The growth of the decentralized finance (DeFi) sector over the last two years cannot have gone unnoticed by most people by now. Having recently hit $200 billion worth, the total value locked (TVL) has incredibly doubled since June, as more and more people are drawn to the world of blockchain-fueled financial services.
Emerging ecosystems of financial applications and protocols built on blockchain technology are changing the face of financial services. After a year of WallStreetBets, suspicious broker outages, crypto adoption, and the power of the Reddit trader, the world of Decentralized Finance (DeFi), which doesn’t rely on central institutions, is transforming traditional finance.
People rely upon and trust less the traditional banking system more than ever before. The global coronavirus pandemic undoubtedly hastened the uptake and usage of DeFi, as the world moved more and more online.
What started life as a simple Ethereum-based swap interface that allowed ERC-20 tokens to be exchanged in a decentralized way, named Uniswap, has transformed into a massive and evergrowing ecosystem packed with decentralized exchanges, crowdfunding, and staking platforms. NFTs, yield farms, and lending protocols.
Now, with a TLV worth hundreds of billions, and new protocols and technologies emerging all the time, what is next for DeFi?
Interconnectivity
Interconnectivity will play a key role in what’s next for DeFi. At present, blockchain applications and the DeFi sphere are just a balkanized group of solutions. Blockchain networks, in order for the benefits to be fully realized, must be able to be connected to other networks and be open to a sovereign network of blockchains, all interconnected.
The development of the Inter-Blockchain Communication (IBC) protocol will go a long way to solving the connectivity issues. Currently, there is an over-reliance on older, less scalable Bitcoin and Ethereum networks. The majority of the $200 billion is held in projects on Ethereum. as much as $140 billion according to DefiLlama Up next comes Binance Smart Chain with $18.5 billion and Solana with $11.7 billion. The next largest networks are Terra, Avalanche, and Fantom.
However, this is changing and new networks such as Cardano and Solana are more than changing the status quo, but there is still a lot more to do in the blockchain world regarding Interconnectivity.
Regulation
The explosion in growth of the DeFi sector has not escaped the notice of regulators. There are no centralized entities who run the DeFi market place & the platforms are ultimately governed by its users. This is not something that sits well with regulators,
Under the premise of AML (Anti-Money Laundering and counter-terrorism policies, governments around the world are taking more of an interest in cryptocurrency and the activities of the DeFi world. An industry that doubles in value within just six months will be an industry that the regulators will want to regulate, so it is fair to say, we can expect some regulatory moves from the likes of the SEC very soon.
However, the DeFi juggernaut is going to be difficult to rein in, so if anything, it will be interesting to see the battle ahead.
