The spectacular growth of DeFi in 2021 has created many new assumptions about its potential for the future. Decentralized Finance has not only supported the growth of the broader crypto market but also emerged as one of the profound innovations in the crypto space. DeFi applications have successfully pointed out the ways for removing traditional financial systems and institutions while enabling new approaches for trading digital currencies. The emphasis on DeFi trends becomes an inevitable concern now, especially considering the staggering growth of DeFi. For a concept that arrived in 2020, DeFi has shown unreal performance with a peak TVL (Total Value Locked) of $112.07 billion in 2021.
As of December 2021, the TVL in DeFi solutions and projects amounted to over $200 billion. Therefore, it is quite natural to expect favorable DeFi trends in 2022 with an emphasis on the sector’s growth. The following discussion offers you a clear glimpse into the top trends you can expect in DeFi for 2022.
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DeFi in Modern Finance
Before diving into an overview of the latest DeFi trends, it is important to understand DeFi itself. DeFi or decentralized finance is basically the concept of allowing decentralized public blockchain users to use financial products and services. The most striking highlight of DeFi is that you don’t find any centralized intermediaries such as banks, brokers, and any other financial institutions. DeFi users don’t need government-issued identification, proof of address, KYC verification, or social security numbers for accessing financial services. On the contrary, DeFi presents a system where buyers, sellers, borrowers, and lenders could interact with trusted software.
How is DeFi Performing Now?
The most effective approach to predict the future is to start with an overview of the present. You can develop a better understanding of top DeFi trends for 2022 by taking a look at how it performs now. One of the first highlights about DeFi is that it is still in the stages of infancy. Even if the market capitalization and TVL estimates for DeFi present it as a humongous sector, it has many setbacks. For example, infrastructure failures, hacking attacks, and limited liquidity in many DeFi coins. On the other hand, improvements in DeFi regulation based on smart contracts have started introducing standardization in the DeFi landscape.
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Top Trends for DeFi in 2022
The existing performance of DeFi complemented with the value benefits it promises for the global financial infrastructure, draws attention towards the sector. What will be the major highlights of DeFi growth in 2022? You can find the answer to this question by reflecting on the top trends which would dominate DeFi in 2022.
1. New User Groups
The crypto market has been traditionally known for its fickle behavior. Therefore, many people are wondering whether the downturn in the crypto market would translate into the DeFi trends of the future. With the impact of a global pandemic in the daily lives of people still going strong in 2021, DeFi evolved as a favorable alternative to bank branches.
People sought DeFi solutions for loans or alternative assets for investment rather than visiting banks. As a result, the macroeconomic situation opened many channels of access to DeFi products and crypto-assets. Subsequently, the DeFi and crypto market registered promising levels of growth. Experts assume that the trend of DeFi growth in 2022 will continue, especially with the participation of traditional financial institutions.
Some experts have also pointed out the dominance of new types of assets in DeFi trends for 2022 would drive mainstream DeFi adoption. The other factors, such as lower transaction costs, regulatory clarity, and institutional approval, would also play a vital role in driving the adoption of DeFi in mainstream use cases. New real-world assets and financial products on the blockchain could play a vital role in expansion of the DeFi ecosystem. It can obviously tap into the interests of investors as well as traders with flexibility for accessing traditional assets in DeFi.
If you are wondering about “What’s next for DeFi” you must take note of the opportunities they offer in comparison to traditional markets. With possibilities of traditional assets entering the DeFi space, the new audience groups could explore favorable prospects in achieving better yields than traditional markets. At the same time, they can also access a broad set of assets in DeFi, thereby driving DeFi adoption. On top of it, some of the top institutional entities and traditional players in finance are actively interested in tapping into the potential of DeFi.
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2. The Dominance of DEXs and AMMs
The biggest setback in the DeFi space largely relates to the balance between decentralization and performance. One of the notable aspects of latest DeFi trends focuses on the growth of decentralized exchanges and Automated Market Maker protocols. Most of the popular centralized cryptocurrency exchanges such as Coinbase enable efficient transactions albeit without decentralization.
Decentralized exchanges or DEXs offer the ideal solution for designing crypto exchanges with the advantage of decentralization. Crypto owners could engage in transactions with each other directly without any intermediary platform. As of now, the biggest DEXs, Sushiswap, and Uniswap, account for almost 68% of total trading volume on all DEXs.
The growth of DEXs is obviously one of the top DeFi trends, which presents new prospects for the DeFi sector in 2022. The total trading volume on DEXs in January 2021 amounted to more than $60 billion. Interestingly, DEXs have come up with an innovative approach to offer direct transactions among DeFi users. Decentralized exchanges can adapt to the growth in trading volumes by using Automated Market Makers or AMMs for improving efficiency.
