From regulation to insurance and new forms of assets, the DeFi trends for 2023 will explore the area between decentralization and government.
after reading this, you'll understand:
Demand is growing for DeFi insurance policies.
Development of crypto bridges is advancing to allow trading across different blockchain platforms.
More DeFi platforms are offering their own governance tokens.
Some of the DeFi trends for 2022 were not favorable for crypto markets. Market value fell over 50% following the 2021 bull market. But crypto was not alone — U.S. stock values dropped more than 15% while bond markets declined by over 20%.
At the beginning of 2022, traditional finance was dealing with high interest rates. More investors explored speculative investing in crypto, especially after bitcoin (BTC) and ether (ETH) reached all-time highs in 2021.
In the second quarter of 2022, market liquidity in traditional finance decreased as interest rates rose. As traders sold their riskier assets, the crypto market cap fell by $1 trillion.
With the collapse of the FTX exchange platform, crypto markets continued to struggle. FTX, which supported many struggling start-ups during the first market dip, had commingled customer deposits and funds. Its insolvency was discovered in November, resulting in a mass market exodus. Its native token FTT dropped from $26 to $1 in value in days.
Though the market struggled, there have been massive developments in decentralized ledger technology. One of the most notable was Ethereum’s Merge, in which the giant moved from a proof-of-work to a proof-of-stake blockchain. The shift reduced total energy demand involved with the Ethereum network by about 99%.
Bankruptcies, frauds, and irresponsible lending and trading have pushed many to call for better regulation of the crypto market. The crypto market still operates without clear regulatory frameworks, but there's pressure to build confidence in crypto. Let’s look at 2023’s growing trends, and how regulatory oversight and technological innovations may affect the crypto financial world.
Crypto’s biggest task for the year might well be to stabilize the market for investors, using features found in the traditional market. From regulation to insurance and new forms of assets, 2023 will explore the middle ground between decentralization and regulatory systems. Let’s look at some specific trends we anticipate.
One exciting development in blockchain technology is the emerging technology of crypto bridges. So far, token and coin exchanges have been confined to the blockchain they were developed on. Trading across different blockchain platforms hasn’t been possible, but cross chain technology will fix this.
Developers are creating two types of crypto bridges. Trusted bridges involve a central authority that can transfer native coins or tokens from one blockchain to another. With trustless bridges, the cross chain transfer occurs through smart contracts and trading algorithms.
Each system has inherent risks. In a trusted bridge, you will send money to a third party. Like centralized wallets, this has a risk of censorship and scams that can lead to losses. Alternatively, the smart contracts and code of a trustless bridge need to be airtight. Unless the code is very clean, hackers could take advantage of weaknesses. Both are emerging technologies, to be used with the best judgment, but will become more normalized across the crypto market.
Decentralized finance is integrating traditional finance in new ways. Blockchain protocols are now allowing real-world assets, like corporate credit and mortgages, to transfer into crypto assets.
One example is the new collaboration between Archblock, a subsidiary of lending protocol TrueFi, and MJL Capital. Together, they’re working to bring U.S. community banks into the DeFi ecosystem.
In an interview with CoinDesk, Marcus Leanos, the founder and chief investment officer for MJL capital, said: “We have a number of banks in our pipeline that range in size from $500 million to $5 billion in assets and have a history of conservatively originating loans.”
In-game purchases is an exciting frontier for non-fungible tokens (NFTs). According to Finextra, there are over 1 billion users already winning, trading, buying, and selling in-game assets. The video game industry saw steady growth through the 2010s. Fortnite demonstrated a gaming system where most of the revenue is generated by in-game skin purchases. This trend continued into the early 2020s, and now interest surrounds developing digital assets transferable between games.
Meanwhile, all digital platforms are preparing for the expansion of the metaverse. Fintech reports that the metaverse is expected to have 5 billion users by 2030, with an anticipated value of $13 trillion.
