Updated on January 16, 2023 11:29 AM
Decentralized Finance (DeFi) or Open Finance is a global, open alternative to every financial service you use today — savings, loans, trading, insurance, and more — that is accessible to anyone with a smartphone and an internet connection anywhere in the world.
DeFi technologies are used to develop alternatives to traditional financial methods. A public blockchain serves as the foundation or computational layer upon which transactions and smart contracts (code) are recorded. A smart contract is a piece of code that is run on a blockchain.
The execution of a smart contract is triggered when the smart contract is "called" by a blockchain transaction. If the smart contract is triggered, it will be executed through the blockchain's network of computers, resulting in a change in the blockchain's "state."
Smart contracts can be used to issue and manage tokens, escrow tokens, and perform a variety of "if/then" type computations.
While much of the activity in DeFi takes place on a specific base blockchain (on-chain), participants also rely on and use technologies other than blockchain (off-chain) to build products and systems, as well as communicate and coordinate activities, such as the internet and its infrastructure, which includes internet-based software, collaborative tools, online forums, and social media.
Defi is a viable alternative to traditional centralized financial services. They enable a greater number of people to participate in financial transactions, as well as greater transparency and lower costs.
There are still significant barriers that cause hesitation. First, they are risky; a lack of regulations, on the one hand, allows for a significant number of hacks and scams, while asset prices are volatile on the other.
Fees for users on Ethereum (the main platform for decentralized applications (dapps)) are high (referred to as "gas fees"). To be a part of this economy, you must be technologically savvy.
Regardless, we see 2022 as the year of transformation, and the signs of that transformation are already visible.
The total value of assets in DeFi platforms has already surpassed $100 billion. And 2022 appears to be a year of exponential growth as more start-ups, traditional financial institutions, and consumers enter the market.
At the moment, experienced cryptocurrency investors have embraced this new financial transaction tool. However, changes in regulations, price drops, and other factors give us reason to believe that DeFi will become mainstream this year.
Also Read: DeFi vs CeFi
Things have changed dramatically since the creation of the Bitcoin genesis block. DeFi has seen product market fit as a result of the subsequent rise of Ethereum. DeFi TVL increased from $600 million in January 2020 to $180 billion in December 2021 during the previous Bitcoin bull market.
Despite the market crisis in 2022, the TVL within DeFi has retained over $39 billion. Because it does not require a centralized organization to onboard users, DeFi has democratized access to financial services. Aside from democratization, DeFi has enabled new models such as automated market making.
Despite these intriguing developments, DeFi will be worth only $39 billion in 2022. Let us see what happened in 2022 and what we can expect for DeFi in 2023.
The year 2022 began with a general market decline. Solana's Wormhole bridge within the Web3 ecosystem was hacked, resulting in the theft of $310 million in crypto assets. They were able to emerge from the abyss thanks to a few projects on the Solana environment.
However, in March, reports about the Terra ecosystem and its algorithmic stablecoin began to circulate. As the market fell further in April and May, the network disintegrated, resulting in a broader market sell-off.
Following the Terra incident, the markets rebounded over the summer, only to be pulled down again by the FTX fiasco. While the FTX problem cannot be considered wholly a DeFi issue because it arose from suspected misbehaviour at a centralized exchange, others have observed the impact FTX and its related corporation, Alameda, had on the ecosystem.
Despite the tragedy, the DeFi business has quietly continued to grow and innovate. Several institutional DeFi headlines in 2022 could also provide rewards in the coming years.
As the Lightning Network enables projects to develop on top of the Bitcoin network, it is beginning to show utility. For speedier Bitcoin transactions, Cash App integrates the Lightning Network.
While market sentiment has been negative, there have been numerous positive developments within DeFi; therefore, what does 2023 hold for DeFi?
DeFi and security
Hackers were rampant in 2022, causing significant financial losses for DeFi crypto investors. There must be a few key developments in this space as regulations ramp up and institutional adoption shows promise.
As of October 2022, the crypto industry had lost nearly $3 billion due to 125 hacks. This harms the space's reputation and creates a significant barrier to attracting institutional capital.
As a result, the DeFi ecosystem has already begun developing applications that notify wallet holders of what a smart contract intends to do before the user signs it.
However, more work is needed to address security flaws associated with oracles and cross-chain bridges. More decentralisation of cross-chain bridges is a positive step.
In addition, DeFi platforms will begin to take insurance products more seriously in order to protect user funds. CertiK and Hacken, for example, provide specialised cybersecurity solutions for Web3 platforms.
Web-based gaming looking for DeFi
In 2022, a number of gaming projects with DeFi integrations competed for market share. These projects will continue to mature and grow in 2023, with DeFi acting as a strong pull factor.
Web3 gaming has found itself in an unusual position within the ecosystem, and it may be the growth hack that Web3 has been looking for. While the games' playability remains an issue, ecosystem-specific earning models, staking, and farming will provide unique offerings and value propositions that traditional games lack.
DeFi in institutions is on the rise
Over the last year, institutional interest in DeFi has increased. Large banks and financial institutions have shown a particular interest in payment, custody, and anti-money laundering (AML) solutions.
Standard Chartered's innovation arm partnered with investment management firm Northern Trust to launch Zodia, a cryptocurrency custodian for institutional investors, while Barclays acquired a stake in Copper, an institutional crypto custody firm.
Countries are attempting to regulate DeFi
Fraudsters and thieves stole more than $10 billion from DeFi users in 2021, according to reports.
This prompted experts and organisations to call on governments to enact industry regulations and authorities have taken action.
Britain is monitoring crypto advertising and is preparing rules for DeFi assets. The EU and the United States are also debating how to regulate this new industry.
Many analysts believe that DeFi products will finally become mainstream in 2022. It is not only a lucrative and rapidly growing industry, but it is also a means of changing the old model of financial transactions.
Financial and economic services will be run on Distributed Ledger Technology in the near future, which is a decentralised database managed by multiple participants with no central administrator.
Investing in decentralised finance (DeFi) coins can be a fantastic idea for a number of reasons. Remember to conduct extensive research on how to invest in DeFi and to examine as many DeFi exchanges as possible.
Aave is widely regarded as one of the most reliable DeFi ecosystems, but it is not content to rest on its laurels.
We have 203 DeFi projects listed, with 12 built on Solana.
D2T - the native cryptocurrency of the Dash 2 Trade crypto analytics and social trading platform - is the overall best DeFi token to invest in in 2022.
DeFi will expand while CeFi consolidates: This past year exposed many of the shortcomings of centralized finance (CeFi), while DeFi performed admirably.