AMMs are a crucial highlight of decentralized exchanges for offering liquidity. The AMMs provide liquidity pools, which rely on staking. Crypto owners can lend their assets into the liquidity pools in return for interest. Transactions on the exchange come with transaction fees, which are used for paying interest to the true owners of assets.
AMMs are one of the biggest highlights in answers to “Why DeFi is the future?” as they remove the need for order books. Automated Market Makers use an algorithm for determining the precedents of trading in the pool. Many experts have pointed out the efficiency of AMMs in improving liquidity on DEX platforms.
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3. Monetization of Gaming Sector
As of now, the global video game industry registers almost $159 billion in expenses by gamers annually. With over 2 billion players in the gaming industry, the sector has grown profoundly as a go-to source of entertainment. However, DeFi trends also reflect on how the gaming industry would come closer to DeFi in 2022. Players as well as creators spending endless hours in gaming seek opportunities for further monetization in the industry.
Blockchain video games basically focus on simple tasks for players, which would offer a token as a reward. DeFi protocols will play a crucial role in monetization of the blockchain gaming industry further. Some of the top DeFi protocols can support in-game asset transfers.
In addition, the latest DeFi trends would also emphasize game-based cryptocurrency owners seeking returns on their assets. Almost 82% of developers and 62% of gamers in a survey study reported their interest in developing and investing in digital assets with in-game transferability. Ubisoft released the first blockchain video game, HashCraft, in 2019, and many other titles have followed suit since then.
One of the recent highlights for DeFi growth in 2022 points towards the crypto gaming platform, BitSport. The platform announced plans for enabling crypto owners to stake their assets on tournaments and endorse professional gamers. In simple words, BitSport allows stablecoin owners to stake their tokens on different tournaments in return for interest. The prospects for monetization in blockchain video games with DeFi solutions can open up a new face of the gaming industry.
4. Clarity in DeFi Regulations
As of now, one of the biggest setbacks for DeFi is the lack of clarity regarding regulations. Institutions and users are apprehensive of DeFi due to ambiguous regulations and precedents for compliance. Generally, regulations are one of the foremost highlights in discussions on “what’s next for DeFi” as regulations can standardize DeFi usage.
In the short term, DeFi solutions can embrace KYC and AML solutions alongside wallets with in-built KYC and cross-border transaction rule checks. Regulations will be one of the key highlights in DeFi trends for 2022, as people with financial responsibilities could not access DeFi through unregulated services and platforms. Examples of initiatives by countries like Germany for bringing crypto assets in the ambit of existing securities regulations can encourage other countries to follow suit.
Regulators will play a crucial role in shaping DeFi trends for the future by tailoring the industry to meet expectations of investors. The regulatory implications of DeFi will continue their dominance in discussions around the growth of DeFi in 2022. In addition, the DeFi market must also look forward to upcoming regulations such as the EU’s Regulation of Markets in Crypto Assets (MiCA).
Furthermore, rising scrutiny by the US Government and the US Securities and Exchange Commission also emphasizes the need for better compliance in DeFi protocols and platforms. Therefore, you can look at new DeFi solutions in 2022 with KYC/AML frameworks, clear guidelines, and competent cross-border regulatory compliance.
Curious to understand how Defi works? Check out this detailed article on How Does Decentralized Finance Works?
5. Cross Chain Technologies Introduce Stability
Another critical highlight in the answers to “Why DeFi is the future?” points towards the importance of cross chain technologies. The constantly rising transaction costs have been one of the formidable issues emerging from the phenomenal growth of DeFi. The high gas charges for validating DeFi transactions could be one of the formidable issues for mainstream DeFi adoption. Therefore, many DeFi projects have introduced cross-chain capabilities, which allow them to move smart contracts and transactions from one chain to another.
With the help of such exceptional levels of interoperability, DeFi solutions could identify better prospects for scalability. The Polkadot network is one of the most promising examples showcasing how cross chain technologies would dominate latest DeFi trends in 2022. The Polkadot network facilitates cross-blockchain transfers of assets, tokens, and data.
In addition, it also allows the facility of creating custom blockchains. You can clearly notice how cross-chain technologies can provide better prospects for cost-effective and efficient DeFi transactions. Therefore, cross-chain technologies will obviously have a major role in shaping up DeFi in 2022.
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The trends for DeFi in 2022 showcase many promising opportunities for the sector. At the same time, you can notice how the new DeFi trends in 2022 would focus on resolving current setbacks. For example, you have the assurance of better clarity in DeFi regulation. In addition, with the introduction of DEXs and AMMs alongside cross chain technologies, DeFi users can enjoy cost-effective and efficient transactions.
Furthermore, the arrival of traditional assets in the DeFi space will also play a crucial role in shaping its future. With a broad range of opportunities and many speculations, the year 2022 is a crucial one for the DeFi landscape. Stay updated to learn more about the DeFi sector and how it will change over time.
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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!