Re-Growth of the DeFi Field: Innovative Trends Affect the Development of Blockchain Technology

.Re-Growth of the DeFi Field: Innovative Trends Affect the Development of Blockchain Technology

Over time, networks have evolved to meet different needs, and with Web 3.0, blockchain is more than just decentralizing power in financial systems.

Over the past year, the decentralized finance realm has made waves in the financial industry, relying on blockchain technology to decentralize large numbers of banking services. The adoption of DeFi services is steadily increasing and moving towards all types of asset blockchains.

With Unchangeable tokens popularizing digital art ownership representations, blockchain technology is infiltrating the most unexpected places and DeFi is fueling its expansion. These unique and sometimes highly valuable tokens are particularly relevant today as art galleries are closed due to the global pandemic and restrictions on cultural experiences happening online more than ever.

Throughout 2020, DeFi saw an explosion of the types of liquidity that could be generated with marketplaces for financial products, community-based social and governance tokens, and unique artworks. Today, a significant amount of Bitcoin (BTC) is used as a store of value, but not created for it. Slow transaction times, high fees, and a history of rising value prevent Bitcoin from being used as a payment system, but that didn’t stop the blockchain industry from creating others.

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The advent of programmable smart contracts has accelerated the formation of our modern decentralized finance ecosystem and made financial services accessible to anyone with an internet connection. The expensive overheads of centralized banks made international transfers slow and uneconomical for most use cases. However, by implementing a number of nested protocols, decentralized finance offers alternative ways of distributing value to different communities around the world.

The traditional financial system works for most, but it may be doing much better. While the blockchain isn’t quite ready to take on this task, today’s decentralized networks have big goals, and as access to digital assets continues to evolve, people around the world are increasingly interacting with the global economy without reliable brokers, banks or lawyers. With more development resources allocated to DeFi systems than ever before, blockchain is the next frontier for any financial services company worldwide.

Messy But Powerful

The Internet has changed the flow of data and information around the world, and this evolution of communication channels has had a profound impact on the banking system. As the world begins to move to platforms that offer faster enrollments, faster service, and more reliable products, the pathways of centralized banking are a stark contrast.

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Smart contract platforms allow people to interact with several decentralized applications using a single financial identity. With nearly 2 billion people on the planet not having access to financial services, it would be in everyone’s interest to reduce the barrier to entry.

In fact, even some centralized banks have started offering cryptocurrency custody services, allowing users to securely store cryptocurrencies, with a party that can be held responsible for their security. While this may seem counterintuitive to the decentralization blockchain morality, centralized surveillance services can actually be beneficial to the wider industry.

Brian Kerr, CEO of the Kava DeFi platform, said: “To me, having a bank that uses Kava at the backend to securely offer loans and great APYs to its users is a natural progression of the evolution of banks, finance and fintech services. . ”

According to Kerr, holding cryptocurrencies is much more intimidating for the average citizen than fiat because transfers are irreversible and make mistakes even more costly. “I believe banks supporting digital asset protection are a great step towards making crypto available to mainstream users,” he said.

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However, the current scheme for development has not changed much in the past few decades as fintech companies continue to improve their products and services to provide better experiences to end users. Also, as banks begin to provide large amounts of stablecoin liquidity to DeFi platforms, APY for lending and borrowing will decrease in the future, as Anton Bukov, co-founder of the 1inch decentralized exchange aggregator, points out.

Over time, networks have evolved to meet different needs, and with Web 3.0, blockchain is not just about decentralizing power in financial systems; redefining value. In the near future, these systems will likely become even stronger and will eventually be seen as a valuable proposition for any type of business.

Analyzing AMMs

The tic factor contributing to both decentralized finance and overall growth of the blockchain throughout 2020. Before the AMMs, decentralized exchanges weren’t as popular as they are now. Instead of using order books to match trades in a decentralized way, AMMs increase liquidity and eliminate counterparty risk by enabling users to trade with a smart contract.

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While higher volumes are occasionally reported on decentralized exchanges like Uniswap than Coinbase Pro, it is debated whether centralized exchanges are sustainable in the long term. However, while DEXs have definitely improved over the past few years, changing the order book changes is not on the agenda.

