Any product or service provided by the Web3 world that enables users to carry out financial operations including payments, borrowing, lending, investing, trading, and staking is referred to as decentralised finance (DeFi).
Despite the market catastrophe in 2022, the TVL under DeFi has managed to hold onto more than $39 billion. Since DeFi doesn’t require a centralised entity to onboard customers, it has democratised access to financial services. In addition to democratisation, DeFi has made other models, including automated markets, possible.
The last bullish cycle saw the emergence of several Web3 use cases, including DeFi, GameFi, SocialFi, and nonfungible tokens (NFTs). DeFi, which had a peak total value locked (TVL) of more than $175 billion at the height of the 2021 bull market, has had the highest market cap activity within Web3.
DeFi protocols and applications have expanded as a result of all these novel components. This has also contributed to the expansion of related use cases like NFTs and GameFi. As an illustration, lending models that use “NFTs as collateral” have been well received. DeFi-based models and markets for gaming NFTs have additionally arisen, enabling gaming guilds to access them.
2022 began with a general market decline. A breach of Solana’s Wormhole bridge within the Web3 ecosystem resulted in the theft of $310 million worth of cryptocurrency assets. They were able to do this because of a few projects on the Solana ecology.
Despite these intriguing prospects, DeFi’s revenue in 2022 dropped to just $39 billion. Let’s examine 2022’s events to determine what to anticipate for DeFi in 2023.
However, in March, doubts began to circulate regarding the reliability of the Terra ecosystem and its algorithmic stablecoin. As the market continued to decline during April and May, the network collapsed, which sparked a sell-off in the broader market.
After the Terra incident, the markets bounced back over the summer until being knocked back down by the FTX fiasco. Some have observed the impact FTX and its affiliated company, Alameda, had on the ecosystem, even if the FTX scenario cannot totally be classed as a DeFi issue because it was the product of suspected misbehaviour at a centralised exchange.
Despite the carnage, the DeFi sector has subtly continued to grow and innovate. Additionally, 2022 saw a number of institutional DeFi announcements that could be advantageous going forward. As projects can now be built on top of the Lightning Network, the Bitcoin network is beginning to have value. For quicker Bitcoin transactions, the Cash App incorporated the Lightning Network. There are a number of other payment uses that may alter the perception of the apex asset as a “store of value.”
Before the previous bull run began, the DeFi TVL on the Ethereum network was a few hundred million dollars. DeFi TVLs are valued at a few hundred million dollars apiece on a number of layer-1 and layer-2 networks, including Avalanche, Solana, Polygon, and Arbitrum. All these ecosystems should experience DeFi growth as the subsequent Bitcoin halving approaches. In 2022, hackers went berserk, forcing DeFi crypto investors to lose a substantial sum of money. There would need to be a few significant improvements in this area as laws increase and institutional adoption appears promising.
As of October 2022, 125 hacks caused the cryptocurrency sector to lose close to $3 billion. This damages the industry’s credibility and makes it extremely difficult to draw in institutional money. As a result, the DeFi ecosystem has already begun developing applications that alert wallet owners to a smart contract’s purposes before the user signs them. To address security flaws surrounding oracles and cross-chain bridges, more work must be done. A positive development is the increased decentralisation of cross-chain bridges. DeFi platforms will also begin taking insurance goods more seriously in order to safeguard user finances. Web3 platforms can take advantage of specific cybersecurity solutions from companies like CertiK and Hacken.
- DeFi optimistic about 2023 after turbulent year
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