BeInCrypto estimates that decentralized finance (DeFi) will evolve in the coming year in terms of financial integration and personal identity.
While 2021 saw cryptocurrencies and Web3 development flourish, including DeFi, last year saw these advances being rolled back. Crypto valuations plummeted, causing many companies to fold, leading to further collapses and revelations of massive frauds. Nevertheless, as DeFi perseveres, these events helped shape how it would evolve over the course of the next year.
centralized exchange failure
The year saw the failure of several centralized exchanges (CEXs), most notably the collapse of Sam Bankman-Fried’s FTX. As customers face a long, uncertain process to retrieve their assets, many have become wary of these platforms’ lack of transparency and control. consequently, decentralized exchange (DEXs), a key feature of DeFi, has great potential for growth.
Although DEXs are often complex and require more due diligence from the average user, they transparently enable them with complete control. Rather than entrusting their funds to a corporation, users have complete visibility into how the platform is storing and investing their assets. Therefore, 2023 could potentially be a breakout year for DEXs, with potentially more innovative functions coming to applications and platforms.
Likewise, a growing number of investors will also begin to understand the difference between DeFi and its traditional, centralized counterpart. One reason is the ease with which claims can be refunded through DeFi protocols. For example, the only creditor who managed to reclaim their assets did so through smart contracts. This was the case when Celsius and Alameda Research repaid their loans using collateral posted to borrow dollars.
Through the use of smart contracts, DeFi transactions are trusted and fairly arbitrated using cryptographic methods. Meanwhile, in CeFi, transactions are subjectively arbitrated by humans, as are any failures, which are usually caused by human error. Unlike the case with FTX, for example, smart contracts do not require the arbitration of external third parties.
As investors begin to trust with the ability to use smart contracts, there will likely be more integration of DeFi within CeFi. For example, JP Morgan has created significant progress in its blockchain-based development through its dedicated unit Onix. investment bank also made it first defi transaction Earlier this year, in partnership with the Monetary Authority of Singapore.
Many also believe that the size of the FTX collapse will trigger legislation that could accelerate the adoption of blockchain technology. To this end, CeFi’s existing infrastructure will enable institutions to interact with DeFi applications while remaining compliant. Steps taken by JP Morgan and other financial institutions this year indicate more consolidation in the coming fiscal year.
Nevertheless, DeFi will also play a central role in the development of digital identity as CeFi finds ways to further integrate blockchain-based methods. This past year, a number of tools emerged that explored the interactions between social networks, reputation, and decentralized identityProjects include kindred token, ENSPOAP and Lens, This focus on prestige and identity is consequently likely to increase in 2023.
This will also be facilitated by the increasing use of digital wallets and irreplaceable Tokens (NFTs), both of which have found more use cases over the past year. For example, the public benefited more awareness The number of digital wallets introduced this year by big social media companies such as Reddit, Instagram and Twitter. As of November 2022, approximately 80 million crypto wallets have been created, of which some 6% have interacted with DeFi. rising trend purse So adoption will easily contribute to the growth of DeFi in the next year.
Meanwhile, as unique identifiers, NFTs will also be play a role Helping to establish decentralized identity in DeFi. For example, users may one day contribute NFTs of assets as liquidity to a decentralized exchange’s liquidity pool. They could also borrow cryptocurrency against that NFT to invest in other yield-yielding products.
In addition to direct DeFi applications, NFTs can also see use in licensing licenses and academic credentials. Verifiable Credentials will also become a standard for off-chain credentials and verification, with the first iteration of such scalable reputation systems being built using tools such as metamask Snaps, DID and VC.
BeInCrypto has reached out to the company or the person involved in the story for an official statement regarding the recent development, but has yet to hear back.