Federal Reserve Sees DeFi Challenging Mainstream Finance
VYSYN Ventures Weekly Insights #49 – A multi-chain DeFi ecosystem continues to grow, proliferate, and yield lucrative returns for investors
Decentralized finance (DeFi) has continued to grow throughout 2021. In line with the expectations of many, more innovations are springing up in the ecosystem while investors and speculators continue to inject liquidity.
The DeFi trend kicked off in 2020 with a viral growth that many anticipated would end with a bubble bursting. However, the DeFi ecosystem continues to expand, innovate, and attract more attention and capital.
In the latest VYSYN Release, we identify some of the recent developments that have added momentum to the bullish DeFi trend. We also highlight some key areas where users are exploring the benefits of this emerging technology.
Redefining The Financial Industry
DeFi is quickly encroaching on mainstream industry, gradually serving use cases that would have previously been met by the traditional finance industry. According to a paper published by the United States Federal Reserve Bank, DeFi may lead to a paradigm shift in the financial industry and potentially contribute toward a more robust, open, and transparent financial infrastructure. The only concerns that the paper notes are the areas of risk and security.
Increasing amounts of liquidity are being locked in DeFi protocols with the total-value locked (TVL) recently reaching a record high of over $77.3 billion. At the start of 2020, the liquidity locked in the entire DeFi ecosystem was less than $1 billion.
The continued growth in DeFi liquidity is partly driven by the release of novel solutions. Moreover, existing platforms that continue to evolve and extend their services further strengthen the growth. Both of these cases will be detailed in the following section.
DeFi Ecosystem Continues to Expand
Formation Fi recently raised $3.3M to build what they have titled “Smart Farming 2.0”. Kenetic, Kosmos, Spark Digital Capital, and AU21 were among the investors in the project. According to Formation Fi, Smart Farming 2.0 aims to simplify DeFi for ordinary investors and deliver superior returns over time by optimizing the return-to-risk ratios. Formation Fi intends to accomplish this by allowing users of the protocol to tailor their risk exposure while also receiving feedback from the protocol itself.
The biggest decentralized exchange (DEX) Uniswap is one platform that has been extending and improving their services. On May 5th, Uniswap launched its latest Version 3 upgrade. Uniswap’s latest version is proposed to introduce more versatility, introducing multiple fee tiers that would offer greater protection against impermanent loss to liquidity providers. This is just one of several innovations that are attracting more users into the DeFi ecosystem.
A Balanced Growth System
However, DeFi innovation is not isolated to the Ethereum chain. Polkadot is recognized as one of the primary Ethereum challengers. The versatility of the platform and its parachain enablement’s have made it one of the trailblazers of the DeFi era. These parachains run in parallel with the Polkadot ecosystem as diverse layer-1 blockchains. They are connected to the central Polkadot chain and share the security, scalability, interoperability and governance of Polkadot. While novel projects are springing up on Ethereum, the same is occurring on other blockchains like the Binance Smart Chain and Polkadot.
Equilibrium is one example of a DeFi project that springed up on the Polkadot blockchain. Equilibrium pools together is a cross-chain liquidity solution that facilitates decentralized lending, synthetic asset generation, and trading. Equilibrium recently raised $8.5M in Polkadot’s native token, DOT. Equilibrium’s aim is to raise 1 million DOT, roughly equivalent to ~ $39 million at the time of writing, to gain a Polkadot parachain slot. In their recent series A fundraising, the Hardcap of 250,000 DOT was achieved in just 3 days, with 1,500 angel investors participating.
Several projects have also been burgeoning in the Binance Smart Chain DeFi ecosystem. Pancake Swap, Pancake Bunny Finance, and Nerve Finance are all BSC-native protocols that provide versatile DeFi functionality.
What Lies Ahead for DeFi?
2021 has been an extremely bullish period for DeFi protocols. The DeFi Perp, an FTX-traded index that tracks a basket of DeFi assets, has grown 388% year-to-date (YTD). Among the top protocols, $252M was generated in revenue alone for token holders and users in April.
These are the kinds of figures that are certain to attract more investors into the ecosystem. DeFi has not only come to stay but could reshape mainstream finance according to the Federal Reserve. One year ago, many were forecasting the bursting of a bubble. However, DeFi relentlessly continues to grow and challenge centralized incumbents.