Five trends that will transform Decentralized Finance in 2022

Since the summer of 2020 (aka “The DeFi Summer”), Decentralized Finance (DeFi) has grown from an ecosystem of about 1 billion in Total Value Locked (TVL) to an ecosystem of 280 billion in TVL. From a DeFi ecosystem residing mainly on the Ethereum Network to a DeFi ecosystem spread over hundreds of blockchain networks. What’s next in DeFi? This article will provide you with the five trends that will transform Decentralized Finance in 2022 and beyond.

Different sources might coin some of those trends individually as DeFi 2.0; however, I believe all of them together will play a significant role in DeFi 2.0+. DeFi brought us freedom and great alternatives to centralized finance, such as decentralized exchanges, lending platforms, insurances, and many new ways of investing our capital. Although a lot has happened over the past two years in the space, it is fair to say that DeFi is still in its infancy.

All the trends I will mention in this article aim to fix some of DeFi’s shortcomings, extend the current DeFi capabilities or bring the ideas of DeFi to new frontiers. Below you will find a brief overview of each trend, with more detail and use-cases to come in separate articles.

PriFi – Privacy for Smart Contracts

One of the most significant merits of public blockchain networks and smart contract platforms is transparency. Every action taken on a blockchain network is recorded and is publicly accessible. Everyone can go and look up all transactions performed by a particular person. The transactions are not private, but rather anonymous. If a person somehow can connect your identity with your wallet, he can see all transactions you executed in the past and follow all transactions you will perform in the future. That’s why transparency is more like a double-edged sword in this case.

The transparency of public blockchain networks is important for particular cases, such as wallets of non-profit organizations or government funds. However, in the case of individual accounts, that’s not so great. Imagine sending your friend some funds that you owe him for a dinner he paid in the past, and as a result, your friend is getting access to your complete transaction history. The same problem also applies to legal entities’ wallets. You wouldn’t like your customers to know where and how you spend your funds or whom you have as a client. Therefore, privacy in public blockchain networks is essential.

PriFi is a recently introduced term associated with blockchain technologies bringing privacy to decentralized finance. PriFi stands for Private Decentralized Finance. Some teams are developing decentralized applications to provide privacy to existing public blockchain networks. Other existing networks are enhancing their products to incorporate privacy features, while others are working on building privacy-first smart contract platforms.

Although the PriFi trend has already begun, you will be hearing more and more in the coming months about privacy in smart contracts, PriFi, Zero-knowledge proofs, and other terms associated with privacy in Web 3.0. In 2022 and beyond, PriFi smart contract platforms will start taking off, experiencing similar ecosystem development to the one many public blockchain networks experienced in 2021. Secret Network, Manta Network, and Findora are among the many projects working on bringing privacy to smart contracts.

Interoperability and Cross-chain Smart Contracts

In 2021 DeFi experienced tremendous growth. Many blockchain networks were deployed, with each hosting its own DeFi ecosystem. DeFi is now spread across hundreds of blockchain networks. More general-purpose and special-purpose blockchain networks are currently in development. Considering the potential of this technology, having thousands of networks to deal with in the near future doesn’t sound like a farfetched goal.

Interoperability, cross-chain value transfers, and cross-chain smart contract execution are some of the problems resulting from having a multi- and cross- chain DeFi ecosystems. Although there are a lot of bridges and other cross-chain value-transfer protocols in place, the user experience is not so great. Whenever we want to use a protocol on a different blockchain, we have to add new network configurations in our wallets, move funds, etc.

Cross-chain smart contracts will allow decentralized applications to leverage capabilities from smart contracts deployed across various blockchain networks and interoperate to create one unified application. This will allow dApps to offer more powerful features, enable new use-cases, and allow users to have a seamless cross-chain experience.

SocialFi – Decentralized Social Media Platforms

SocialFi and decentralized social media platforms are among the most anticipated use-cases for public blockchain networks. Web 2.0 brought us social media networks and allowed us all to connect and communicate in so many different ways. Sharing our moments, pictures, stories, and whatever we are doing in our daily lives. According to Statista, depending on which country you are coming from, between 70 to 90+ percent of the population uses social media networks.

The problem with the existing social media platforms is associated with the centralization of power. Few companies utilize our data, most of the time without our consent, to show us targeted advertisements. These few companies can even influence our decisions and behaviors by using our data. In the past, they were able to even influence the national elections of some very powerful nations.

