Top 3 DeFi trends to watch in 2023
2022 has been a year of bear market building – could 2023 see a DeFi resurgence?
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A lot has changed in the DeFi realm over the past year, and much more is on the horizon. Despite a poor-performing 2022, developers have kept building, and the technologies have matured rapidly.
Projects and communities have noted what's working and what failed, and the roadmap to 2023 is looking strong.
We explore the top DeFi trends and new technologies expected to hit the market in the coming months and what they mean for DeFi moving forward.
The rise of layer-2s
Layer-2 blockchains play a unique role in the crypto space. They are designed to take Ethereum transactions off its mainnet, process them on their blockchain and redeploy them. All the while, inheriting the security and functionality of the Ethereum blockchain.
Although this is a complex solution and requires advanced cryptography, it has proven its efficiency and effectiveness.
Polygon's zkEVM is set to launch in early 2023 and is the most groundbreaking layer-2 advancement to date.
The Polygon zkEVM (zero-knowledge Ethereum Virtual Machine) uses zero-knowledge proofs to bundle Ethereum transactions into a single "bulk transaction".
These bundled transactions are processed by Polygon as a single transaction, with gas prices being split between participants – drastically lowering fees and reducing processing times. Once verified, transactions are relayed to the Ethereum network.
In addition to improved speeds and costs, zkEVM allows the migration of dApps (decentralised applications) that operate on the Ethereum blockchain to transition to Polygon.
By simply switching nodes, developers can take advantage of zkEVM while still using EVM programming languages and tools such as Solidity, Truffle, Hardhat and Remix to execute smart contracts.
Developers running dApps on Polygon can also seamlessly migrate to its upgraded zkEVM.
Although it's down about 70% from 2021 all-time highs, Polygon's native coin MATIC has been one of the best-performing cryptos throughout this year's bear market, gaining over 150% from June lows.
2023 is set to be a big year for layer-2 technology, and Polygon is undoubtedly leading the way.
Web2 meets Web3
There is currently a gap between Web2 services, such as centralised exchanges and DeFi, Web3 alternatives. Confidently managing assets on-chain can be complex and is often not feasible for beginner investors.
Fortunately, companies are building projects intending to bridge this gap and help make DeFi more accessible to a broader audience.
For instance, the Coinstash DeFi Connector allows users to trade on-chain assets directly through the Coinstash platform to access over 1,000 cryptocurrencies – all of which can be purchased using Australian dollars.
This removes many of the hurdles associated with DeFi trading, including smart contract vulnerabilities and bridging between blockchains.
DeFi Connector aggregates crypto prices on-chain, sources the lowest prices with the least gas fees, and provides users with secure, verifiable transactions up to 20 times faster than Web3 alternatives such as MetaMask.
The platform currently supports 6 blockchains, including Ethereum, BNB Smart Chain, Polygon and Avalanche.
By providing beginner users and crypto natives with easy access to DeFi, Coinstash and projects of similar nature are helping the industry bridge the gap between Web2 and Web3, taking a much-needed step towards mainstream adoption.
Finder Innovation Awards 2022: Best Innovation in Digital Currencies
Finalist: Coinstash DeFi Connector
With the Coinstash DeFi Connector, investors can use their AUD to buy almost any cryptocurrency available in the DeFi space, without installing a crypto wallet and transferring funds there.
"Accessing DeFi responsibly requires sufficient knowledge of how to use a blockchain and Web 3 wallet, which can be a substantial hurdle for many investors. Coinstash solves this by providing tokens listed on decentralised exchanges to users through a familiar interface easier and safer to navigate than if done natively." said the Finder judges.
Another significant and noteworthy DeFi advancement is the development of a new generation of stablecoins from projects including Aave.
Aave is one of the industry's most popular and trusted DeFi lending protocols. It currently has a US$3.75 billion total value locked (TVL) and a marketcap of US$860 million – ranking in the top 50 crypto projects.
In July 2022, the Aave team proposed its own stablecoin, GHO.
The idea was voted favourably and approved for development by its community of token holders, the Aave DAO (decentralised autonomous organisation).
The GHO stablecoin differs from others, such as Tether and USD Coin, in that while it's pegged to the US dollar, it's not backed 1:1 by fiat currency. Instead, it operates under a multi-currency, over-collateralised minting model.
When borrowers post collateral into one of Aave's lending pools, GHO will be minted and available to trade.
Once the loan is repaid, GHO is burned and the interest accrued is distributed to the DAO and lenders.
This process is the same as borrowing any other crypto or stablecoin from the Aave protocol. All GHO loans are over-collateralised and are at risk of liquidation if a loan-to-value (LTV) ratio is exceeded, meaning that the lender is protected against lost assets due to market downturns or a borrower's losses.
While the GHO stablecoin is not intended to act as an investment, it does have utility and incentives for its holders.
Investors staking the Aave token (stkAAVE) will be eligible for discounted borrowing rates on GHO. This will likely encourage more traders to lock up their Aave tokens and help to secure the network.
The GHO release is set to coincide with Aave's V3 updates, which include compatibility with the Fantom, Optimism and Arbitrum blockchains.
Aave co-founder Stani Kulechov stated in a recent podcast that integrations with new blockchains and layer-2s allow Aave to improve the functionality of existing stablecoins.
"So what I'm thinking and what I'm envisioning is that we have, for the first time ever, an opportunity for stablecoins to be used as internet money to solve real-world payment problems while still using the blockchain." – Stani Kulechov.
By reducing transaction costs, users on a global scale can practically and affordably hedge against inflation by holding assets such as GHO.
Aave V3 is currently in the testnet stage – documentation can be found on the Aave official website.
Despite 2022 being a poor-performing year for the price of many cryptos, development advancements, particularly in the DeFi space, have not slowed down.
If history is anything to go by, bear markets have proven the best time to build, innovate and invest. 2023 is sure to be an exciting time to be involved in the blockchain space.
Disclosure: The author owns a range of cryptocurrencies at the time of writing