Decentralized exchanges saw massive success in early 2021, with a trading volume of over $60 billion. As DEXs grow, the challenge is to keep these exchanges cost and time efficient. Growth has been catalyzed using automated market makers, or AMMs. At the end of 2020, Consensys reported that 93% of all DEXs use AMMs to improve market liquidity. The largest AMM is Curve Finance, growing to $11 billion TVL in under two years. Another well-known DEX is Uniswap, currently with $2.93 billion in total value locked. It will pair any Ethereum-hosted coin and is a great option for those who prefer yield farming on the Ethereum network.
More and more, DeFi platforms are offering their own governance tokens. These operate differently from native tokens, giving voting power to the holders in the decentralized autonomous organizations (DAOs). These social tokens allow for investors to govern how the Defi protocol of their platform develops over time. The value grows as more people hold governance tokens. One of the most common examples is MakerDAO’s MKR token, which has risen 7x in value since early 2020.
There are over 20,000 digital currencies currently in existence, but only a fraction of them are available on exchange platforms. Coinbase, the largest centralized exchange network, offers around 450 currencies to trade. The second largest, Kraken, offers 160. One area for advancement in 2023 will be the diversification of coin offerings on large-scale exchanges.
Around $2.4 billion has been lost due to hacks and exploits in DeFi space, according to cryptosec.info. Decentralized exchanges have inarguable risk, from fraud schemes to hacking exploits. But with the inherent risks, there’s still division in crypto space about whether regulation would be a good thing.
On one hand, regulation would require some sort of third-party intervention, potentially compromising decentralization in the market. This could take a myriad of forms and is complicated by financial regulation varying by country or region.
But people like the CEO of CoinZoom, Todd Crosland, argue regulation is necessary for trust in the crypto market. “For the industry to grow and become mainstream, customers must have trust in the infrastructure and framework underpinning it. And it starts with regulation,” Crosland says.
Regardless, regulation is burgeoning. The European Commission released the European Markets in Crypto Assets Regulation (MiCA) in 2021. It will be implemented in early 2023. The World Economic Forum also developed a policy-maker toolkit for governments to reference for legal and regulatory purposes.
While banking insurance has been around in trad-fi for nearly a century, there aren't standardized insurance policies for digital assets. But the demand for DeFi insurance policies is growing.
Nexus Mutual is a DeFI, a peer-to-peer insurance platform operating on the Ethereum network. It covers exchanges, smart contracts, and stable coin investments. The insurer has grown from $4 million total value locked in 2020 to $164 million by the end of 2022.
Another popular insurance is the Crypto Shield product from Breach Insurance. It’s serviceable for over 20 different currencies through Coinbase, Binance US, Gemini, and Coinlist.
As the TVL in blockchain technology grows, DeFi users expect financial services like insurance to protect their financial assets. With the growing demand for financial instruments familiar to users, more products and services are expected to develop.
In 2022, Triple A calculated global crypto ownership to be 4.2%. Since then, the Thomson Reuters Cryptos Report Compendium of 2022 found cryptocurrencies continue to proliferate around the globe.
Many governments, however, fear tax evasion. Bolivia, for example, banned cryptocurrencies as early as 2014 out of fear of tax evasion and economic instability. But Reuters has reported that few crypto "tax havens" are left. “Most countries have generally found ways to tax gains or income derived from cryptocurrencies, and some have more specific obligations than others.”
From NFT developers to investors to NGOs, many are very concerned about the environmental impact of cryptocurrencies. 2022 was a good year on the eco-front, namely due to Ethereum 2.0’s successful Merge. As environmental efforts push decentralized finance greener, 2023 could see much more tech innovation for carbon-neutral decentralized applications.
The new year has great potential for change in the crypto world. As new users gain interest in decentralized technology and its financial products, defi projects align more with traditional finance models. The challenge lies in making asset management safe and accessible while also maintaining the core values of the blockchain network.
At Hedera, we evolve with the crypto industry while maintaining our values as a decentralized, secure, and scalable dApp.