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DeFi Market Growth 2021 — What to Look Out For in DeFi

DeFi Market Growth 2021 Defi 101

Many expect the DeFi market growth in 2021. This is certainly due to the unprecedented boom of DeFi crypto in 2020. In fact, it surged to over 400% since last year, with the DeFi market’s total value locked (TVL) reaching toward $50 billion.

On the other hand, the overall DeFi market cap has also surpassed the $80 billion mark. Despite this massive number, it is still quite a leap to come in close to the Bitcoin and Ethereum market cap value.

As the potential for cryptocurrency becomes more recognized with a lot of industry leaders adopting these digital assets, DeFi market growth in 2021 is indeed projected. In light of this, DeFi tokens are among the best cryptocurrencies to invest in 2021.

defi tokens
Source: CoinGecko | February 2021

5 Factors That Can Affect DeFi Market Growth 2021

There are several developments within the DeFi market that contribute to its growth. Thus, DeFi market growth 2021 is presumed considering the following factors:

Cross-chain technology

In particular, cross-chain technology allows assets from one blockchain to be represented on another. As a result, this can reduce the burden of the DeFi sector through even distribution across many chains.

Scalability, transaction fees, as well as transaction time have been problematic amid the explosive DeFi market growth. This has certainly led to a problematic situation for DeFi users. In 2020, the Ethereum network became slow and more expensive. How? The average cost of transactions rose from a few cents to over $20 in February 2021. At the same time, the average transaction time started increasing as the network becomes congested.

In response, the likes of Matic, Cosmos, Polkadot, and PlasmaPay, among many others, are working actively on cross-chain technology. Moreover, experts believe that cross-chain scaling solutions will benefit the DeFi market growth in the long-run.

In addition, to maximize the efficacy of DeFi, cross-chain technology and interoperability are at the very core of a number of next-generation blockchain networks.

Crypto launchpads

Without a doubt, the decentralized finance ecosystem is booming. Hence, the options for cryptocurrency investors have also improved. Previously, many initial coin offerings (ICOs) made way for numerous crypto tokens to prosper.

But in modern times, the introduction of the crypto launchpad model made capital access better. In this way, both investors and project creators are choosing the route of the token launchpad project.

This also provides a safer platform for early investors compared to previous ICOs where some caused losses to investors. Furthermore, crypto launchpad projects help in building a community around a project. Thus, creating a network effect.

Crypto launchpads provide a way to raise capital for upcoming DeFi projects while allowing investors to gain early access to token sales. Among the most reliable ones are the Binance Launchpad, TrustSwap, Polkastarter, and YFDAI.

Many crypto launchpad projects act as a vetting process for new DeFi projects to protect early investors. Furthermore, crypto launchpads can offer some users a passive income with DeFi through gaining instant access to new tokens.

Staking opportunities

Staking is a profitable activity in 2020. Thus, staking is an integral part of DeFi market growth in 2021. The impact of staking involves many new crypto users entering the market in 2021 with staking products and services. As a result, this will increase the demands for staking.

To illustrate, Tezos, Cardano, and Polkadot are among the leading names in the staking space. Moreover, the Ethereum 2.0 deposit contract has already crossed the figure of $5.5 billion staked, which is worth roughly 3 million ETH. Taking this into account, it is very likely that many DeFi blockchains will adopt staking in varying degrees in 2021.

Meanwhile, the total assets staked in DeFi platforms amount within a $40 – $50 billion range in February 2021. This is also a true testament to the massive demand for staking. The shift towards staking certainly received new strength when Ethereum finally made the shift and officially welcomed staking in December 2020.

Indeed, in 2021, the popularity of both decentralized and centralized staking appears at an all-time high while DeFi staking continues to flourish. Despite this, it is a high-risk opportunity that should be approached with caution. Specifically, those newly-created protocols that promise suspiciously high rewards for yield farmers or liquidity providers.

Automated market makers (AMMs)

By definition, automated market makers (AMMs) — based on smart contract-based liquidity pools — allow digital asset trading without permission. Hence, this new technology is decentralized, always available for trading, and does not rely on conventional order books.

As a matter of fact, AMMs are a financial tool unique to Ethereum and DeFi.  How do automated market makers work? The automated market maker formula (x * y = k) specifically determines how the different AMMs function. To date, Uniswap, Curve, and Balancer are the three dominant AMM models within the DeFi ecosystem.

Did you know?

Uniswap is the first decentralized exchange (DEX) to reach $100 billion in cumulative trading volume due to DeFi market growth.

By 2021, AMMs are expected to become more popular as it resolves the biggest obstacle to the adoption of DEX — liquidity. In detail, anyone can participate in a Uniswap pool; users must only deposit an equal amount of the paired tokens at the set price ratio. Moreover, Balancer’s pool ratios can be adjusted dynamically, allowing liquidity providers to change their strategy over time. Besides, Curve offers interoperability between the growing number of different stablecoins for DApp builders and users.

Stablecoins and non-fungible tokens (NFTs)

Similarly, the boom of stablecoins and non-fungible tokens (NFTs) would influence the DeFi market growth in 2021.

Source: CoinGecko | February 2020-2021

Looking at the chart above, there has been a steady growth in terms of stablecoin market capitalization. Undoubtedly, the growth of the leading stablecoin Tether (USDT), from a market cap of less than $5 billion to over $32 billion between February 2020-2021, demonstrates just how important price stability is to many cryptocurrency users.

Despite the Bitcoin price surge at the beginning of 2021, the BTC price volatility still makes it a very poor unit of account. Thus, stablecoins remain its favorable position in the crypto market as traders exit positions into them, DeFi yield farmers use them to manage risk, and industries are also accepting them.

