At the time we wrote this article, the total market capitalization of decentralized finance-focused crypto assets exceeded USD 120 billion, while the total value of crypto assets locked on decentralized finance platforms exceeded USD 200 billion.
The Past, Present and Future of Decentralized Finance
The first step taken with the introduction of Bitcoin as a payment method and electronic currency idea managed by its users, not dependent on a central authority, has also laid the seeds of a new generation financial system. This payment method, which was accessible to everyone and at the same time allowed participants to transact safely without the need to trust an authority, allowed new ideas and projects to be developed after a while.
The introduction of smart contracts on the Ethereum blockchain made it easier for entrepreneurs and developers to create blockchain-based products and services. In 2014, the Maker project, which emerged with the idea of producing a decentralized stable cryptocurrency, came to life at the end of 2017, enabling the production of a cryptocurrency called DAI with a price equal to 1 USD by pledging Ethereum as collateral.
We can consider 2017 as the year when the concept of decentralized finance came to the fore. Hundreds of projects raised funds for their projects with the digital assets they produced on the Ethereum blockchain. Smart contracts, which played a major role in the fundraising processes where crypto assets were offered for the first time, allowed those who funded the projects to securely make payments and receive crypto assets in return. Moreover, users were able to trade ERC20-based crypto assets on the Ethereum blockchain between each other on the decentralized trading platform EtherDelta. When the smart contracts that mediated the swaps were cyberattacked at the end of 2017, users questioned the reliability of decentralized platforms.
Uniswap, one of the most important projects that brought the concept of decentralized finance to the top, was launched in late 2018. Smart contract-based liquidity pools and automated market makers enabled users to trade from pools managed by smart contracts. While the decentralized trading platform solved the liquidity problem, it also provided users with the opportunity to make fast and secure swaps. Users who provided funds to liquidity pools were incentivized to provide liquidity with commissions and various rewards they received from realized settlement transactions.
Decentralized finance platforms also offer users the opportunity to borrow different crypto assets by pledging crypto assets as collateral. In this way, users who do not want to sell their cryptocurrencies but need different cryptocurrencies for a certain period can borrow against interest at the rate of the collateral they deposit. A significant portion of the lent crypto assets are again covered by other users. Users who provide funds for lending and collateral for borrowing entrust their crypto assets to smart contracts. All movements of the smart contracts to which the assets are entrusted can be tracked on the blockchain.
Following platforms that allow users to lend, borrow or exchange directly through cryptocurrency wallets without having to trust any person or organization, platforms that digitize precious metals, stocks and even fiat currencies as synthetic assets have also come to life. Blockchain-based synthetic assets have made it possible to move any asset that can be traded in traditional financial markets onto the blockchain.
Blockchain and crypto assets powered by blockchain have been developing since 2009. Each new project has the potential to be more capable, more powerful, and more efficient than the alternatives that have already hit the market. While between 2017 and 2020, almost all decentralized finance projects were using the Ethereum blockchain, today, we see that both layer 2 solutions on the Ethereum blockchain and decentralized finance platforms on blockchains such as Avalanche, Binance Smart Chain, Polygon stand out. Moreover, almost all the Ethereum alternatives encourage the use of decentralized platforms by offering users the advantage of low transaction fees. I believe that these platforms will become more capable, more widespread, and more advantageous for users in the future.
At the time of writing, the total market capitalization of decentralized finance-focused crypto assets exceeded $120 billion, while the total value of crypto assets locked on decentralized finance platforms exceeded $200 billion. The proliferation of bridges that facilitate the transition between decentralized finance protocols and the support of decentralized finance platforms for multiple blockchains are leading users to prefer these platforms more and more. However, before using these platforms, I recommend making sure that the platforms’ smart contracts are audited and verifying that the decentralized application belongs to the platform you want to connect to before connecting your wallet.
Use secure and the best decentralized experience: Trade on Venice Swap.