Decentralized finance (DeFi) is an umbrella term for various blockchain-powered financial applications geared towards democratizing access to financial products and disrupting financial intermediaries. In 2021, lending protocols grew from a TVL of $7.1 billion to $46.8 billion, representing a 559.2% increase. The lending landscape is becoming diverse with the introduction of new protocols that come with various tweaks and target specific niches. May 2021 was the best month for decentralized exchanges (DEX), Curve remained the most prominent decentralized exchange.
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Inspired by the “2022 Digital Asset Outlook” report by The Block
Decentralized finance (DeFi) is an umbrella term for various blockchain-powered financial applications geared towards democratizing access to financial products and disrupting financial intermediaries. Decentralized finance expands the use of blockchain and cryptocurrencies from mere value transfer to more complex financial use cases.
DeFi is an alternative to the traditional financial systems characterized by old infrastructure and processes. Users enjoy borderless and permissionless access to financial instruments without giving intermediaries, such as banks and brokerages, control over these assets. The following are some of the categories that defined DeFi in 2021:
Lending
Lending is one of the main pillars of DeFi. In 2021, lending protocols grew from a TVL of $7.1 billion to $46.8 billion, representing a 559.2% increase. Maker, Compound, and Aave were the top three lending protocols based on value locked with a TVL of $18.3 billion, $12.8 billion, and $10.8 billion, respectively. These protocols also had total outstanding debts valued at $9.1 billion, $7.7 billion, and $6.5 billion, respectively.
$DAI, the largest decentralized stablecoin, is powered by Maker. On the other hand, Aave and Compound are money markets that have algorithmically adjusted interest rates based on the utilization rates of lending pools.
These lending protocols offer loans that are over-collateralized. The lending landscape is now becoming diverse with the introduction of new protocols that come with various tweaks and target specific niches. Cream is one of the protocols that tried to onboard various long-tail assets onto its money market. Rari’s Fuse and SushiSwap’s Kashi are other examples that introduced isolated lending pairs but were characterized by capital inefficiency.
Abracadabra and Alchemix experimented with yield-generating positions as collateral. Even though this approach mitigates risks to a certain extent, it also comes with composability risks.
Fixed-term, fixed-rate lending didn’t appeal to DeFi power users, despite repeated efforts, and this can be attributed to fragmented liquidity. Liquidity Mining may bootstrap liquidity temporarily. However, it distorts bond prices when organic…
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