Decentralized social media platforms intend to change that. SocialFi will provide users with more privacy and ownership of their data and content. Moreover, by getting ownership of their content, users will be able to decide on how to monetize them. Most importantly, Decentralized Autonomous Organizations (DAOs) will govern SocialFi platforms that will allow users to participate in decisions associated with the future developments of the various platforms.

Even though social media decentralization can be seen as something entirely irrelevant for DeFi, that’s not true. The idea is to combine elements from the DeFi world with elements from the Social Media world. I will be writing more about this topic in the future. In the meantime, you can check out Myriad.social to get a glimpse of SocialFi and what’s about to come.

GameFi and the Decentralized Metaverse

GameFi, similar to SocialFi, is among the most meaningful use-case of decentralization. GameFi is a fusion of Gaming with Decentralized Finance. Considering that Metaverse is closely related to Gaming, Metaverse is a term closely associated with GameFi.

The GameFi trend already kicked off in 2021, with some very popular use-cases and games getting a lot of traction. Among them Axie Infinity, Decentraland, Crabada, and DeFi Kingdoms.

Game Developers can now build games with blockchain technology, where ERC20 tokens power the in-game currencies. Similarly, unique in-game assets, such as in-game characters, are powered by Non-Fungible Tokens (NFTs). Users earn tokens while playing the game and can even sell the game characters they own and develop.

Another term used interchangeably with GameFi is Play-to-Earn. GameFi made life-changing money for people across the globe. Many people have quit their jobs as they can earn more money playing a game compared to working a day job.

The gaming industry is vast, and GameFi is still tiny in comparison. I expect many traditional game development studios to jump on the GameFi train. Many projects have already raised millions to develop full-blown games on the blockchain. Game development takes time. Many will fail. Some will succeed. GameFi will rise.

As a side note, there’s a considerable hype/bubble around GameFi, Play-To-Earn, and Metaverse. Naturally, hype attracts many ill-intentioned people and charlatans. Stay safe.

RealFi – Real Asset Tokenization

I haven’t heard anyone using this term so far, but it aligns with the rest of the trends. What would you call a sub-group of decentralized applications, where you could exchange or unlock the liquidity of Real Assets on-chain? Tokenized Real Assets used in DeFi? RealFi sounds about right.

Today, you can find a lot of decentralized applications providing services similar to the ones provided by traditional Centralized Financial (CeFi) providers. The list includes decentralized exchanges, options trading, lending & borrowing, derivative exchanges, insurance protocols, etc. The most significant limitation of today’s DeFi protocols is that their capabilities are limited to dealing with Digital Assets. For instance, DeFi lending protocols allow anyone to borrow on-chain, but the only asset class supported as collateral is the “Digital Assets” class.

The possibilities of real asset tokenization are limitless. Someone will be able to raise money on-chain to purchase real assets, such as Real Estate and other income-generating assets. Moreover, existing DeFi protocols can be enhanced to support tokenized real assets. This will enable owners to easily exchange real assets on-chain or deposit tokenized real assets as collateral to the various decentralized lending platforms.

Undoubtedly, this is not an easy task to achieve. Real estate tokenization or any other type real asset, is subject to local rules and regulations. Currently, the rules and regulations around DeFi and Crypto are vague or uncertain. Moving real assets on-chain will be a big challenge, but not far from reality.

Centrifuge, possibly the biggest name in this space, has already started onboarding real-world assets on-chain. Recently, Centrifuge, in collaboration with Aave, has opened markets allowing the financing on Real Estate Bridge Loans, Trade Receivables, Cargo & Freight Forwarding Invoices, Branded Inventory Financing, and Revenue Based Financing on-chain.

Closing Thoughts

I hope this article gave you a glimpse of what is coming up for DeFi and Web 3.0 in 2022 and beyond. Web 3.0 and Decentralized Finance are expanding rapidly on new frontiers. This made it difficult to fit everything into one article. I will be writing more deep-dive articles in the near future about these trends as well as additional trends not covered in this article.

Aris Ioannou
Aris Ioannouhttps://coinavalon.io
Aris created Coinavalon with the purpose of helping the average person navigate the decentralized web. Aris has been passively in the space since 2017 and full time since late 2020. Before Coinavalon, Aris worked as a Business & IT Architect in the financial services sector. Aris holds an MSc in Advanced Computing from Imperial College London, a BSc in Computer Engineering from University of Cyprus and currently pursuing an MBA degree from CIIM.

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