The Current State of DeFi and Potential for Startups


The introduction of decentralized finance has been pivotal, offering us yet another chance to build a digital economy- one that is decentralized. Applications on the blockchain work in tandem, and the information they store is visible to all. This evokes the idealism of the internet’s first architects, back before tech giants built up walled gardens and we embraced them. 

DeFi enables its users to get loans, trade assets and store deposits. Since 2020, the total value of assets locked in DeFi protocols has grown from $1bn to over $200bn at the beginning of 2022. This value refers to all deposits locked in the form of cryptocurrencies for staking, lending, liquidity pool and more.

Understanding DeFi and its place in Web 3.0

The idea behind DeFi is that blockchains- decentralized databases distributed over many nodes worldwide and secured by cryptography- can replace intermediaries in financial transactions, like banks and tech platforms. 

Through DeFi lending, users can lend out cryptocurrencies, like a traditional bank operates with fiat money, and earn interest as lenders. Borrowing and lending are the most popular use cases of the DeFi, besides more complex ones like becoming a liquidity provider and liquidity farmer to a decentralized exchange.

It’s possible now on smart contract blockchains like Ethereum. Smart contracts are programs that run on the blockchain and execute automatically when certain conditions are met. These contracts are why developers can build sophisticated functionality rather than simply sending and receiving crypto assets. The functionalities are held in decentralized apps or dapps.

Today, DeFi apps allow us to create stablecoins (cryptocurrencies with their value pegged to the USD), lend money and earn interest on crypto, take out a loan, exchange assets and implement advanced investment strategies.

DeFi apps differ from traditional counterparts in that they are decentralized, not managed by an institution, transparent, global, permissionless, flexible and interoperable.

All of that to say that Web 3.0 is focused on decentralized data, is more open and powered by distributed ledger technology, AI and ML. DeFi, tokenization of assets, distributed ledgers, online gaming, CDBC, NFTs and P2P transfers are all use cases of Web 3.0.

What was wrong with Ethereum? How DeFi is Emerging

Ethereum, one of the leading DeFi platforms, is losing its near-monopoly. Ethereum was created in 2015 as a general-purpose version of Bitcoin, whose database stores transactional information about the associated cryptocurrency, providing proof of who owns how much at any time. 

The current blockchain technology is unwieldy with mechanisms such as “proof of work”, where computers or nodes solve mathematical problems to verify transactions in exchange for a reward. This computation slows down the network and limits capacity. Bitcoin can process seven transactions per second, while Ethereum only handles 15.

During busy hours, transactions are either painfully slow or astonishingly expensive.

DeFi’s backers brag about being able to transact securely without centralized intermediaries. In early 2021, all assets locked in DeFi applications resided on Ethereum’s network. But, in a recent report by JP Morgan Chase, the share of DeFi applications using Ethereum fell to 70% by the end of 2021.

Growing networks such as Avalanche, Binance Smart Chain, Solana and Terra now use a more efficient mechanism called “proof of stake”. Avalanche and Solana both process thousands of transactions in a second.

As long as Decentralized Finance holds promise and attention, competition will continue to be fierce for the network of choice.

Related Reading: Are Metaverses Happening? The Potential for Startups

Quantifying DeFi Adoption and Future Trends

In 2021, the market capitalization of cryptocurrencies hit $3tn for the first time from $800bn at the beginning of 2021.

Here are a few trends taking place as you read and some we are looking at into the future:

  • Metaverse – The year 2021 was all about the metaverse. Facebook rebranded itself as Meta and highlighted its focus alongside multiple other organizations such as Epic Games, Coinbase, Microsoft and Tencent joining the game. While the hype continues and we see brands investing in the future of virtual reality as it is, 2022 and a few next years will be profoundly developmental in the building of the metaverse. As per Grayscale Investments, the metaverse is to become a trillion-dollar revenue opportunity.
  • NFTs – Non-fungible tokens are growing in criticality, evident from OpenSea’s $13.3bn valuation after a Series C funding round. The NFT aggregator and marketplace continues to dominate decentralized platforms, as other competitors give it a run for its money. OpenSea hit an all-time high of $5bn in monthly trading volume between Ethereum and its marketplace Polygon in Jan 2022. According to Deloitte, between four to five million sports fans globally will purchase or be gifted an NFT sports collectible in 2022. NFTs will also play an integral role in giving gamers ownership of their digital assets purchased within a game, highlighting its significance in the gaming industry.
  • Virtual real estate – Prices on digital property in the metaverse rose 700% in 2021. Rapper Snoop Dog built an interactive Snoopverse, in which users can pay as much as they would to buy a physical house in the real world to become his virtual neighbors.

All these quantifiable trends point us to the fact that Web 3.0 or the metaverse is just beginning to take shape and that DeFi will be an integral part of it.

Related Reading: How Crypto and Blockchain are Changing the Online Gaming Industry

The Potential for Startups in DeFi

Every financial service can be rebuilt and redesigned with DeFi for better accessibility, efficiency and innovation. Explosive growth creates opportunities for startups. As DeFi continues to grow, it is upon enthusiasts and developers to figure out how they can create space for themselves in the metaverse.

While the total addressable market for DeFi financial services is not yet quantifiable, the opportunity can be predicted by the state of DeFi today. Therefore, startups can be sure of the growth.

To know how KiwiTech helps startups innovate and compete in the metaverse, learn more about our blockchain development services.

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