By Palash Jain
Decentralized finance (DeFi) has grown exponentially from $112 billion in 2020 to $229 billion in TVL, according to recent data from the analytics platform, DeFilama. What used to be a niche sector is now attracting huge VC funds and a constant influx of institutional-grade players such as Sequoia Capital and a16z, to mention just a few. Having observed the trajectory DeFi has taken over the past years, here are the latest DeFi trends to look out for in the coming years.
Social and fan tokens
Social and fan tokens are slightly different but largely fall in the same category as NFTs. Social tokens are creator tokens issued by an artist or a creator to monetize themselves or their work. Social tokens as an approach to financialisation creates a direct, mutually beneficial relationship between creators and their fans and cuts out any middleman. Brands or clubs issue fan tokens to accelerate improved community engagement. With these tokens, fans get access to fan-related membership perks like voting on club decisions, merch designs, and exclusive experiences.
DeFi governance tokens
Governance tokens are a growing trend of crypto-assets issued by protocols to provide token-holders voting rights on initiatives for the protocol’s progress. With these tokens users can carry out other activities like using them as collateral. Governance tokens started with the introduction of MakerDAO’s Maker (MKR) tokens. Today, top DeFi protocols, such as Curve Finance, Uniswap, Compound, Aave, Yearn Finance, MakerDAO etc., have accumulated between $4-18 billion individually in TVL from their governance tokens.
More decentralized and collateralized stablecoins such as DAI are associated with cryptocurrency collaterals, enabling the minting of these stablecoins while introducing high-quality collateral. With the introduction of a new trend in stablecoins called algorithmic non-collateralized stablecoins, we see a way to offer users improved price stability as compared to collateralized stablecoins. For instance, TerraUSD (UST) maintains its fiat peg by utilizing a dual token system with the LUNA token serving as its governance and fee-paying token.
Cross-chain DeFi technologies
DeFi has grown expeditiously, resulting in increasing and unsustainable transaction costs due to its siloed infrastructure. With users faced with high gas fees per transaction costs, a need for cross-chain solutions to foster scalability became imminent. Cross-chain technologies are solutions that facilitate smart contract transactions across multiple chains, making blockchain interoperable. Projects like Polkadot allow users to build custom blockchains and complete transactions and asset movement more efficiently by spreading them across various chains. Another cross-chain technology, the Cosmos ecosystem, acts as a base layer for several independent blockchains which are interconnected to facilitate interoperability and communication between chains. DeFi aggregator platforms like Frontier also foster interoperability within the DeFi space by connecting DeFi activities on different blockchains through a single user-friendly interface for easy accessibility.
DeFi derivatives markets
Derivatives are financial securities or contracts that obtain their value from other assets or collections of assets. Derivatives markets are prevalent in traditional finance because they allow people to invest in things that are pegged to assets such as stocks, commodities or currencies. But unlike in conventional finance, where a central body creates derivatives. DeFi allows anyone to create and manage derivatives transparently on the blockchain using smart contracts. For instance, Synthetix, a platform that allows users to create decentralized blockchain assets pegged to other assets such as stocks and commodities.
Metaverse and broader institutional adoption
Facebook’s rebrand to Meta brought the term Metaverse into the mainstream. But more importantly, the company’s shift in focus and commitment towards building a digital ecosystem validated all Metaverse projects as many established institutions, and web2 companies began seeing the potential in the transition into a digital society.
The crypto space is expected to see more institutional adoption and investments across various sectors of the crypto industry. Fashion giants like Adidas and Nike are not left out of the trend as they have set up shop in Metaverse platforms like Sandbox and Decentraland. Also, the eCommerce giant Walmart is making a play into the Metaverse. Microsoft’s acquisition of the game maker Activision Blizzard is another evidence of how much value these companies see in the future of the Metaverse.
Exchange-traded funds (ETFs) provide investors easy access to a diversified asset class. Due to the difficulties currently faced in buying crypto assets, crypto ETFs would make crypto assets more accessible to traditional investors by allowing them to incorporate digital assets directly into their portfolios without navigating crypto exchanges themselves. 2021 saw the launch of some crypto futures ETFs, such as the ProShares Bitcoin Strategy ETF, which quickly gained assets under management worth $1 billion within 24hrs of trading.
As the world continues to grow, so do the participants in the industry. For instance, in 2021, crypto gaming saw $80M to $100M in daily transactions. An indication of the flow of individuals from traditional gaming to DeFi gaming. Seeing the growth of the DeFi ecosystem, solutions such as the Frontier wallet are to ensure interoperability of features enabling users to access features from one spot. While trends such as the Metaverse, an intersection between NFTs and AI, continue to develop, we see a future where users can navigate between DeFi features and solutions with ease while earning.
The author is co-founder, Frontier, a crypto wallet