{"id":3381,"date":"2022-05-12T12:08:00","date_gmt":"2022-05-12T12:08:00","guid":{"rendered":"https:\/\/www.kiwitech.com\/blog\/?p=3381"},"modified":"2022-05-23T08:40:36","modified_gmt":"2022-05-23T08:40:36","slug":"the-current-state-of-defi-and-potential-for-startups","status":"publish","type":"post","link":"https:\/\/www.kiwitech.com\/blog\/the-current-state-of-defi-and-potential-for-startups\/","title":{"rendered":"The Current State of DeFi and Potential for Startups"},"content":{"rendered":"\n

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\u2019s first architects, back before tech giants built up walled gardens and we embraced them. <\/p>\n\n\n\n

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<\/a> at the beginning of 2022. This value refers to all deposits locked in the form of cryptocurrencies for staking, lending, liquidity pool and more.<\/p>\n\n\n\n

Understanding DeFi and its place in Web 3.0<\/strong><\/p>\n\n\n\n

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. <\/p>\n\n\n\n

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.<\/p>\n\n\n\n

It\u2019s 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.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

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

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.<\/p>\n\n\n\n

What was wrong with Ethereum? How DeFi is Emerging<\/strong><\/p>\n\n\n\n

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. <\/p>\n\n\n\n

The current blockchain technology is unwieldy with mechanisms such as \u201cproof of work\u201d, 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.<\/p>\n\n\n\n

During busy hours, transactions are either painfully slow or astonishingly expensive.<\/p>\n\n\n\n

DeFi\u2019s backers brag about being able to transact securely without centralized intermediaries. In early 2021, all assets locked in DeFi applications resided on Ethereum\u2019s network. But, in a recent report by JP Morgan Chase<\/a>, the share of DeFi applications using Ethereum fell to 70% by the end of 2021.<\/p>\n\n\n\n

Growing networks such as Avalanche, Binance Smart Chain, Solana and Terra now use a more efficient mechanism called \u201cproof of stake\u201d. Avalanche and Solana both process thousands of transactions in a second.<\/p>\n\n\n\n

As long as Decentralized Finance holds promise and attention, competition will continue to be fierce for the network of choice.<\/p>\n\n\n\n

Related Reading: <\/strong>Are Metaverses Happening? The Potential for Startups<\/strong><\/a><\/p>\n\n\n\n

Quantifying DeFi Adoption and Future Trends<\/strong><\/p>\n\n\n\n

In 2021, the market capitalization of cryptocurrencies hit $3tn for the first time<\/a> from $800bn at the beginning of 2021.<\/p>\n\n\n\n

Here are a few trends taking place as you read and some we are looking at into the future:<\/p>\n\n\n\n