The last few months have been wild in DeFi. We are witnessing daily developments in the space, despite the recent decline in token prices. With approximately $215B of total value locked (TVL) in DeFi protocols, the community interest is clearly not holding back. Many projects continue to work relentlessly towards developing scalable and interoperable L1 and L2 solutions.
At this moment, mostly NFTs and the Metaverse attract the interest of crypto enthusiasts. Most NFT marketplaces run on a centralized service like OpenSea with prominent exchanges like Binance and Crypto.com launching their own marketplaces. These NFT projects probably do not fall under the category of DeFi as they run in a controlled environment. Many Metaverse games and platforms are partially decentralized like Axie Infinity and Sandbox which plan to eventually shift the governance into the hands of their users. Decentraland is one of the few Metaverse ecosystems that already run as a DAO, focusing on digital art and property.
The Current State of DeFi
Purely DeFi, the focus is on the development of Ethereum L1 and L2 scaling solutions. Many projects look to deploy on EVM-compatible blockchains. Therefore, DeFi protocols similar to Uniswap emerged to address these networks.
Code exploits and rug pulls amount to approximately $2B of dollars drained from DeFi projects. Poly Network, Cream Finance, and Compound were some of the “victims”. Users can distinguish legit from malicious projects, as legit ones compensate users that lose their tokens in such incidents.
With more than $200B in TLV, multi-chain liquidity protocol Curve tops the TVL rankings among DeFi projects. Its ecosystem incentivizes users to compete for rewards with Curve Wars. DEXs have a TVL of more than $68B, while DeFi lending protocols follow with roughly $50B. Anchor and AAVE hold more than 50% of the TVL of DeFi lending protocols.
Some of the most promising scaling solutions derive from L2 developments. Consequently, the crypto community looks at these solutions for more scalable and cost-efficient blockchain infrastructures. These solutions enable the efficient transfer of funds from the main Ethereum chain. Offchain Labs are building the Arbitrum One Rollup network. Arbitrum can process transactions in an efficient and scalable way, while still recording transactions on the main Ethereum blockchain. On the other hand, the concept of ZK rollups by projects like StarkWare attempts to address scalability and privacy issues. Some L2 networks may launch their own tokens in the future and provide new incentive mechanisms for users.
It is fair to say that projects building multi-chain integrations gain more traction among competitors. This is where bridges come into play. For example, AAVE V3 features cross-chain swaps and focuses on risk management and capital efficiency. Furthermore, Polkadot is a promising network that allows independent L1 blockchains to run in parallel and connect to the Relay Chain.
Promising Developments Ahead
Liquid staking is growing among multiple networks by projects like Lido. Liquid staking enables users to stake an amount of a token i.e. ETH or SOL and unstake it without the requirement of transactions being enabled. This is possible via the issuance of a tokenized representation of the staked funds which can be traded as a regular token and still earn staking rewards.
The most anticipated development coming up in 2022 is The Merge. The Merge enhances the transition of the Ethereum network to Proof-of-Stake. This will be a key turning point for the ecosystem, as we will find out how Ethereum can operate in terms of speed, costs, and scalability against its competitors. The long-awaited upgrade may also positively impact the price of Ethereum and other tokens.
The degree to which Metaverse ecosystems will operate as DAOs remains to be seen. As several Metaverse projects claim, this is their main plan for the future.
The concept of collateralizing NFTs is gaining traction within DeFi. Projects like NFTfi work towards this solution. Users can list NFTs as collateral and receive loan offers, consequently wETH or DAI liquidity from the lender’s portfolio. The NFT is transferred into a double-audited escrow smart contract for the loan duration. If users repay the loan before the expiration date, they receive their NFT back. If not, the lender seizes the NFT.
The regulatory environment is still grey and brings uncertainty for projects, users and investors. Most non-hostile countries try to address crypto regulation within already existing frameworks. However, this does not cover the DeFi ecosystem on most occasions, as it is primarily an attempt to regulate exchanges and their users.
