Top 2023 DeFi Trends for Crypto Investors
Key Takeaways: 2023 DeFi Trends
- After the widespread mismanagement of user funds by centralized exchanges, DeFi will continue to play a bigger role in crypto, and this will lead to new 2023 DeFi trends.
- In 2023, new DeFi trends will include putting more real-world assets on the blockchain, more interest in non-custodial dApps, new developments in derivatives and options, DeFi scaling solutions like L2 rollups and Cosmos app chains, and more.
- A bear market is often one of the best times to see what worked and what didn’t and separate the good projects from the bad ones. This lets investors invest in promising trends they believe in at better prices for the next bull market.
Blockchain-based projects like NFTs, GameFi, Metaverses, and of course Decentralized Finance are making the cryptocurrency market grow quickly (DeFi).
Let’s take a moment to define DeFi and look at some of the 2023 DeFi trends that will be big in 2023.
What is DeFi?
Decentralized finance (DeFi) is a fintech solution that uses a distributed ledger to make it possible to do financial transactions without banks or other centralized financial institutions. All transactions are written down on a public and unchangeable ledger, so institutions don’t have to charge a fee for each one.
With just a phone and an internet connection, you can borrow, save, lend, or trade cryptocurrencies without knowing your customer (KYC). This makes DeFi easier to use, more integrated, and more transparent, which are all well-known benefits.
As DeFi protocols have grown, they have also made it easier for several new crypto companies to get started. Demand has gone up a lot, and the industry is expected to grow from $11.78 billion in 2021 to $231.19 billion in 2030, which is an increase of nearly 20 times.
2023 DeFi Trends to Observe
We think 2023 will be just as exciting, if not more so, than 2022 because so many exciting things happened in 2022 and before. Here are some new trends to keep an eye on.
FAQs – 2023 DeFi Trends
The Revival of DEXs – 2023 DeFi Trends
Decentralized apps (dApps) are apps that are built on top of blockchains. They are usually open, autonomous, don’t need permission, and don’t hold users’ funds. Decentralized exchanges (DEXs) are a key part of DeFi and are where most trading takes place.
This is different from centralized exchange (CEX) applications, which are usually permissioned and custodial, which means that the CEX holds the funds and manages them on behalf of the users.
Several centralized exchanges (CEXs), like Sam Bankman Fried’s FTX, closed down in 2022. Many users are worried that they will lose their money on centralized platforms like CEXes because there isn’t enough transparency and control.
This has caused DEXs to come back to life, and they have a lot of room to grow because they are the natural choice for people who want to leave centralized exchanges. Even though DEXs can be harder to use and require more care from the average user because they have to protect their private keys, they give users full control over their funds instead of giving them to a business.
In 2022, we saw interesting liquidity mechanisms like GMX’s GLP token and GNS’s DAI vaults acting as counterparty liquidity. Perp v2 and Rage Trade also used Uniswap v3’s concentrated liquidity mechanisms to improve liquidity and trading.
By TVL, Uniswap is still the best DEX, and its market cap has been more stable than ETH’s in 2022. After their license for Uniswap v3 expires in April 2023, Uniswap v4 could come out with even more cool features, which could be a turning point for the DEX space.
Decentralized Derivatives and Options
Since DEXs are back, there is more interest in blockchain derivatives. In terms of notional value and volume, derivatives are one of the biggest markets in the world. According to Internet Data, the derivative volume on CEXs is currently over $1 trillion.
The fact that derivatives often come with leverage is what makes them so popular. Some types of derivatives are perpetual contracts and options contracts, which give users a lot of leverage, up to 50x on some of the most popular perpetual DEXs.
As users become warier of CEXs, some of this volume may move to derivative DEXs that are on-chain. As new features are added to make trading on-chain derivatives better, there is a chance that this trend of rising volume and more people using it will continue. Permanent trading is already popular, but options trading is still growing. Protocols like Panoptic Options and Dopex are coming up with new ways for people to trade options.
