The future of DeFi
Few predicted the dramatic rise of DeFi, and fewer still can predict its future. There are a few obvious directions where it might go.
The industry will expand to more blockchains
As of September, Ethereum is the home to all the major DeFi projects. But other blockchains are building projects. A few things will likely occur.
The first is that DeFi projects will become more interoperable. Bitcoin can already be used on Ethereum in the form of Wrapped BTC, and more initiatives to enable cross-blockchain compatibility are in the works, most notably Tendermint’s Cosmos, additional work by Ren and the Polkadot project.
Second, DeFi will expand to other blockchains. Once the domain of Ethereum, other blockchains are eying up DeFi. Huobi, Conflux, Binance and others are all launching incubators and platforms for DeFi projects, many of which have no connection to Ethereum.
Third, DeFi will interact with centralized finance. What if your credit score could be linked to a decentralized lending protocol? What if you could stake your house as collateral for a crypto loan? What if your high-street bank let you buy and hold decentralized stablecoins? All these are in the works. The job market could surge, and institutional investors could pour money into its protocols. The operative word there being “could”.
Itamar Lesuisse, co-founder and CEO of DeFi-friendly crypto wallet Argent, told Decrypt in July 2020 that this “early experiment” is “just the start. He said: “In the years ahead we look forward to it solving significant problems for mainstream users around the world; we'd argue the user experience is already better than traditional finance in many areas.”
Jason Wu, CEO and cofounder of DeFiner, told Decrypt that DeFi projects will attract lots of capital. “With the raised capital, DeFi projects can build more applications and fit the demand and build next generation financial networks,” he said.
There’s a fourth, less certain question: are we in a DeFi bubble, and is this sustainable?
Vitalik Buterin, the co-founder of Ethereum, warned at the end of August 2020 that the current DeFi craze is not sustainable. “Seriously, the sheer volume of coins that needs to be printed nonstop to pay liquidity providers in these 50-100%/year yield farming regimes makes major national central banks look like they're all run by Ron Paul,” he tweeted, raising the specter of the Republican Congressman who called for the end of the Federal Reserve.
Seriously, the sheer volume of coins that needs to be printed nonstop to pay liquidity providers in these 50-100%/year yield farming regimes makes major national central banks look like they're all run by Ron Paul.
— vitalik.eth (@VitalikButerin) August 31, 2020
In a since-deleted tweet in September 2020, Ryan Selkis, founder of crypto data analytics firm Messari, said, “We're nearing the apex of ponzi economics, rug pulls, and "yield" hopping, and ETH fees are going to eat too heavily into non-whale profits.” He continued: “DeFi is just one big pool of capital sloshing around a small group of insiders and mercenaries who will soon run out of victims to fleece.”
Others think that should the “bubble” pop, the DeFi space will continue to grow, albeit the profits from things like yield farming will