Trends to Watch

in DeFi in 2021
The phenomenal rise of decentralized finance was one of the most prominent success stories in the world of crypto in 2020. The outbreak of the COVID-19 pandemic dissuaded investors away from the traditional money-market instruments. On the other hand, the digital market of decentralized finance grew manifolds. With its unique lending protocols, stable coin borrowing, and liquidity mining features, the DeFi space piqued the interest of crypto enthusiasts and investors alike.

The total value locked in the decentralized finance sector crossed the mark of 1 billion US dollars in February 2020. By the time the year 2020 came to an end, the dollar value of assets locked in the DeFi protocols exceeded 13 billion US dollars, with a growth rate of more than 2000%, considering January as the base period.

As far as the latest available numbers are concerned, the total market capitalization of the DeFi crypto market has crossed the figure of 32 billion US dollars. Experts believe that the dominance of DeFi protocols will increase in the days to come. Here, we have identified the top trends in the DeFi market that will shape the space in 2021.
The Increased Adoption of Cross-Chain Technology
The growth of decentralized finance was frequently getting challenged by a host of factors. Despite transaction times reducing significantly, the average fees were increasing at a rapid rate. It went from a few cents to more than 10 US dollars within a year. Scalability and interchangeability were also emerging as roadblocks as the movement of tokens in and around the defi space. These issues were costing the users anywhere between 5 US dollars and 30 US dollars or even more.

Cross-chain technology platforms intend to address this area of glitch. With the use of cross-chain technology, assets represented on one blockchain can be represented on another. It helps to homogeneously distribute the load of the entire DeFi space across many chains, in turn, increasing the efficiency of the entire DeFi sector. There are cross-chain protocols that have been working on a sidechain Ethereum, while others are looking at more broad-ranging solutions.

Some defi protocols have already been implemented. Whereas, some are in the process of implementing networks of independent yet interoperable blockchains. Interoperability is one of the most enticing features of cross-chain. Interoperability makes it easier for the users to seamlessly transact on other blockchains. Interoperability is also expected to help users leverage diverse functionalities without having to leave the blockchain. For instance, users can make payments across multiple blockchains. This feature will help to strengthen the core of the digital economy at large.

Interoperability also facilitates multi-token transactions owing to the development of multi-token wallet systems. It enables users to maintain a single wallet for storage and transfer of tokens hassle-free across multiple blockchains.

The cross-chain technology and the cross-chain technology-induced interoperability features will not only work to make the defi sector better, but it will also help to make blockchain a useful tool for the entire domain of digital finance.

The rise of cross-chain technology as a DeFi trend is apparent from the growth in blockchain interoperability projects. Experts believe that increased interest in cross-chain technology will sustain and grow as a trend in 2021, accelerating blockchain mass adoption.

DeFi Competing With Traditional Banking Sector
Several industry experts believe that the aggregation of diverse services under one platform will become a trend in 2021. As a result, the DeFi space would become equipped to compete with the traditional banking sector. As it works for a banking account, the aggregation of multiple decentralized protocols will allow users to control all their operations from a single dashboard. Experts think that with this growing trend of aggregation, the capability-differences between centralized and decentralized finance will diminish further. In some cases, aggregated DeFi platforms will lead to better management of funds.

In traditional banking, the funds that sit idle on the low-interest saving accounts will be better spent with the help of aggregated DeFi solutions. Users will be better placed to earn an additional income on their fund by leveraging native DeFi mechanisms such as staking rewards, lending protocols, and liquidity mining.

Lending will equip small operators and businesses with the opportunity of earning a higher return than traditional bank interests. They will be able to put their capital reserves to better use. The same applies to the area of liquidity mining. With these facilities coming together, DeFi applications will lead to more efficient management of the treasury.

Blockchain, as a growing technological field, will keep witnessing innovations. These innovations, in turn, will make DeFi faster and cheaper than traditional banking.

Growth in Stablecoins
The growth in stablecoins emerged as a trend in 2020. It is expected to continue in 2021 as well. Between October 2019 and October 2020, the supply of stablecoins witnessed an astounding surge of more than 1,200 percent. While the aggregate supply of stablecoins by the end of Q3 2020 was nearly 20 billion US dollars, the market capitalization of tether (USDT) alone crossed the mark of 24 billion US dollars within the first two weeks of 2021. Tether is the largest stablecoin by market capitalization and is, therefore, considered the flagbearer of growth in this market.

Along with its growth in supply volume, the exponential growth in stablecoin's market is also evident from its spread across multiple blockchains. Well-known stablecoins keeps on adding support for new protocols each passing day. Experts attribute this growth in the market of stablecoin to a growing number of hedge funds and OTC trading desks that have moved their funds to USDT, anticipating a faster arbitrage and faster reaction to market movements.

In terms of pegged fiat currencies, the US dollar still dominates the market of stablecoins. But with the imminent stimulus package coming into the scene, experts feel that other fiat-pegged stablecoins will gain prominence, and the coverage will become more broad-based.

The Rise of Yield Farming

The rise of yield farming has been one of the most discussed trends in the DeFi space in recent times. The interest in yield farming observed among crypto users and traditional mainstream investors alike have compelled experts to term it as the 'rocket fuel' of DeFi.

Yield farming implies efficient strategies, where investors deploy their crypto assets temporarily at the disposal of some startup's application. In exchange, the investors are rewarded with more cryptocurrencies. Liquidity mining is a phrase that is often used interchangeably with yield farming. Those who engage in yield farming are commonly known as yield farmers.

To understand why yield farming is gaining such momentum in the market, we should delve deeper into understanding how the process works. At its core, yield farming is a process where holders of crypto assets invest their idle coins to earn either a fixed or variable return. The concept is similar to traditional bank lending. In traditional bank lending, the fiat currency loans that are lent comes back with interest. In yield farming, instead of a bank, the yield farmers add their assets to a liquidity pool, giving the name liquidity mining to the process. These liquidity pools are nothing but smart contracts. Subsequently, these pools empower a marketplace where users can exchange, borrow, or lend tokens. The investor who adds his/her assets to the liquidity pool is called the liquidity provider.

In exchange for locking up their funds in the pool, the investors get rewarded with fees generated from the underlying DeFi platform that facilitates this process. Investors can reinvest their reward tokens in the pool again to multiply their return on the initial investment. It is a regular practice for seasoned crypto investors to keep on shifting their funds between different DeFi protocols to gain the maximum yield possible.

There is another aspect to the success of yield farming. Investors often add their funds to the liquidity pools to accumulate tokens that are yet not there in the open market or are trading at a very low volume. A low liquidity pool always incentivizes its providers at a higher rate than a well-known pool does. Furthermore, the ability to invest in nascent projects help investors to gain token rewards that might shoot rapidly in value.

Experienced investors keep creating complex chains of investments by reinvesting reward tokens into different pools. Since yield farming offers lucrative interest-generating avenues that work better than what a traditional bank could provide, one can reasonably expect yield farming to continue alluring investors in 2021 as well.
Analyzing all these trends as cited above, it is apparent that 2021 defi trends will revolve around its usability, efficiency, and the potential of offering high returns. One can assume that technological innovations will make the DeFi space more all-encompassing. With an increase in investment options, traditional investors will feel more incentivized to join the crypto bandwagon. Whether the DeFi sector would be able to cater to investor demands in terms of providing scale, efficiency and return is something that will be interesting to track.