Decentralized Finance (DeFi) has been the hottest crypto trend in 2020 and is likely to continue dominating the show next year as well. This burgeoning crypto niche is now a force to reckon with when it comes to financial services; in fact, diehards are of the opinion that it is the future of finance. Basically, DeFi innovations spun around traditional financial services with the cutting edge being a decentralized ecosystem.
Today, the total value locked (TVL) in DeFi is well over $15 billion, most of which was accumulated during the summer DeFi craze. While some skeptics have shorted the fundamentals of this sector, it appears that financial services on decentralized platforms is inevitable. Recent months have seen the debut of serious projects as scams got edged out of the market; it comes as no surprise that institutions also want a piece of the pie.
Well, as we approach 2021 most stakeholders are curious what the DeFi market holds for them. There already seems to be a shift in hot DeFi trends from the dominant yield farming narrative to other areas such as NFTs, Deflationary governance tokens, Insurance & Derivatives. Let’s take a deep dive into these potential areas to get a better picture of what DeFi might look like in 2021.
New Trends for DeFi in 2021
Non-Fungible Tokens (NFTs)
This particular DeFi niche is yet to hit mainstream like the yield farming concept, but implies a strong value proposition in asset ownership. To put it simply, NFTs are exclusive digital assets which means that no token is the same. NFTs have come up as a unique way of storing valuable assets such as art and collectibles on blockchain tech, where only the owner is entitled to the underlying value.
According to the latest DApp radar report, NFTs are gradually growing in terms of adoption with the gaming industry playing a big role in this uptick. The report further highlights that this is among the potential DeFi hot trends after integrating yield farming incentives,
“After the implementation of yield farming initiatives on the NFT marketplace Rarible unique active wallets spiked from around 200 to more than 1,500 in September 2020.”
Deflationary Governance Tokens
Given the volatile nature of crypto assets, tokenomics is a fundamental ingredient for DeFi projects to be successful. On this front, one project dubbed Rootkit is already ahead of the game based on its highly deflationary, yield farmable token that leverages locked liquidity pools to unlock new possibilities for DeFi users. Rootkit combines permanently locked liquidity pools, a fixed-supply currency and Uniswap’s pricing mechanism to create a price floor while ensuring a minimum lifetime price for its governance token.
As for its deflationary nature, Rootkit burns 0.4% of every transaction in order to balance supply with the overall volume. Ideally, the tokens that are removed from circulation or added to the liquidity pool have an upward effect on the Rootkit price-floor. Currently, Rootkit is trading at $681 with Uniswap being the largest market of this governance token.
To further boost the effectiveness of a price-floor tokenomics, this project uses a Vault which assists in the locking up of more liquidity or burning more Rootkit (depending on which increases the price).
Insurance & Derivatives
Like any nascent industry, DeFi is still crawling before it can start walking and finally run when the time is right. It only makes sense to prepare for this future from all angles, hence the emergence of insurance and derivative focused DeFi projects. While there is still little fundamental development and traction, there seems to be a consensus on introducing all traditional financial products to DeFi.
In fact, this area of DeFi innovation is being spearheaded by prominent players like the Yearn Finance (YFI) developer, Andre Cronje. The DeFi expressionist is now focused on integrating Yearn Finance with valuable projects such as Cover, which is an insurance protocol. Recent weeks have been particularly active as developers combine wits to introduce DeFi insurance.
Another area that is also getting some traction is DeFi derivatives; innovators with a background in option pricing and related derivative products are working to bring this niche alive. One project that has pivoted towards derivatives is Hegic, an on-chain options trading protocol built on Ethereum. It has also combined forces with Yearn Finance developers to introduce DeFi option contracts for risk diversification.
DeFi will soon become a threat to traditional finance, although it may take some time before a mainstream paradigm shift. That said, the early DeFi stakeholders who include innovators, adopters, investors and validators are likely to make a killing for being among the first to experiment on the future of finance. Also, the year 2021 is likely to be more bullish for DeFi given that Bitcoin recently broke it's All-Time High (ATH).