When Vitalik Buterin launched the Ethereum Network in 2015, only a few could have foreseen its massive impact on the decentralized finance sector ten years down the line.
In less than three years since its inception, Ethereum’s smart contracts technology has given rise to Decentralized Finance (DeFi) — the core of Web 3.0. In no time, developers were able to program and build decentralized apps (DApps) that provided financial services, including lending, borrowing, and trading within the crypto market; DeFi was up and running.
Fast-forward to today, the DeFi industry has grown into a staggering $23.99 billion market with millions of developers, traders, and crypto lovers all thriving under one umbrella. This article describes the top DeFi trends and use cases of 2024.
The Best DeFi Protocols Changing the World
DeFi protocols are now more than just simple lending and borrowing blockchain technologies. From Perpetual Liquidity Pools to GambleFi, here are 5 trends leading the DeFi evolution.
1. Cross-chain Bridging
The future of DeFi lies in the ability of different blockchain networks to be intertwined. Typically, blockchains operate as single isolated digital ecosystems; Crosschain bridging allows for seamless communication between protocols, ensuring interoperability. For instance, cross-chain decentralized exchanges will enable you to exchange crypto 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 Cross Chain Bridging
Currently, the industry already has multiple crypto bridges allowing two-way asset transfer by creating synthetic derivatives compatible with multiple chains. For instance, Portal Token Brie, formerly Wormhole, built on Solanas, has connected 7 DeFi blockchains, including Ethereum, Solana, BSC, Terra, Polygon, Avalanche, and Oasis. The bridge’s Total Value Locked is over $3.5 billion despite having extremely low transaction costs of $0.0001 per exchange. Â
Cross-chain brides enhance liquidity by enhancing token utility, mitigating the risk of depending on a single chain for transactions.
Criticism of Cross-Chain Bridging
The main challenge in cross-chain bridging is ensuring there are no logical flaws or technical mismatches during transaction processing in two networks. Vulnerabilities may allow attacks to execute unauthorized contracts. The 2023 Orbit Bridge Hack is a perfect example—the protocol lost $82 million.
2. Perpetual Liquidity Pools (Perp LPs)
Liquidity is the cornerstone of DeFi. It is crucial for price stability and market efficiency. The higher a token’s liquidity, the easier it is to trade it for another crypto and the less volatile its price is. That said, traditionally, liquidity pools required constant rebalancing to reduce price slippage. Perpetual pools have come in to address this issue since they offer continuous liquidity, which helps reduce slippage and stabilizes price movement. Â
Utility of Perpetual Pools
With perpetual pools, automated market makers (AMM) help quote prices in all perpetual markets involved in a trade. The liquidity providers in perpetual pools act as counterparties to orders placed in derivative markets in the DeFi space. This means if a trader decides to short the price of ETH currently trading at $3,000, believing it will decrease, the perpetual liquidity pool will take the opposite position of going long at $3,000. This guarantees liquidity for traders in varying trading positions.
Liquidity providers in these pools will earn from the trader’s negative profit and loss, the trading position’s funding rates, and maker rebates.
3. GambleFi
With online gambling sites already accepting crypto as a form of payment, it was only a matter of time before they incorporated DeFi into their platforms. GambleFi, which combines online gambling and decentralized finance, creates an ecosystem where people enjoy placing wagers while benefiting from blockchain features.
Most importantly, GambleFi will address the issue of implementing fair and provable gaming algorithms. As a result, bettors playing slot games on a no deposit bonus casino Canada will be able to verify the fairness in each game; adding more transparency to gambling. Moreover, more casinos will likely incorporate rebate systems for players that work similarly to loyalty programs.
Use Case of GambleFi
Besides, GambleFi is looking to introduce decentralized gambling platforms with self-executing contracts that allow instant automated payments once outcomes are reached. Unlike traditional online casinos, which are prone to fraud and manipulation, blockchain will enhance security and increase user adoption.
On the other hand, while crypto volatility might make gambling risky, it also offers an opportunity for huge gains.
4. Bitcoin Layer 2
Bitcoin has been late to the improved scalability party (supporting only 7 transactions/sec), but the latest Bitcoin L2 solutions development has helped this blockchain level up. Bitcoin Layer 2 is a secondary protocol built on top of Bitcoin. However, this L2 has a different architecture compared to those developed on, say, Ethereum. For instance, the L2 solutions don’t rely on Bitcoin’s security protocols since they have separate network validators. In comparison, Ethereum’s layer 2 networks rely on the main net’s validators for security.
These layer 2 solutions handle off-chain transactions using state channels, side chains, and rollups. The approaches enhance the speed of these transactions by bundling numerous off-chain transactions and then registering them on the Bitcoin blockchain as a single transaction.
Utility of Bitcoin L2
While still in its nascent stages, Bitcoin L2 has enabled smart contract functionality on Bitcoin, unlocking the development of dApps and DeFi protocols on the network. The layer 2 solutions allow off-chain transactions without burdening Bitcoin’s main network. As a result, transactions are fast and cheap.
The recent Bitcoin halving has led to a surge in innovations in the Bitcoin network. Some early Bitcoin L2 adapters like Elastos(ELA) and Lightnin Network now see more exposure as users embrace L2 solutions.
Conclusion
These top trending trends are at the forefront of DeFi’s future as it democratizes the traditional financial system. From monetizing the blockchain gaming sector to the rise of Bitcoin layer 2 solutions and derivatives, DeFi’s landscape over the next few years looks exciting.