Moreover, other fiat-collateralized stablecoins, such as USDC and TrueUSD, also provide great stability within the current stablecoin system. On the other hand, crypto-collateralized stablecoins such as MakerDAO’s DAI token also prosper as the protocol lends out DAI tokens at a rate that can allow trading close to $1.

Along with this, NFTs are quickly gaining popularity as they prove authenticity and ownership of digital art, collectibles, in-game items, and even parcels of virtual land. NFT marketplaces enable people to buy and sell all kinds of collectibles using ETH as well as stablecoins.

Additionally, the total value of the NFT market hit $250 million within Q3 2021. Particularly focusing on DeFi use cases, protocols such as NFTfi and Rocket allow NFTs to be used as collateral for peer-to-peer (P2P) loans. As more NFT-backed financial products like insurance and collateralized loans come into play, NFTs will contribute more to the DeFi market growth.

How to Invest in DeFi

As the DeFi market growth becomes inevitable, many crypto users are considering to invest in DeFi — many have invested already. With many leading DeFi tokens in the market, you can diversify your portfolio and put your investment at your own discretion.

So where to buy defi crypto? The easiest option is through cryptocurrency exchanges. Despite being risky and volatile in nature, are DeFi tokens worth buying? With the potential of the industry, it is indeed worthy to be considered. But, do your own research (DYOR) before deciding to invest in DeFi.

Best DeFi Projects to Invest in 2021:

What is Chainlink? It is a decentralized network oracle that strives to pioneer a real-world data solution through a network of computers. Chainlink aims to change smart contract usage by creating a method that will pull out data from off-chain sources.

It is ranked first among all DeFi tokens, with a market cap of over $30 billion as of February 2021. Moreover, there is approximately 41% of LINK’s total supply circulating in the market. Check out this LINK price prediction for an in-depth analysis of this asset’s performance.

Uniswap (UNI)

Unsurprisingly, with Uniswap dominating the DEX scene, the Uniswap Protocol token UNI is also leading the DeFi market. To start, 1 billion UNI have been minted and will be accessible over the course of 4 years.

Uniswap has also given a benchmark for responsible and long-term aligned on-chain governance systems. Thus, UNI holders can participate in governance decisions. Check out this UNI price prediction for an in-depth analysis of this asset’s performance.

Aave (AAVE)

Aave is one of the most active open-source and non-custodial liquidity platforms in the crypto world. For that reason, Aave is one of the most trusted DeFi apps by investors globally. In fact, the high demand for flash loans and a strong rally in DeFi tokens boosted AAVE price.

In detail, AAVE’s daily trading volume crosses $1 billion. Furthermore, there is almost 80% of AAVE’s total supply circulating in the market. Check out this AAVE price prediction for an in-depth analysis of this asset’s performance.

Avalanche (AVAX)

Upon launching its mainnet in September 2020, Avalanche’s native token AVAX surged to over 800% during February 2021. AVAX particularly performs various tasks within Avalanche and also functions as a rewards and payment system for users.

Generally, Avalanche bridges blockchain platforms together into one interoperable ecosystem. There is only roughly 11% of AVAX’s total supply circulating in the market. Check out this AVAX price prediction for an in-depth analysis of this asset’s performance.

0x (ZRX)

0x is a protocol that facilitates the P2P exchange of Ethereum-based assets. Hence, the protocol serves as an open standard and common building block for any DApp developer. Moreover, it offers better prices and lower revert rates than any other liquidity aggregator.

ZRX aims to tokenize all kinds of financial values through blockchain. With this in mind, ZRX might be a good investment in 2021. Check out this ZRX price prediction for an in-depth analysis of this asset’s performance.

Polkadot (DOT)

Polkadot is at its peak recently in terms of developments. In fact, DOT is one of the top 5 cryptocurrencies on the market, with a market capitalization of almost $30 billion. Hence, if this continues, DOT is one of the most profitable cryptos in 2021.

As a matter of fact, the Polkadot Network is said to be a scalable, interoperable, and secure network protocol for the next web. Check out this DOT price prediction for an in-depth analysis of this asset’s performance.

Other top-performing DeFi tokens include Yearn.finance (YFI), Sushiswap (SUSHI), Synthetix (SNX), Ren (REN), Maker (MKR), Compound (COMP), and Dai (DAI).

Upcoming DeFi Projects

With the emergence of various DeFi projects in the industry, there are some upcoming DeFi projects that may be worth it to keep track of in 2021. Last year, DeFi projects like Uniswap, Curve, and 1inch released governance tokens with distribution schemes in the form of retroactive airdrops that rewarded users.

Various types of schemes are being done to attract DeFi users to the protocols. Among the most common depictions when it comes to DeFi is the ability to receive high returns on investment (ROI). Despite this, DeFi investment should be done strategically to maximize capital and reduce losses.

Conclusion

The success of the DeFi market growth 2021 can further be determined by how the protocols can keep up with the users’ demands. In particular, DeFi networks should consider transaction fees, transaction speeds, and users being able to exchange their fiat money for cryptocurrency and vice versa.

As more innovative players bet into the DeFi space, we can look forward to a thriving decentralized finance sector in the years to come. For as long as users continue to believe in these technologies’ potential, their market values will continue to surge higher.

Disclaimer: The views and opinions expressed in this article are solely the author’s and do not necessarily reflect the views of CoinQuora. No information in this article should be interpreted as investment advice. CoinQuora encourages all users to do their own research before investing in cryptocurrencies.

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An aspiring journalist who spills her ideas in cryptocurrency and blockchain-related matters. With her background in Communication and Journalism, she is more inclined to write about reality than fiction.