When Vitalik Buterin launched the Ethereum network in 2015, few could have predicted its massive impact on the decentralized finance industry ten years later.
In less than three years since its inception, Ethereum’s smart contract technology has given rise to decentralized finance (DeFi) — the heart of Web 3.0. In no time, developers were able to program and build decentralized applications (DApps) that provided financial services, including lending, borrowing, and trading on the cryptocurrency market; DeFi was up and running.
Today, the DeFi industry has grown into a staggering $23.99 billion market with millions of developers, traders, and crypto enthusiasts all thriving under one umbrella. This article outlines the top trends and use cases for DeFi in 2024.
The Best DeFi Protocols That Are Changing the World
DeFi protocols are now much more than just blockchain lending and borrowing technologies. From perpetual liquidity pools to GambleFi, here are 5 trends leading the evolution of DeFi.
1. Inter-chain bridging
The future of DeFi lies in the ability of different blockchain networks to intertwine. Typically, blockchains operate as single, isolated digital ecosystems; cross-chain bridging enables seamless communication between protocols, ensuring interoperability. For example, cross-chain decentralized exchanges will allow you to trade cryptocurrencies across multiple networks by burning assets in one network and minting new ones in the other. Other mechanisms include lock-and-unlock and lock-and-mint models.
Examples of chain bridging
Currently, the industry already has several crypto bridges that enable bidirectional asset transfer by creating cross-chain compatible synthetic derivatives. For example, Portal Token Brie, formerly Wormhole, built on Solanas, has connected 7 DeFi blockchains including Ethereum, Solana, BSC, Terra, Polygon, Avalanche, and Oasis. The total value locked on the bridge is over $3.5 billion despite extremely low transaction costs of $0.0001 per exchange.
Cross-chain brides improve liquidity by improving token utility, mitigating the risk of relying on a single chain for transactions.
Criticism of Inter-Chain Bridging
The main challenge in cross-chain bridging is ensuring that there are no logical flaws or technical incompatibilities when processing transactions across two networks. Vulnerabilities can allow attacks to execute unauthorized contracts. The Orbit Bridge hack in 2023 is a perfect example of this, where the protocol lost $82 million.
2. Perpetual Liquidity Pools (Perp LP)
Liquidity is the cornerstone of DeFi. It is crucial for price stability and market efficiency. The higher the liquidity of a token, the easier it is to swap it for another crypto and the less volatile its price. That said, traditionally, liquidity pools required constant rebalancing to reduce price slippage. Perpetual pools came to solve this problem as they provide continuous liquidity, which helps reduce slippage and stabilize price movements.
Usefulness of perpetual pools
With perpetual pools, automated market makers (AMMs) help quote prices across all perpetual markets involved in a trade. Liquidity providers in perpetual pools act as counterparties to orders placed on derivatives markets in the DeFi space. This means that if a trader decides to short the price of ETH that is currently trading at $3,000, thinking it will go down, the perpetual liquidity pool will take the opposite position to that of a long position at $3,000. This ensures liquidity for traders in different trading positions.
Liquidity providers in these pools will earn on trader negative profits and losses, trading position funding rates, and maker rebates.
3. GambleFi
With online gambling sites already accepting cryptocurrencies as a payment method, it was only a matter of time before they integrated DeFi into their platforms. GambleFi, which combines online gambling and decentralized finance, creates an ecosystem where people enjoy placing bets while benefiting from the features of blockchain.
Most importantly, GambleFi will address the issue of implementing provably fair gaming algorithms. As a result, punters playing slot games at a no deposit casino in Canada will be able to verify the fairness of each game, adding more transparency to gambling. Additionally, more casinos will likely integrate player rebate systems that work similarly to loyalty programs.
GambleFi Use Cases
Additionally, GambleFi is looking to introduce decentralized gaming platforms with self-executing contracts that allow for instant automated payouts once results are achieved. Unlike traditional online casinos, which are prone to fraud and manipulation, blockchain will enhance security and increase user adoption.
On the other hand, while the volatility of cryptocurrencies can make gambling risky, it also offers an opportunity for huge winnings.
4. Bitcoin Layer 2
Bitcoin has been slow to embrace the improved scalability part (only supporting 7 transactions/sec), but the latest development of Bitcoin L2 solutions has helped this blockchain move to the next level. Bitcoin Layer 2 is a secondary protocol built on top of Bitcoin. However, this L2 has a different architecture than those developed on, for example, Ethereum. For example, L2 solutions do not rely on Bitcoin’s security protocols because they have separate network validators. In comparison, Ethereum’s Layer 2 networks rely on the mainnet validators for security.
These Layer 2 solutions manage off-chain transactions using state channels, sidechains, and rollups. These approaches improve the speed of these transactions by grouping together many off-chain transactions and then recording them on the Bitcoin blockchain as a single transaction.
Usefulness of Bitcoin L2
Although still in its early stages, Bitcoin L2 has enabled smart contract functionality on Bitcoin, unlocking the development of dApps and DeFi protocols on the network. Layer 2 solutions enable off-chain transactions without overloading the Bitcoin mainnet. As a result, transactions are fast and cheap.
The recent Bitcoin halving has led to an increase in innovation in the Bitcoin network. Some of the early Bitcoin L2 adapters like Elastos (ELA) and Lightnin Network are now more visible as users adopt L2 solutions.
Conclusion
These prominent trends are at the forefront of the future of DeFi as it democratizes the traditional financial system. From the monetization of the blockchain gaming sector to the rise of Layer 2 Bitcoin solutions and derivatives, the landscape of DeFi in the coming years looks exciting.
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