bringing in more of the capabilities traditional banks have. Furthermore, it managed to connect protocols in an easier manner, allowing dapps developers to implement new concepts with less effort.

While the connectivity between protocols might have represented a rational choice for developers to join into DeFi, the hype might have played a role as well.

Reasons behind the hype

Reasons behind the hype

In Q1 of 2020, the total value locked (TVL) in DeFi passed $1 billion for the first time. However, in Q3, the TVL broke over $11 billion. This level of investment has not been seen since the Bitcoin hype in 2017.

  1. Since August 2020, The Total Value Locked in DeFi spiked over $10 billion and broke above 11 billion at the end of September. Why do you think people are so invested in it?

Hype for sure is a big reason, we tend to overvalue new developments in crypto massively. But the hype started from something real. More than a few DeFi protocols are generating revenue in the tens if not hundreds of millions of dollars per year, without having to mint new tokens to do so. 

Cameron from Crypto Daily

DeFi is one of the first use cases where people are doing more with their crypto than just holding it and trading it. Of course, yield farming is an easy way for those holding large amounts of crypto to earn additional passive income, therefore the attractiveness of high returns is too great to ignore for most people holding crypto.

Crypto Slate

Besides breakthroughs, the hype behind DeFi seems to come from giving the opportunity to hodlers to turn their assets into passive income by providing liquidity to lending protocols. Therefore, terms such as yield farming and liquidity mining became of much interest to the crypto world, further fueling the growth of the total value locked in DeFi.

Is a downtrend coming in 2021?

Is a downtrend coming in 2021

Again, this is not the first time the crypto world has seen such growth. 

In 2017, Bitcoin and ICOs have seen exponential growth as well, which in turn acted a lot like a bubble that burst by 2018. The numerous scams and ‘hit and run’ crypto projects brought a black aura upon ICO as a method of raising money, and over the crypto market as rather being a space for illicit uses.

  1. Looking at the DeFi Spike, we can’t help but notice some similarities with Bitcoin and ICOs in 2017. Is it possible that DeFis will follow a downtrend reversal in 2021?

I think we’re already seeing one at the moment. It’s important to keep in mind just how quickly it grew and by how much, in that context, this current pullback still shows a lot of resilience. 

Cameron from Crypto Daily

Yes, as more and more people begin developing DeFi projects and protocols, there will inevitably be some bad actors who “rug pull” or want to make a quick buck off the people using their platform. Because crypto is such a new, novel industry with so many strong financial incentives, it has unfortunately managed to attract a lot of bad actors who do not have the mindset of building value over the long-term.

Crypto Slate

A downtrend in 2021 is fairly possible as we have already seen a cool off throughout October. That cool off can be related to the yield farming’s returns getting smaller, and possibly to Ethereum’s overpriced fees. Still, in November, the DeFi TVL passed over $13 billion, so the race does not seem over yet.

Also, with the ongoing hype, inevitably there may be a few bad actors looking to make a quick buck. So, in 2021 we can expect to hear even more on the scammers that exploited the Decentralized Finance.

Quick tip – if you are invested in a DeFi, maybe triple check it.

The Next step for DeFi

The Next step for DeFi

But, even within the prospects of a DeFi downtrend in 2021, there are decentralized finance projects that are as real as Bitcoin and Ethereum were in 2017. 

And since then, many other projects continue to keep it real. Therefore, rather than dismissing the DeFi sector, we should ask more of it.

  1. What do you think is next for DeFi?

I hope to see more innovation and a lower barrier of entry to get involved. A big one will be non-collateralized decentralized loans using a cryptographic trust score. We won’t truly be our own banks until we really have no need for them anymore.

Cameron from Crypto Daily

Up until this point, the majority of DeFi has largely been concentrated around the Ethereum ecosystem, but in the future, developers working other protocols such as Tezos, Cosmos, Polkadot, Cardano and many others will begin rolling out their own DeFi protocols for usage within those ecosystems. Ethereum certainly has the first-mover advantage, and it remains to be seen whether strong token ecosystems will develop on these other protocols.

Crypto Slate

Rather than looking on to a downtrend that is most likely to come, we may as well start looking towards decentralized finance projects implementing more functionalities and further exploring the developing opportunities offered by other protocols.

Key Takeaways

  • Although hype might have played a big role in its rapid growth, the Decentralized Finance sector brought more of the traditional banks’ capabilities into the crypto and managed to connect protocols more easily, allowing the implementation of new concepts with less effort.
  • The growth and the hype around DeFi, comes mainly from yield farming.  With the opportunity to turn their assets into passive incomes, hodlers are much more inclined to provide liquidity to lending protocols.
  • It’s fairly possible for DeFi to go through a downtrend reversal in 2021 caused by yield farming’s returns getting smaller, hype dying down, and loss of trust due to scammers.
  • However, aside from the hype going away, we can expect DeFi to evolve further and implement more functionalities and further explore the developing opportunities offered by other protocols.
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