The development of high-performance software and new financial technologies have provided a better economic system that is reshaping the way we view finance as a whole. One of them is an exciting ecosystem from the fintech world with over US $88 billion in market cap currently, called DeFi, or decentralized finance.
The Emergence of DeFi
DeFi is an industry of financial protocols without a central authority. They take vital aspects of the traditional system and replace the middleman with a smart contract, a two-party agreement that can execute and enforce itself with scripted code.
DeFi has had a tremendous impact on the modern financial world. Decentralized financial platforms have allowed everyone, even the unbanked, to participate in a space full of opportunities and exciting features without needing third parties.
It’s worth noting that Ethereum, the world’s most popular decentralized ecosystem, and second-largest cryptocurrency, is the father and pioneer of the DeFi space, where several successful projects built with it, such as Chainlink.
With this in mind, let’s take a look at some of the hottest trends in the DeFi space.
Non-Fungible Tokens (NFT)
Non-Fungible Tokens are undoubtedly the most popular trend in the DeFi world right now. While the industry is currently enjoying mainstream popularity, NFTs began in 2012 with CryptoKitties — blockchain-based collectible and tradable animated cats.
And what are these so-called Non-Fungible Tokens? To cut a long story short, an NFT is a crypto asset that acts as a digital representation of a unique digital item. These digital assets are built using blockchain technology. Every NFT has an alphanumeric number that can be tracked and can provide general information about that digital piece, like the current owner, the original creator, and for how much it was sold.
However, NFTs are not interchangeable, hence the name “Non-fungible” — they can only represent ownership of digital content from art, sports, music, and other forms of entertainment.
NFTs are so popular now because artists, musicians, and everyone with an idea realize the benefits of blockchain technology, like ownership, transparency, and better revenues, compared to centralized platforms who usually take a cut on artist’s incomes.
Let’s take a quick look at NFTs characteristics:
- Uniqueness: tokenized content is unique — unless limited editions are issued — and every NFT has its own standard depending on its underlying blockchain. Most NFTs are built using the ERC-20 token standard. However, creators can also launch their NFTs using Binance Smart Chain, Tezos, or Polkadot.
- Ownership: NFTs have a certificate on their property. When you purchase one of these pieces, it entirely belongs to you. Besides, NFTs can’t be duplicated, unlike other digital files.
- Better source of income: Many artists, underground and famous, are joining the NFT space because they can receive a better income for their projects instead of relying on centralized authorities. This also allows content creators to better connect with their fans instead of dealing with intermediaries that take a cut of their revenues.
Gaming and Blockchain
Blockchain has been introduced into the gaming world to show gamers the benefits of this innovative technology. The gaming community is a vast market to spread massive blockchain adoption, bringing a decentralized ecosystem for the community.
Game Publishers Exploring Blockchain
One recent example is the integration of Ubisoft —a gaming giant behind many titles like Assassin’s Creed and Farcry, into the Tezos protocol, becoming a corporate validator node while experimenting with the features of DeFi and blockchain and how it can benefit the gaming world.
Decentralized virtual reality worlds have become incredibly popular for crypto-enthusiasts and gamers alike. One of these worlds is Decentraland, a virtual reality platform where users can create their own avatar and interact with other players on its metaverse. In Decentraland, players can buy, sell, and trade NFTs. Users can also acquire pieces ofLAND (an ERC-721 token in the form of lands in the metaverse) with MANA, the ERC-20 utility token in Decentraland.
Avatars interacting in Decentraland
The Emergence of Stablecoins
Stablecoins are digital tokens pegged to a fiat currency or a real-world asset such as the US Dollar. They serve as a medium of exchange and a way to avoid the inherent volatility of classic cryptocurrencies like Bitcoin (BTC) and Ether (ETH).
Stablecoins are popular among investors who want to keep their money in crypto assets without relying on fiat money. Investors with several positions in the market can get out of it by selling their positions in exchange for stablecoins. The most popular in the market are:
- Dai Stablecoin
- USDT (Tether)
- USDC (USD Coin)
- TUSD (True USD)
- PAX (Paxos Standard)
Let’s take Dai, for example, an Ethereum-based stablecoin issued by MakerDAO, an autonomous organization. The issuance of Dai is guaranteed thanks to lenders in MakerDAO every time they lock their funds in ETH, BTC, or any other crypto through smart contracts on the Ethereum blockchain.
Stablecoins have all the aspects of cryptocurrencies without the inherent volatility, making them an alternative to fiat money.
Yield farming (or liquidity mining) is a way to make revenue by lending your funds to others via smart contracts. By doing so, you earn crypto fees in exchange for your service. However, farming is not as easy as it sounds —it involves risks and well-thought strategies to make money out of it.
Farmers usually move their funds from one marketplace to another to leverage their returns and take over-collateralized loans with the inherent risk of liquidation due to the collateralization ratio threshold.
Yield farming is wildly popular in the DeFi space because it allows investors to make crypto with crypto —if they are clever enough to do so. It is a highly competitive environment where farmers compete to get the best out of a protocol. 2020 was the boom of DeFi considerably due to yield farming. The market is set to become even stronger than ever this 2021 as innovation in the industry grows.
With such a strong impact on modern economics, DeFi has allowed a degree of unprecedented innovation, creating financial products and whole ecosystems using blockchain technology. The crypto and DeFi community is eager to see what holds for 2021 in the world of decentralized finance.