History can teach us a lot
Centralized financial institutions have such a large user demand for decentralized financial services that it is safe to say that history will repeat itself in a devastating way for mainstream finance.
Global changes in the world of finance
DeFi’s rapid growth shows no signs of slowing down. Conversely. Since January, the total value of DeFi has tripled, from $15 to $45 billion. Moreover, it has great potential for further growth.
Of course, the story changes depending on which way the wind blows. In the summer of 2020, when the so-called “degenerate finances” began to be felt. Some experts in the cryptocurrency community have begun issuing ominous warnings about historical parallels with the ICO era.
To be honest, this came on the back of the collapse of Yam Finance, which experienced an impressively short but dramatic up and down in 24 hours in August after one of the founders admitted they had discovered a fatal flaw in a smart contract. This happened at a time when the trend of “yield financing” was beginning to gain momentum.
Cycles are a well-known phenomenon, especially in financial markets, so it is understandable to draw parallels with the past. But while the ICO boom has left a scar in the collective memory of the cryptocurrency community, we need not rush to assume that DeFi is making the same mistakes. After all, there are many similarities between DeFi and the rise of cryptocurrencies.
We are now increasingly seeing centralized organizations taking an interest in DeFi, which became apparent when exchanges like Binance started offering staking and lending services. Although they are centralized, the concepts are clearly borrowed from DeFi. However, centralized services have also begun to integrate with DeFi projects and protocols, and in some cases even deploy their own. Binance, for example, has been a pioneer among centralized crypto exchanges, launching its own smart contract platform, Binance Smart Chain, last year, which has quickly become the focus of DeFi projects seeking to escape the increasingly beleaguered Ethereum. In February, PancakeSwap became the first billion-dollar project in the Binance Smart Chain.
Other companies take a different approach. In March, centralized exchange Huobi and credit platform DeFi Kava announced a major integration release. Users can now delegate to the Bitcoin-linked HBTC stack on Kava to earn an 8% return until March 2022. Kava CEO Brian Kerr is obviously embracing the idea of integrating CeFi, stating that the partnership could attract millions of new users to the Kava platform.
Kava already has a certain strategy when it comes to integrating with centralized platforms. BNB and BUSD Binance were among the first assets to be listed on Kava as collateral for the release of the project’s own stablecoin, USDX. With the long-awaited Kava 5.1 update for the Kava infrastructure, users can now borrow and borrow Bitcoins to earn + 45% APY revenue. The frequency and speed of such Kava integration by financial institutions demonstrates the pent – up demand from users for DeFi products and services.
Bright future ahead
So what’s next? We’ll probably start seeing more DeFi and CeFi integrations. For example, Trace Network is an intriguing new project that combines DeFi with NFT and real-world use cases in retail and trade finance. NFT offers the opportunity to provide an immutable and unique proof of ownership of luxury items, such as designer handbags or high-end watches. The DeFi element makes it possible to overcome financial barriers and open new channels of liquidity between partner firms.
In other countries, some DeFi initiatives are taking steps to bridge the regulatory gap. The Chicago DeFi Alliance is a collaboration between well-known Chicago merchants and members of the DeFi community, including representatives from Compound, Kyber Network, and Aave. The latter also became the first DeFi protocol to be licensed for electronic money by the UK Financial Conduct Authority last summer.
These are all echoes of Bitcoin’s transformation into the mainstream. From little-known platforms used by a tiny community, to an explosion of popularity accompanied by growing interest from first-timers willing to take risks. If the cycle continues, the next wave will come from companies outside the cryptocurrency space. This will be followed by the full integration of DeFi into the existing financial infrastructure, similar to what is currently happening with Bitcoin. History often repeats itself, and if this happens to DeFi, then now is the best time to take action.