In 2021, the decentralized finance (DeFi) industry blossomed spectacularly, feeding into the expansion of the crypto market as a whole. It now has a total value of more than $200 billion locked in, having been little more than $22 billion on January 1.
Experts expect DeFi sub-sectors to see considerable growth next year, from yield farming and liquidity mining to decentralized autonomous organizations (DAOs), non-fungible tokens (NFTs) and decentralized exchanges (DEXes).
However, many believe that we'll see the introduction of legislation directly addressing DeFi in 2022, although most concur that it will be a net benefit for the industry, allowing it to appeal to more mainstream interest and investment.
Continued growth, new users
The question on everyone's mind - can DeFi keep up this year’s growth into 2022?
“2021 saw a mix of COVID-19 still affecting our daily lives and ability to earn a living and the opening of the global trade/financial market after a very abnormal 2020. As a result, most people started looking at alternative options to going into a bank branch to get loans and at alternative assets to invest in, in order to diversify from traditional stocks/bonds types of investments,” Brad Yasar, CEO of EQIFI.
Similarly, Swarm Markets co-founder Timo Lehes thinks new asset types, regulations, institutional investments, and lower transaction costs will bring mainstream adoption to DeFi next year.
“Bringing more real-world assets and financial products, like securities, on-chain will expand the DeFi ecosystem dramatically, attracting more investors and traders alike. DeFi offers more opportunities than traditional markets to earn yield from a broader set of asset types and gives people greater autonomy to build wealth,” he said.
Regulation to become a reality in 2022
One of the biggest roadblocks for institutions is compliance and regulation. However, 2022 will see progress in this regard from multiple angles.
“Across DeFi, [know-your-customer, KYC] and [anti-money laundering, AML] solutions and wallets with inbuilt KYC and cross border rules checks will help to increase institutional exposure in the year ahead. AllianceBlock’s Cross-Border Regulatory Compliance Rules Engine allows traditional institutions to access opportunities in DeFi in a compliant way through pre-trade international checks,” said Rachid Ajaja, CEO of AllianceBlock.
Timo Lehes agrees regulation will be key in 2022, as those with a fiduciary responsibility can't access DeFi in unregulated platforms.
“The good news is that some top-tier jurisdictions, like Germany, have already brought cryptoassets in line with existing securities laws. Entrepreneurs seeking to build DeFi projects that attract this sidelined capital could find opportunities there,” he said.
Indeed, “In order for the DeFi sector to meet these requirements and truly feel the benefits of clearer guidelines, effective cross-border regulatory compliance and KYC/AML frameworks are needed. Traditional and decentralized exchanges are crying out for these solutions, which will help to provide a compliant gateway to valuable digital assets,” Rachid Ajaja said.
GameFi, NFTs, DAOs, Liquidity Mining, DEX Interoperation
Assuming that the DeFi market is able to pass increasingly stringent regulations by 2022, it will be able to provide a wider selection of investments. Non-fungible tokens will top this list.
“In 2022, NFTs will evolve to represent assets with intrinsic value and thanks to the composability of DeFi, we will see some interesting trading pairs and yield-bearing products, as a result,” Timo Lehes said.
Lehes expects NFTs for securities like stock or perhaps even the US Constitution in 2022.
Indeed, the US Constitution was in the headlines in 2021 when a DAO raised over USD 40 million in crypto to buy a rare surviving copy. Further, Lehes expects to see DAOs being increasingly tied to DeFi next year.
“We expect to see DAOs, investor protections and [a widening] scope of financial activities alongside DeFi and NFTs, being a key theme for crypto in 2022. Increasing the scope of what can be executed via smart contracts, will dramatically expand what is possible in crypto and DeFi next year and beyond,” he said.
“DAOs are not only a useful means of equitable decision-making, they can also serve as an effective mechanism to offload risk amongst a pool of community members. Similar to single-tranche structured credit vehicles, the pooling of this type of risk will create opportunities for investors to passively gain exposure to a particular type of risk,” he continued.
Another two areas that are expected to rise in popularity next year are liquidity mining and yield farming. According to Rachid Ajaja, who says that providing liquidity is essential for the proper functioning of DEXes, but which is presently hampered by impermanent loss.
“Reducing impermanent loss is imperative to the development of liquidity mining. New formulas for automatic market makers that reduce impermanent loss are being developed, and the results look promising,” he said.
in 2021, according to Ajaja, interoperability between DEXes will increase, which is critical for improving liquidity.
“Facilitating interoperability and the ability to trade between DEXes on different chains is pivotal to the next phase of DeFi. Further innovations aiming to mitigate risk for users and improve [user experience] and [user interface] will make processes on DEXes more seamless,” he went on.
While the preceding projections cover a wide range of what is expected to happen in 2022 in the DeFi space, it's worth noting that the industry is still young and gaining momentum. As a result, what's most intriguing about next year isn't so much what was predicted to occur; rather, it's what hasn't been predicted.