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Decentralized finance is often considered a relatively new phenomenon in crypto, but it has been around in various forms for several years now. MakerDAO was founded in 2015, Aave started life as ETHLend in 2017, and Uniswap emerged in 2018. But it’s fair to say that 2020 marked such a watershed moment in the advancement of DeFi, that for many people, last year was when it all really began.
As speculators rushed in to capitalize on the opportunity for vast returns, developers and venture investors have also turned more attention to DeFi. Now in 2021, we’re starting to see more advanced protocols emerge as the DeFi markets begin to more closely resemble their traditional counterparts. Some projects have even started to merge crypto native concepts like stablecoins with traditional assets to create entirely new products.
So how is DeFi transforming in 2021 across the various segments?
As the DeFi landscape has become more complex, it’s becoming increasingly challenging for investors to keep track of their portfolios. In traditional finance, asset managers have a role to play in helping clients maintain an optimal portfolio based on their risk appetite and investment objectives.
In DeFi, there’s an opportunity to automate part or all of this role using smart contracts. Furthermore, asset management on a blockchain comes with other advantages. Funds and their makeup are transparent, and changes are visible in real-time. Due to the transparency, there’s little opportunity for foul play.
Cook Protocol is one of the projects looking to capitalize on the growing market for crypto asset management with a decentralized cross-chain platform. With a single user interface, fund managers can deploy and execute strategies, while everyday users and investors can browse and contribute to funds set up on the platform. The protocol uses Nexus Mutual to ensure that any losses resulting from smart contract errors within whitelisted DeFi projects are fully insured.
It’s only in recent years that margin trading has become popular in the broader cryptocurrency space, as the derivatives market has grown exponentially. However, with the rapid development in DeFi, demand for margin trading has surged as speculators seek ways to magnify their gains.
Last year, a few different margin trading protocols entered the DeFi space. However, many relied on off-chain relays to secure margin, meaning that they compromised somewhat on the “decentralized” element of DeFi.
A newer protocol called UniMex claims to have solved this issue by leveraging lending pools from which traders can borrow to execute long and short trades. Traders pay a fee, which is distributed among those who supply liquidity to the margin pools.
Options were even later to the cryptocurrency space than margin trading, with Deribit the sole player until around 2019. Options play an important role in the high-stakes world of trading, as they provide an opportunity to hedge against losses.
For instance, if you open an ambitious futures contract going long on an asset, opening a put option allowing the opportunity to sell can help offset some of the risks, with only the option premium as a potential loss.
Premia is one example of a project that’s aiming to fill this gap in DeFi. It features a marketplace where users can buy and sell call and put options for a range of supported Ethereum and Binance Smart Chain-based tokens. It also allows users to mint their own call and put options and stake Premia tokens to earn a share of the platform’s fees.
The idea of stablecoins is far from a new one. Stablecoins have been one of the factors accelerating the growth of DeFi over the last few years. However, the stablecoin space is currently dominated by a small range of US dollar-backed tokens – predominantly USDT and USDC, and Maker’s DAI.
BondAppétit is seeking to redress this balance by introducing a dollar-pegged stablecoin backed by bonds. Anyone can mint their own BondAppétit native stablecoin, called USDap, by staking bonds as collateral. Users can continue to earn income from the bonds while they’re staked in the protocol.
Composability is at the core of what makes DeFi such a compelling proposition. It refers to the feature that allows a user to pass funds through multiple protocols using a single transaction, enabling fast profits through vehicles such as flash loans. However, so far, composability has been limited to those protocols based on the same blockchain. The next era of composability will be cross-chain.
There are already some early signs. pTokens allows users to stake an initial deposit of an asset, say BTC. They then request the equivalent in pBTC issued on Ethereum. This allows them to stake their BTC in any Ethereum-based DeFi app without converting it to ETH or an ERC20 token. The peg in/out speed and cost are both more optimal than alternatives such as wBTC.