Decentralized Finance (DeFi) or Open Finance is a global, open alternative to every financial service you use today — savings, loans, trading, insurance and more — accessible to anyone in the world with a smartphone and internet connection.
Intrigued? Let’s take a closer look.
DeFi technologies work to create alternatives to traditional financial approaches. A public blockchain forms the base or computational layer on which transactions are recorded and smart contracts (code) operate. A smart contract is code that is deployed on a blockchain. The execution of a smart contract is triggered when that smart contract is “called” by a transaction on the blockchain. If triggered, the smart contract will be executed through the blockchain’s network of computers and will produce a change in the blockchain’s “state.” Smart contracts can be used, for example, to issue and manage tokens, escrow tokens, or carry out any number of “if/then” type computations. While much of the activity in DeFi occurs on a particular base blockchain (on-chain), participants also rely upon and use technologies apart from blockchain (off-chain) to build products and systems and communicate and coordinate activities, such as the internet and its infrastructure, including internet-based software, collaborative tools, online forums and social media.
DeFi offers an alternative to traditional centralized finance services. They allow a larger number of participants to join in financial transactions as well as greater transparency and lower costs.
Still, major barriers exist which continue to cause hesitation. First, they are risky – lack of regulations allows for a significant number of hacks and scams, on the one hand, and the prices of assets are volatile, on the other. Fees for users on Ethereum (the so-called 'gas fees') – the main platform for decentralized applications (dApps) – are high. And you need to be tech-savvy to be a part of this economy.
Regardless, we see 2022 as the year of transformation, and the signs of change are here.
The overall value of the assets in DeFi platforms is already over $100 billion. And 2022 seems poised to grow exponentially as more start-ups, traditional financial institutions, and consumers enter the space.
At the moment experienced crypto investors have embraced this new tool for financial transactions. But changes in regulations, drop in prices and other factors give us a reason to think that this year DeFi will go mainstream.
Keep reading to find out more as well as some of the hottest trends in this field and what you need to build your own DeFi product.
In 2021 it is reported that more than $10 billion were stolen by fraudsters and thieves from DeFi users.
This prompted experts and organizations to urge governments to create regulations for the industry.
And authorities have reacted.
Britain monitors advertising for crypto and is set to come up with rules for DeFi assets. The EU and the US are also discussing ways to regulate this new industry.
All these efforts should offer participants protection and more security which in turn will draw more people to DeFi according to experts. Our opinion is this will lead to mass adoption and increased prices, good for early investors. The concern is obviously to maintain the two key aspects: Anonymity and Transaction Speed. Striking the right balance will be challenging.
A lot of analysts noted that the gas fees on Ethereum stopped investors entering the industry.
But the situation has changed.
Since the end of 2021 prices have been decreasing. And what's more, there are competitive platforms that offer lower fees. This means that DeFi is becoming accessible to more users.
Blockchain enthusiasts believe that stablecoins may help more people adopt the possibilities of the sector in 2022.
Price volatility is typical for many cryptocurrencies. And stablecoins are designed to reduce it. They manage to do it as they are pegged to a reserve asset.
This makes them suitable for payments and paves the way for the use of DeFi as more than just a speculative investment. It also makes them attractive to conservative investors who were scared away by the changes in the price of crypto.
As these new financial tools become more popular, they need to become easier to use, too. Now, a new generation of dApps makes them more accessible to individual users and traditional financial institutions which want to join, too. This should contribute to growth in the industry.
So if you are thinking of entering this sector but you are not sure where to start, here are some parts of it that are expected to be on the rise this year:
This is the DeFi equivalent of a loan. Farmers lend crypto through a decentralized application and generate returns in the form of interest or other rewards.
Per reports from the beginning of 2022 this was the most significant growth driver of the industry and we expect this trend will not fade soon.
Games in the sector generate enormous sums of money. Reports state that some players even quit their jobs to dedicate to gaming full-time. Play-to-earn games allow them to generate income from a fun activity.
Crypto Casinos like the ICON developed Dancing Diamonds Crypto Casino offer different types of games where cryptocurrencies are used to fund bets. This type of gambling is becoming increasingly popular due to the control and anonymity it provides to its users.
Everybody was talking about NFTs in 2021 and they seem likely to continue to grow in popularity. They are digital art, keys to private clubs and a part of the play-to-earn games we discussed. There are also predictions that they will expand to real-life art and charity.
And NFT platforms will become more important as well.
As we already said this type of crypto is growing not only in popularity but also in importance to the DeFi world.
These tokens are an important part of the decentralized finance ecosystem as they allow users to vote on changes to a DeFi project. This helps prevent its centralization keeping it in line with its original spirit.
Most exciting, DeFi has led to a boom in new innovative financial products in development.
Our key steps to building a DeFi product?
Research the available dApps and solutions to see what's in the market at the moment. See what the competition does well, what can use improvement and what's missing.
Also, research the users' needs. What would they like to see on the blockchain network?
After you do the research, draft an idea and start thinking of its functionalities. Be careful not to miss important details and build a sound model. Take the time to talk to investors and developers early to solicit feedback and input.
You'll need a partner that can help you develop your dApp. It's best to trust someone with experience not only in development but in blockchain/DeFi, too.
The execution of your idea will rely on the developers to realize the vision, at the cutting edge of DeFi trends and technology.
Key development principles:
The Smart Contract is the central code that forms the basis of every DeFi application.
Its development is challenging and requires assistance from skilled professionals. This code needs to be transparent, secure, and take into account all possible interactions with the platform.
This is a testing step that requires an in-depth analysis of other DeFi products codes to guarantee safe and sound integration between them and your project as this is an important component of this system.
This is the final step of the development of your DeFi product. The team creates the interface of the dApp so it provides the best user experience possible.
In upcoming years, we might see every financial service that we use in today’s fiat system being rebuilt for the crypto ecosystem.
In the future, we expect that crypto wallets will be the portal to all your digital asset activity, just like an internet browser today is your portal to the world’s news and information. Imagine a dashboard that shows you not just what assets you own, but how much you have locked up in different open finance protocols–loans, pools, and insurance contracts.
Across the DeFi ecosystem, we’re also seeing a move towards decentralizing governance and decision-making. Despite the word “decentralized” in DeFi, many projects today have master keys for the developers to shut down or disable dapps. This was done to allow for easy upgrades and provide an emergency shutoff valve in case of buggy code. However, as the code becomes more battle-tested, we expect developers will give up these backdoor switches. The DeFi community is experimenting with ways to allow stakeholders to vote on decisions, including through the use of blockchain-based Decentralized Autonomous Organizations (DAOs).
It’s a rare opportunity to see an entirely new industry blossom from scratch. The DeFi space will at first play catch up with today’s financial services industry. But over time, it’s hard to even fathom what innovations will come about when the power to build financial services is democratized to anyone who can write code.
Many analysts suggest that 2022 is the year that DeFi products finally go mainstream. It's not only a lucrative industry which grows rapidly but also a way to change the old model of financial transactions.
At ICON we have been developing on the blockchain since the beginning. We love the challenge of new technologies and have partnered with several successful DeFi projects.
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