Wow, the world of decentralized finance (DeFi) is really heating up! Last week the Ethereum-basedAave protocol blew past the $1 billion mark in total value locked—which amounts to an incredible 200x growth since just last year.
It’s no surprise that DeFi has been taking the FinTech realm by storm. With the explosion of Ethereum-based protocols and protocols built on other blockchains, these projects have opened up whole new ways to lend, borrow and move funds. Beyond that, these platforms offer opportunities within the tokenized asset space to earn interest (or yield) on digital assets—which DeFi proponents are calling the “next wave of banking.”
In the wake of the success stories of the Aave Protocol, the MakerDAO, Compound, and the recent Kyber Network launch, where is DeFi truly headed?
It’s clear that the DeFi space is moving quickly towards realizing the promise of a totally open financial system. As DeFi gains greater adoption, it is also quickly diversifying its services and product offering, from yield-bearing protocols to stablecoins. This can then be leveraged in both traditional as well as new financial activities, such as yield farming and automated market makers (AMM).
At the same time, the DeFi space must tackle some major challenges in order to become a more viable, reliable and secure system. One of the most pertinent at the moment is the matter of governance. In this highly volatile environment and with multiple projects vying for dominance, ensuring clarity of purpose and roadmap is paramount.
Additionally, the complexity of DeFi protocols presents its own set of challenges – from understanding the intended purpose of each protocol and its documented risks, to disincentivizing behaviors that could expose users to potential losses.
Despite these looming questions, there’s no arguing that DeFi is a technological revolution that is here to stay. As DeFi continues to revolutionize the FinTech space, it will be interesting to see the projects that truly free up capital and realize the dream of a decentralised financial infrastructure.
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