In 2023 DeFi Trends, a new story called “OpFi,” which stands for “DeFi infrastructure powered by options,” may help spread the use of options.
Real-World Assets on the Blockchain
By moving real-world assets (RWA) to the blockchain, they have helped to open up large amounts of liquidity and utility that would have been hard or impossible to get in the real world.
Even though blockchains have the potential to make things more open and liquid, tokenizing physical assets hasn’t worked out very well. One reason could be that there is a complicated but “good enough” legacy market for most real-world assets that have been around for a long time.
Carbon offsets are a fairly new type of asset, and they might be an exception to this rule. No carbon system has been in place for so long that it can’t be changed. The building of web3 infrastructure to put carbon offsets on-chain could be the first real success story of tokenizing real-world assets.
Also, this information in 2023 DeFi Trends, big players in the DeFi lending market, like MakerDAO, have made it legal to invest in US Treasury and corporate bonds and have teamed up with traditional banks to offer loans with RWAs as security. At the moment, 57% of MakerDAO’s income comes from US Treasury bonds, which are worth more than $500 million.
One of the most useful ways for DeFi to be used is in partnerships with banks and real businesses. Goldfinch is another example. It is a decentralized global credit protocol that lets users loan their USDC to real businesses. Goldfinch’s revenue has continued to grow even during the bear market, with about $100 million in loans given out. This gives real returns outside of crypto activities, but there are risks because the loans are not well-secured and bad debts can happen.
Since many people in the business world already see RWAs as a great way to combine traditional institutions’ liquidity with DeFi, we can expect to see more of these actions in 2023.
Vitalik Buterin’s blog also says that he is excited about RWAs and that “the formula behind stablecoins can be applied to other real-world assets,” such as DAO-governed stablecoins backed by real-world assets.
The Emergence of CBDCs
We can’t talk about real-world assets without talking about real-world fiat currencies, also called Central Bank Digital Currencies, moving into the digital world (CBDCs).
A central bank, not a commercial bank, issues a CBDC, which is a digital currency. It is also a liability of the central bank that is measured in the sovereign currency.
The Atlantic Council think tank says that more than a hundred countries are looking into CBDCs at the research and development stage.
Some countries, like Nigeria and the Bahamas, have already started their CBDC programs, while others, like China, India, and Thailand, are still in the pilot stage.
China’s digital yuan has been the most successful, with more than $14 billion worth of transactions. But overall volumes have grown much more slowly. In 2020, they grew by a record 154%, but since then they have only grown by 14%.
With the launch of its e-rupee, India is one of the more recent countries to join the CBDC race. India will be a good place to start a large-scale CBDC initiative because it is the largest democracy in the world and has a huge crypto audience.
Even though CBDCs are talked about a lot, not many people are using them. This is partly because, from the consumer’s point of view, CBDCs and digitalized fiat currencies are a lot the same. Both are fast, free, and supported by their governments.
CBDCs are helpful because people who don’t have a bank account can still use them as long as they have a phone and access to the internet. Blockchain technology also makes it possible for international transactions to be made instantly.
There are also some worrying ways to get governments to adopt, like Nigeria’s plan to charge high fees for cash withdrawals from ATMs.
CBDCs give governments more power over their people’s money, which most people might not like unless the benefits are much greater than the negative effects.
In 2023, CBDC technology will likely get better, and we’ll know more about how different groups of people use and react to CBDCs. Also, both centralized and decentralized stablecoins already exist, are widely used in DeFi as the main price unit, and are very liquid. Users like them, and they are known to have one of the best product-market fits. So, it’s not likely that CBDCs will replace stablecoins shortly.
Liquid Staked Derivatives (LSDs)
In 2023 DeFi Trends, one of the next big events after the Ethereum Merge will be the Shanghai upgrade for Ethereum. This will allow staked ETH to be turned back into liquid ETH.
