Rising of DEFI in 2021

2021 will be a pivotal year for DeFi by transforming the way we see financial services and the future of money.

Following the explosive growth of decentralized finance in the second half of 2020, we’re asking ourselves what the next chapter will look like. What would it take for DeFi to expand beyond crypto-native assets and communities and start eating financial services as we know it?

The second half of 2020 surpassed many of our expectations, and the market has only accelerated since then. Total value locked in DeFi rose from less than $1 billion at the start of June to $13 billion at the end of the year and over $27 billion since then. We saw a wave of yield farming and a rapid inflow of assets.

Perhaps more excitingly, we’ve started to see the foundations of a new financial system taking shape – with applications that enable everything from self-custodial exchanges to lending and borrowing, payments, portfolio management and insurance. New forms of value are being created: not just the promise of yield in a low-rate environment but also access to financial services for crypto-exposed businesses and individuals and for the underbanked more generally.

Today, DeFi is the preserve of a small subset of crypto-native users and assets and is seen by its critics as the wild west.

The first iterations of decentralized exchanges were fraught with liquidity issues. Early adopters faced a significant lag in order matching, and token pairs were limited. Automated market makers and liquidity pools have become a widespread solution to this, with daily trading volumes on decentralized exchanges currently on the order of $2 billion – and DeFi projects continue to find innovative ways to incentivize the provision of liquidity. This will continue. For borrowers, we believe there remains a clear need to bring down collateralization requirements and indeed to use alternative forms of collateral.

Perhaps the greatest opportunity lies outside the universe of crypto-native assets. There are trillions of dollars of potential collateral up for grabs in real-world assets: Users want to borrow money against the assets that they already have and often cannot access the liquidity they need by conventional means. Tokenization of real-world assets can dramatically increase the size of the DeFi universe.

We are beginning to see crypto-native institutional investors seek higher yields via stablecoins. Many of these investors use centralized exchanges, at least initially, but a handful of institutional-focused self-custodial products has emerged. Regulatory scrutiny on DeFi is likely to increase as these services gain traction.

Meanwhile, regulators around the world have enacted stricter rules for virtual account service providers, such as centralized crypto exchanges.

The rise of crypto in the last decade has transformed the way we think about stores of value. The rise of DeFi in 2020 transformed the way we think about the future of financial services and true innovation in a space that changes very slowly. As the dust settles on a remarkable 2020, we now expect to see a massive increase in scale and professionalization as DeFi captures more regulatory and institutional attention.

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Charles Wade

Charles Wade

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