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To say 2021 was a banner year for decentralized finance would be a notable understatement. Per DeFi Pulse, total value locked (TVL) in DeFi applications topped $107 billion by the end of November. This number is remarkable on its own but even more so with context the current TVL represents a 400% increase from November 2020’s TVL ($22.09 billion) and a 1200% jump from 2019 metrics ($8.5 billion).
With such numbers, DeFi can no longer be dismissed by doubters as a novel fad. Consumers have made it clear that they want the financial freedom and flexibility that DeFi applications provide the overly restrictive digital solutions provided by centralized banks simply no longer measure up.
Blockchain writer Adelyn Zhou noted for Nasdaq earlier this year,
“The outrage we’re seeing these days with fintech and banking experiences are the result of a growing realization that people do not have the control they thought they had over their financial lives. As trust issues continue to occur in the traditional financial world and opportunities for yield stagnate, the exodus into DeFi will only continue.”
In other words the runaway growth we’ve seen this year is only the beginning. DeFi proponents have every reason to expect a ‘DeFi summer’ an unparalleled period of market growth o occur in 2022, as DeFi innovators finally succeed in bringing mainstream consumers into the DeFi ecosystem.
For years, DeFi adoption has been curtailed by complexity. For all that consumers might want to reap its benefits, simply understanding DeFi solutions can often be difficult for those without specialized knowledge using it might be out of the question altogether. However, faced with skyrocketing consumer interest, industry innovators have begun to make their solutions more accessible and usable for ‘ordinary’ consumers.
In November, Portal, a crypto wallet and Bitcoin-centric DEX, and Polygon, one of the foremost protocols for building and connecting Ethereum blockchain networks, forged a partnership to give Bitcoin holders greater access to DeFi solutions. With this partnership, users on both chains will be able to deploy their digital assets within the DeFi ecosystem without facing deal-breaking fees or complicated transfer processes.
The following week, Alchemy Pay and Bella Protocol announced a similar partnership to make yield farming more feasible for layperson users by combining the former’s fiat payment capabilities with the latter’s yield farming and lending products. The result, per the partners’ press release, will be to “enhance usability, bridge the gap between fiat and cryptocurrency and launch CeFi and DeFi solutions for everyday users.”
The rationale behind these usability collaborations is simple f DeFi is more accessible, the threshold to entry will be lower for non-expert consumers. With user-friendly tech, DeFi innovators can usher a flood of new users into the market. The implications are staggering. After all, DeFi has reached stunning heights with a limited pool of expert users. How high could it soar if all interested consumers can access its solutions?
Given all this, it’s more than likely that in the summer of 2022, we’ll see a DeFi boom the likes of which we’ve never seen. The question is how should current and prospective investors prepare for its arrival?
Be bold but maintain due diligence
The DeFi market offers near inexhaustible opportunities for innovative exploration and gain but like any financial sector, it isn’t without its risks. Investors should make due diligence a priority and avoid basing decisions solely on article headlines or social media excitement. A good first step may be to review a solution’s whitepaper to learn more about its value-add and technical viability.
If the solution seems strong, prospective users should consider the product’s development team. What are their credentials, what progress have they made and are they committed to the project? Not all creators in the DeFi ecosystem are qualified to steward and protect users’ funds. According to a recent Elliptic report, more than $12 billion has been lost to malicious actors since the beginning of the year.
Tom Robinson, Elliptic’s chief scientist, shared in a press release,
“The DeFi ecosystem is an incredibly exciting and fast-moving space, with financial services innovation happening at light speed. This is attracting large amounts of capital to projects that are not always robust or well-tested. Criminal actors have seen the opportunity to exploit this.”
Protect yourself make due diligence a priority.
Preemptively lower your transaction costs with layer two solutions
Investing in DeFi solutions requires capital but investors don’t need to give away the metaphorical farm when making trades. In recent years, innovative layer two platforms have become instrumental in helping investors make transactions quickly and at a comparatively low cost. Such platforms move the work of processing transactions off Ethereum while still offering main chain and ERC-20 token compatibility.
Naturally, this functionality empowers investors to sidestep high gas fees and make more lucrative and speedy investing decisions. It’s a given that investors formulating their DeFi approach should at the very least consider incorporating layer two solutions into their strategy.
Be prepared for regulatory changes
Regulation has become a hot topic in the global crypto sector. Consider India lawmakers are in the early stages of developing a bill that would regulate blockchain-based finance. Similarly, in the United States, the SEC has begun probing decentralized exchanges like UniSwap to consider whether such platforms should be regulated.
That said, the prospect of regulation isn’t necessarily a bad one. Noted investor Mark Cuban recently argued that major players in DeFi would “welcome regulation,” as it would “allow the industry to grow and still have a Wild West aspect.”
To Cuban’s point, the push for regulation isn’t a reason to step back from DeFi. Rather, those planning to make use of it should simply keep their eye on regulatory changes and adjust their investment strategies accordingly.
Preparation is the key to success. As investors look forward to 2022’s DeFi summer, they should make an effort to solidify their strategic footing and prepare for the inevitable and welcome boom.
Sameep Singhania is the co-founder at QuickSwap, a UniSwap DEX clone utilizing the most adopted Ethereum layer two scaling solution, Matic Network. QuickSwap is known for its lightning-fast speeds with near-zero gas fees.
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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.
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