Before the Shanghai upgrade is finished, staked ETH can’t be turned into cash. So, Lido made liquid staking derivatives, which started with ETH, popular. Users could deposit ETH with Lido to earn ETH staking rewards and get stETH as a liquid token that represented their staked ETH tokens. stETH can then be used in DeFi for trading, lending, borrowing, and providing liquidity, instead of the ETH just sitting there while it’s being staked.
This trend of derivatives based on liquid staking spread to Cosmos, and several liquid staking providers started making liquid-staked versions of ATOM, OSMO, and other popular Cosmos proof-of-stake (PoS) assets.
Even though staked ETH can’t be withdrawn, the amount of staked ETH has been growing steadily, especially on Lido, as the chart below shows.
Continued Growth of Cosmos
More in 2023 DeFi Trends, Talking about LSDs, the rise in popularity of LSDs is very clear in the Cosmos ecosystem, which is made up of only proof-of-stake networks with governance assets that are staked to protect the network.
In 2022, there were a lot of new liquid staking providers. This made it easier to get the money locked up in these staked assets, which led to more DeFi activities. But even more than that, as DeFi keeps looking for ways to grow, Cosmos app-chain solutions have shown to be a successful way to scale, attracting dApps.
Even though the market is down right now, Cosmos has kept a good number of active users on its existing decentralized apps (dApps). DEXs like Osmosis, for example, have more than 100,000 active users every month.
Central Limit Order Book (CLOB) exchanges are the best chance for this to happen. This trend was started by dYdX, and we expect spot and derivative exchanges to be built as app chains so that they can save money on fees and have faster transactions. What makes app chains so appealing is the Cosmos SDK, which lets you build a technology stack that can be changed to fit the needs of the DeFi protocol.
Interchain Security (ICS) is one of the big changes coming to Cosmos Hub. ICS is a form of shared security in which new chains will use existing ATOM validators to secure the chain instead of setting up their own validator set. In exchange, ATOM validators will get staking rewards from the new chain. This will increase the value of ATOM stakers while letting new applications focus on providing a dedicated execution environment and better user experiences.
Interchain Accounts (IA), which will be released in 2023 and make it easier for Cosmos dApps to talk to each other and create a more balanced ecosystem of dApps, will also help more app chains launch and work together better, which could help Cosmos grow even bigger. All in all, it looks like Cosmos will have an interesting year.
Layer 2s Continues to Gain Traction
App chains can’t be talked about without also talking about Layer 2 (L2) rollups.
L2 rollups came about because Ethereum transactions were slow and had high gas fees when there was a lot of activity on the network. During these times, gas fees were over $200 and confirmations took minutes.
Rollups are layers that handle the execution and order of transactions. Ethereum, which is the L1, handles consensus and data availability.
The launch of Optimism’s OP token increased TVL and DeFi activities across L2 ecosystems, with Arbitrum currently leading the way in TVL.
Even though Ethereum gas fees have been going down, most DeFi activities still cost a couple of dollars, which is a lot compared to the few cents that L2s cost now.
There is also a chance that L2s will continue to grow because trading activity and TVL from Ethereum L1, as well as other capital that lives in EVM chains because of high ETH gas prices, will continue to move to L2. This would create sustainable growth in L2 ecosystems in 2023.
2023 DeFi Trends to Best for Crypto Investors, DeFi is one of the most exciting developments in financial technology right now. It has the potential to be an alternative financial hub with high levels of security, transparency, data integrity, and accessibility.
The past few years can be seen as the first cycle for DeFi. Just as the internet took some time to grow and was even called a fad before it became widely used, DeFi is expected to go through multiple cycles of innovation and failure before it has a chance to become the transformative technology that is hoped for.
So, this bear market is a great chance for the market to get rid of as much of the hype and nonsense that came with the start of the DeFi boom and see which trends stick around. Long-term DeFi investors who are serious about the space and think it will continue to grow for many years can learn more about trends by researching with patience during a bear market.
Do you have questions about how to find your ideal niche? Let us know in the comments below!
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