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What is Decentralised Finance and why is it growing so fast?

Decentralised Finance (DeFi) is a blockchain-based form of finance that does not rely on central financial intermediaries like banks or brokers. DeFi applications have driven a newfound desire to transact and store value on the blockchain and are becoming the most promising use case of blockchain technology. DeFi apps open up financial services to anyone with access to an internet connection. The current market capitalisation of all DeFi tokens as of 13/11/2021 is $172.5 billion. This is an increase of 6900% from its $2.5 billion market capitalisation in November 2019. Leading funds and institutions have only recently started to invest and there is still a lot of interest in DeFi investments from an institutional perspective. This positions DeFi to grow massively over the next few years. Building on current trends and according to industry experts, it is estimated that the DeFi market could reach a value of up to $800 billion by the end of 2022. This is still a tiny proportion of the $20.2 trillion that the traditional finance industry is worth. Although large levels of growth are being experienced in the sector now, there is still an enormous way to go. DeFi is just a fraction of the value of its traditional counterpart.

The current financial system is outdated and DeFi aims to improve upon it. One of these improvements is access to financial services for everyone, including the estimated 2 billion people who are unable to use traditional financial services due to geographical barriers or lack of identification documents currently needed to sign up to services. Services that were previously slow and at risk of human error are automated and safer now that they're handled by open-source code that anyone can view. Additionally, consumers are a lot more concerned about their privacy and data handling now than ever before. DeFi applications are privacy focused as they have anonymous peer-to- peer solutions and run on decentralised blockchains. Furthermore, it is cheaper to use DeFi services and the utility it brings to consumers is much greater than traditional finance solutions. Customers enjoy far lower fees and far higher efficiencies while using DeFi services. This also applies to corporations; DeFi payment services reduce fees dramatically and lead to lower costs for companies dealing with large volumes of transactions. A recent example is Amazon and their refusal to accept Visa in the UK due to the high level of fees they need to pay per transaction. DeFi is a solution to this issue of overpaid financial intermediaries. There are a lot more financial services options available for corporations and individuals now that DeFi has attracted large scale investment and talented developers.

The status quo is that Ethereum is the only viable platform to build DeFi applications on but in fact there are many different blockchains on which it is possible. These new DeFi apps have just started being developed, are often undervalued and can provide better

investment opportunities than ones built on Ethereum. Solana and Cardano are the third and fourth largest blockchains by market capitalisation and are starting to build their DeFi ecosystems now. Terra and Polkadot, which are two of the most innovative blockchains, are following suit. In terms of Total Value locked Ethereum still dominates DeFi with 66% of all TVL being on Ethereum. Binance is catching up with 8%, followed by Solana with 5%.

The next evolution of DeFi includes alternatives to liquidity mining which is when protocols give their native token to users for depositing assets that other users can trade or borrow. OlympusDao, Fei Protocol, Alechemy and many more are trying to capture users with new innovative solutions to some of the problems liquidity mining poses. The problem with DeFi 1.0 liquidity mining is that protocols are diluting their native token supply for asset deposits, which are often only temporary.

OlympusDAO is a DefI project offering a so-called “decentralized reserve currency” in its OHM token, and is trying to tackle this problem. Olympus DAO sells its native token OHM for a discount in exchange for liquidity provider tokens. For example, a user can trade OHM-DAI liquidity provider tokens for OHM. OlympusDAO pays out this discount over 5 days. This allows OlympusDAO to own its liquidity. In order to incentivise users to not sell their OHM tokens that they received for a discount, OlympusDAO has attractive staking rewards. OlympusDAO recently launched Olympus Pro which aims to become “the new industry standard platform to help protocols acquire their own liquidity,” as the project's whitepaper says.

DeFi has certainly captured the attention of individuals and institutions worldwide. The growth it has experienced over the last two years has been phenomenal and it is likely to continue in this fashion. The main drivers behind this accelerating growth include the adoption of crypto-assets by institutions and the realisation of the necessity for the services being offered. DeFi projects increase efficiencies on many levels with faster transaction speeds and lower barriers to entry for providers of new services. This increases competition between DeFi projects aiming to capture users and leads to greater innovation, which can lead to greater utility for consumers.

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