Decentralized Finance (DeFi) applications brought new and exciting trends to the cryptocurrency industry. Complete offerings like GameFi, SocialFi, and ReFi influenced and complemented many sectors in the past year. Unfortunately, even the best products for the best crypto wallets in Australia (2023) experience winter in this space.
In this article, we will explore DeFi's current state and acknowledge whether it could make a comeback or not.
Understanding the Current State of DeFi
Since May 2022, DeFi apps have experienced multiple hits lowering their rallies to one-third of their peak total values locked (TVL) across numerous blockchain ecosystems. Experts link many of these tragic hits to the widespread hacks and the failure of big crypto exchanges like FTX.
Regardless of all that has happened during this crypto winter, it's unlikely that DeFis will remain bearish for long, big thanks to the failure of centralized finance mechanisms.
Despite DeFi's ongoing bear season, DeFi applications continue to be a more inclusive, transparent, and secure option than their centralized counterparts. Its permissionless and open-sourced core and exciting features like coded smart contracts and lending make it a more viable investment for crypto investors.
Decentralized exchanges and lending platforms continue to operate flawlessly and attract more capital. In November 2022, following FTX and Celsius's troubles, many observed that billions of dollars poured into decentralized exchanges from centralized agencies, causing the trading volumes to double.
Potential Catalysts for a DeFi Comeback
There's still much room for DeFi innovation and growth. However, its average performance in these times is enough reason for more users and centralized institutions to adopt its protocols.
However, unlike before, when users were satisfied with DeFi's primary offerings, like sustainable yields, stakeholders must consider introducing better narratives and offerings. In addition, soaring inflation and interest rates make various protocols' accommodative macro backdrop less appealing.
DEX exchanges now offer competitive rates and rewards to bring in more users. For instance, Coinbase offers 2.36% rates on its USDC rewards. At the same time, Ondo Finance plans to provide share class tokens valid for multiple DeFi ecosystems as on-chain collateral.
DeFi analysts believe a better way out of this bearish season is the creation of improved Centralized Finance (CeFi) applications for the DeFi ecosystem. These proposed brilliant innovations include zero-knowledge privacy technology, distributed ledger technology (DLT), on-chain underwriting, clearing and settlement, and liquid stacking.
Many crypto investors are searching for financial stability and would work with anything that provides that.
While regulators have a significant role, smart contract engineers must also play theirs. BaFin, Germany's financial regulator, is among a few with blockchain regulations and legislation. As a result, in Germany, residents can enjoy the values of initial coin offerings, decentralized apps (dapps), and security token offerings.
Stimulating More Users and Activities in DeFi
Liquid staking is one way to encourage more adoption of DeFi platforms that needs improvement. Another is tokenizing real-world assets like money markets, residential or commercial property mortgages, trade finance, and infrastructure loans.
An Ethereum-based liquid staking network Lido has over $9.4 billion in assets staked. It accepts assets as payment, uses them as staked collateral, and then offers alternative tokens that users can use on the platform. Currently, users earn a certain yield percentage while engaging in DeFi activities.
In the future, DeFi may offer more affordable financing options by fractionalizing capital and lowering the barrier to entry for investors with distributed ledger technology.
It is undeniable that CeFi and DeFi are intertwined. With more risk management and pricing models and replications of traditional financial products on open blockchains, more investors will come.
In conclusion, DeFi will make a stronger and more exciting comeback once investors gain access to a broader variety of assets on the blockchain, ultimately increasing portfolio diversification.
