DeFi: Applications And Expectations For 2021

Since the beginning of the cryptocurrency bull run of 2020, we have seen Bitcoin BTC/USD triple its price from the 2017 all-time high. Thanks to this success, many investors have entered the markets to buy bitcoin and participate in this profit-making opportunity. 

However, an additional factor has contributed to cryptocurrencies’ recent success. We are of course talking about the decentralized finance sector, or DeFi. This niche has literally exploded in the past two years, clocking above $50 billion of locked funds at the moment of writing.

In this article, we introduce you to DeFi, its advantages, and the reasons behind its success. Moreover, we will go through some important and upcoming updates that could revolutionize finances as a whole.  

Before we delve deeper into DeFi, let’s have a quick overview of the tech that makes this financial revolution possible. 

A short introduction to blockchain and smart contracts

Blockchain was first made popular with the release of the original cryptocurrency. It was initially used to record transactions on the Bitcoin network and is actually a very simple concept. 

The blockchain is a decentralized, distributed digital ledger of transactions. Transactions are organized on blocks of data and chained together through the means of cryptography. Consequently, blockchains allow users to exchange value over the internet without the use of intermediaries. 

And while blockchain allowed us to transact cryptocurrencies safely over the internet, it had limited use cases. However, this changed drastically with the introduction of smart contracts and with the release of the Ethereum ETC/USD blockchain. 

What are smart contracts?

Smart contracts are applications that automatically execute on the blockchain once certain conditions are met. Thanks to these protocols, developers were able to create their own cryptocurrencies that run on the Ethereum blockchain. With that said, they equally added the ability to execute decentralized applications (dApps), which revolutionized the entire industry. 

The Ethereum network acts as a global supercomputer, where we can deploy applications that can be used by anyone, anywhere in the world. 

What is DeFi and what are its current applications?

DeFi takes advantage of dApps to provide users with traditional financial products, but without the need for a centralized financial institution acting as the middleman. By using blockchain technology and smart contracts, users can enjoy a new financial ecosystem that is: 

• Secure - because it’s decentralized, DeFi projects don’t present a single point of failure.  
• Permissionless - because there’s no central authority, anyone can participate in DeFi, no matter their geographical location. 
• Cost and time-effective - compared to traditional banking, blockchain transactions are much cheaper and can be executed within minutes (instead of days). 
• Full control - due to the fact that there’s no intermediary, users remain in full control of their funds. 

Currently, DeFi has many applications, with the most popular being listed below. 

• Lending and borrowing platforms - where users can lock their crypto funds and lend them to other users and gain interest. 
• Decentralized exchanges - exchanges powered by smart contracts where users remain in full control of their funds at all times. 
• Yield Farming - where users can provide liquidity by locking their crypto and get rewards for their efforts. 

What can be expected from DeFi in 2021?

Although the growth of the DeFi ecosystem has been incredible, there are a couple of issues that are still hindering its growth. However, some upcoming updates will ensure that these problems are solved, which could mean even more gains in the future. 

Ethereum 2.0 update

Ethereum is the main DeFi platform for the moment, with more than a thousand projects running on its network. Due to the high saturation of the Ethereum blockchain, transaction fees have skyrocketed, which has caused the price of Ethereum to stagnate in the past few months. 

However, the Ethereum 2.0 update that is planned by the end of the year should solve this issue. By switching to a PoS consensus, Ethereum will become more efficient, faster, and cheaper to use. 

The emergence of new smart contract platforms

A good number of smart contract blockchains such as the Binance Smart Chain, Cardano, Tezos, and Solana are becoming increasingly popular. 

We expect to see developers start adopting these high-performance blockchains to deploy more DeFi dApps. This growing competition should increase the overall project quality in the space. 

Improving accessibility to DeFi

A major disadvantage of a large majority of DeFi projects is their lack of a user-friendly interface. This makes them difficult to use for beginners and thwarts their adoption. 

As competition increases in the ecosystem, we can expect to see more elaborate projects that will appeal to everyone and not only to tech-savvy crypto holders. 

Conclusion

Blockchain technology has enabled us to revolutionize the financial ecosystem. Decentralized finance brings a huge number of advantages to humanity by allowing them to participate in a global internet economy and avoid bank’s prohibitive costs and limitations. 

As the technology behind DeFi continues to improve, we are bound to see increased adoption of cryptocurrencies as a legit financial instrument.