“Centralized exchanges will always have a pillar in terms of user experience, creativity and trust in the user base,” Kerr said, and centralized exchanges offer an opportunity for fiat ramps, regulatory compliance and better mobile app user experiences.

As the trading fees become increasingly competitive, so are the services offered by cryptocurrency exchanges. From initial exchange offers and staking to lending and borrowing services, exchanges can begin to defend their position and compete with their decentralized counterparts by increasing their margins from other businesses. “Banks do not earn from deposits, just as they make money from back-end services and cross-selling of other financial products – as the industry progresses, so are centralized exchanges,” Kerr said. Bukov added:

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Coinbase named DEXs one of the biggest risk factors for their business during preparations for the upcoming IPO. For example, I think they might try to compete in this area as well while offering their own L1 solutions or DEX. ”

In a nutshell, an AMM consists of pools of token pairs whose rates in the pool determine the price of individual tokens. Uniswap is currently the most popular AMM DEX and allows anyone to join liquidity pools for any token pair. This puts the participants at risk for a share of the return while providing liquidity to the pools.

As AMMs become more and more complex, some platforms even include features such as multi-token liquidity pools and more efficient algorithms for calculating asset prices. Unlike IEOs, there is no guard to prevent someone from launching a token or platform, and while this could be exploited by malicious users, it could lead to very interesting projects in the coming years.

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Interoperability Available

While most DeFi applications are currently running on Ethereum, interoperability is slowly becoming a reality. This will give developers the freedom to choose different platforms that will best fit their individual decentralized application. With platforms like Cosmos and Substrate-based Polkadot, developers can now even create interoperable blockchains tailored to the needs of their applications.

Developers today rely on monolithic layer-one blockchains that provide open smart contract platforms. “These platforms are trying to do everything well and it’s not a great thing. With interoperability, these platforms will continue to be useful for prototyping in the future, but developers will choose the most specific and optimized services for their applications and use cases,” said Kava CEO. says.

One of the biggest trends at the end of 2020 was the increasing demand for access to Ethereum’s liquidity and economic activity in other blockchain-based protocols. From Wrapped Bitcoin (wBTC) to blockchain-based data storage, the domain has seen an increase in activity across cross-chain platforms.

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For example, Kava built with the Cosmos framework has seen significant growth by offering secured loans and staking opportunities for various cryptocurrencies. The platform uses the Kava token for governance and secures the network through staking.

These types of governance tokens allow network participants to vote on critical parameters of the system such as the global debt limit, collateral rate, and savings rate. In cases where the system is under-collateralized, the Kava token even acts as a reserve currency to be issued and sold until the system is re-collateralized.

Both Ethereum and Cosmos require significantly more validators per chain than Polkadot. Compared to Ethereum’s 111 validators per sharding, Polkadot’s claim to offer equivalent security at at least five validators per chain requires further analysis.

Cross Chain Junction

The growth of decentralized finance has been unprecedented and overwhelming. Monthly DEX volumes exceeded $ 55 billion, which also corresponds to the total market cap of stablecoin at the moment. DeFi outstanding debt is over $ 9 billion, but decentralized finance is still a toddler for the wider financial services industry.

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With new innovations constantly around the corner, there is good reason to believe that the availability and variability between DeFi applications will improve over time. As gas costs in Ethereum continue to fluctuate, falling to prohibitive levels at times, blockchain projects compete to create better scalability solutions such as layer two protocols. Ethereum 2.0 promises to solve most of the problems faced by its predecessor already, but how well the network will perform in practice will only be known over time.

Moreover, as long as gas costs continue to fluctuate, DeFi protocols will continue to miss users and therefore liquidity from Ethereum. Another problem facing the DeFi space as a baby industry is that it relies on an experienced user base. Today’s applications are often designed for merchants familiar with DeFi systems and offer services such as audit tools and on-chain data oracles that are not always useful to the average consumer.

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As the industry continues to expand its functions, projects are constantly creating better tools for DeFi tokens. Some platforms now allow the use of non-exchangeable tokens as collateral for peer-to-peer loans, increasing the liquidity of these digital collections to the level of any other monetised asset.

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