Darius Moukhtarzade is a researcher at Sygnum, the world’s first digital asset bank. Prior to Sygnum, he worked for Ernst & Young in blockchain consultancy and for several startups in the Swiss Crypto Valley.
Undoubtedly, NFTs have received the most attention in the crypto space in 2021.
While some market observers had foreseen their rise in popularity and use a while ago, their skyrocketing adoption among both traditional and crypto-native players took most of us by surprise. The hype around punks, apes, and rocks overshadowed even the thriving DeFi sector.
Yet I expect that DeFi will come back into the spotlight again next year, experiencing a second “DeFi summer” as it did in 2020 for two main reasons: yield opportunities are likely to be more sought after, especially in a sideways or a bear market scenario; and the establishment of a regulated version of DeFi, which I will call RDeFi.
Attractive yield opportunities
Since the “DeFi summer” of 2020, many new and innovative projects have emerged while the established ones further developed their offerings. A trend that we already saw this year especially in the first half was different types of yield generation as DeFi offers very attractive yield opportunities ranging from conservative products between 3-5% and with more aggressive ones between 30-40% on stablecoins depending on the investor’s risk appetite.
Many new joiners to crypto who entered the space in the recent bull run will start exploring DeFi. For some, it will be the “traditional” path from Bitcoin to Ethereum and then DeFi. For others, it will be from NFTs to Ethereum and then DeFi.
Regardless of whether someone started with the mother of all coins or with a cyborg shark, the result will be the same: increased adoption of DeFi which could lead to a DeFi 2.0 summer.
Evading high gas fees
Even though the ETH 2.0 update is planned for the first half of next year, I believe that Ethereum will still deal with very high network fees for most of the year.
This will not stop DeFi adoption but push investors to use even more Layer-2 scaling solutions such as Arbitrum, Polygon, or Optimism and alternative smart contract platforms such as Polkadot, Solana, Avalanche, or Terra.
I am very excited about Polkadot’s DeFi platform Acala, which recently became one of the first projects to get a parachain slot on Polkadot. Also, Solana, which gained a lot of NFT share from Ethereum due to lower network fees, will be interesting. Its high TPS and scalability allow DeFi applications that would not be possible with Ethereum.
The emergence of 'RDeFi'
I believe that in 2022 we will see the emergence of RDeFi, “Regulated DeFi”.
This may sound like an oxymoron to some, but I see it as the next evolution of DeFi. I expect that alongside the DeFi that we all know and love, a parallel DeFi sector will emerge, mirroring its rebel twin but with a regulated wrapper around it that matches the regulatory requirements in traditional finance. This RDeFi will only be accessible through the same know-your-customer process that traditional investment instruments use and will have to satisfy the same anti-money laundering standards.
We have already seen early examples of RDeFi project in 2021 with lending & borrowing protocols Aave and Compound both offering regulatory compliant versions of their platforms, Aave Arc and Compound Treasury, respectively.
This trend is likely to continue, and I expect that other types of DeFi projects, such as DEXs, will also offer regulated versions of the platform. It would not surprise me to see an Uniswap Pro version next year.
I also expect to see more projects that are regulatory compliant from inception, such as Swarm Markets that received regulatory approval from German regulator BaFin earlier this year and operates as the first regulated DEX.
Furthermore, I expect large exchanges such as Coinbase or Kraken to offer their investors access to DeFi applications through a regulated gateway. As using centralized exchanges avoids the burden of self-custody and private key management, they can offer DeFi platforms without the need to download a web wallet or to interact directly with dApps. Such offerings would bring further adoption and liquidity to the space.
While some crypto exponents would argue that DeFi applications with KYC requirements go against the spirit of decentralized finance, I prefer to define DeFi as an economic model with owner-operators rather than a service offered by a for-profit entity. The conditions of access to the service do not alter the economic model. RDefi offerings tap into a new customer base for these platforms, regulated financial institutions who would not be able to interact with these platforms otherwise.
In addition, regulation can add customer protection and hold platforms accountable, which may be preferred also by those who are not restricted to regulated services. I believe this development will help mature the space. RDeFi will be pivotal in further increasing liquidity on DeFi platforms and indeed it is the only way for regulated institutions to enter the space.
While I expect that NFTs will continue to attract interest, especially in connection with the metaverse and blockchain-based gaming, I believe that the DeFi space will reclaim some of the limelight.
DeFi has matured over the last year and it remains a very innovative sector. The high yields will continue to attract investors, and RDeFi will bring Defi to another level, increasing adoption and liquidity.
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