Decentralized Finance in 2022: The Best is Yet to Come

Decentralized finance, also known as DeFi, underwent a renaissance of sorts in 2020. Now there is widespread expectation that marked only a beginning; that there are greater things ahead for this sector (and by extension, the legacy finance sector, as well).

Jay Hao, CEO of OKEx, a Malta-based cryptocurrency spot and derivatives exchange, foresees “more amazing developments” from DeFi in the months ahead. Entrepreneur Sarah Austin, writing for Entrepreneur.com, agrees, pointing out that while DeFi “firmly announced itself to the wider blockchain community” last year, the new year could “prove to be greater still for the nascent sector.”

It is a stance that has also been adopted by Lyle Hauser of The Vantage Group, a Miami, FL-based private equity firm and business consultancy. And really, it’s difficult to argue.

The total value locked (TVL) into DeFi protocols as of February 2020 was $1 billion. By year’s end, that total stood at $13 billion. By late January 2021, it had mushroomed to over $23 billion.

DeFi, as the name implies, is a monetary system that operates without the need of a centralized authority, such as a financial institution. Rather, it is built on top of blockchains, most notably Ethereum, the second-largest cryptocurrency platform. Specifically, those platforms allow for decentralized apps (i.e., Dapps) to be constructed and cryptos to be traded.

There are concerns about Ethereum’s scalability, concerns that “increased in the face of its rapid rise over the last several months,” according to Lyle Hauser. But the hope is that those concerns will be alleviated this year, courtesy of cross-chain technology, which enables other blockchains to ease Ethereum’s burdens. Austin, who calls this development “amongst the biggest stories of 2021,” notes that a blockchain called Matic has shown particular promise in this realm, and that Cosmos and Polkadot are making inroads, as well. The latter, she points out, showed a 44 percent increase in active developers for the 12-month period ending last May.

So that bears watching for players like Lyle Hauser and his firm, The Vantage Group, which is focused on FinTech, DeFi and blockchain, to name a few. But so, too, does the development of Ethereum 2.0, the rollout of which came December 1, and promises to improve upon the speed and scalability of its predecessor. At the heart of this new technology is a switch from proof of work to proof of stake. As ConsenSys Ventures investment principal Praneeth Srikanti told Cointelegraph, that offers many advantages, not the least of which are energy efficiency and lower barriers to entry.

Full implementation of the updated Ethereum is still ahead, but it is expected to lead to further disruption of traditional banking, which is very much in need of an overhaul. Because DeFi needs no central authority, transactions can be consummated more quickly and smoothly, says Lyle Hauser of The Vantage Group. It also gives access to the world’s vast unbanked population, which numbers some 1.7 billion. It has been pointed out that the majority of them have cellphones -- as many as 67 percent -- which means they can access financial services. As a result, Ethereum co-founder (and ConsenSys founder) Joseph Lubin believes that the entire global economy has been left “thinking about what they want to be in their next incarnation.” He went on to add the following:

“And it’s looking like they’re feeling like they need a next incarnation. Central banks need new ways of implementing enhanced monetary policy that might include taking dirty paper money and dirty coins out of the hands of fragile human beings because they might carry disease, for instance.”

The latter is certainly of greater concern than ever before, given the coronavirus pandemic. But the larger point is that DeFi’s time has obviously arrived. Every financial expert knows it, Lyle Hauser and The Vantage Group are very much included. It has features that will propel the banking system forward, that will make it better than it has ever been. And not a moment too soon.