A Detailed Analysis of the DeFi Market and How Local Trade Affects Its Further Development
When decentralized finance “DeFi” emerged, it caused a lot of contradictory opinions among the masses. Some were really excited and delighted with this new kind of service that removed traditional market intermediaries, providing an accessible, clear, transparent ecosystem. But, in contrast, others treated it with skepticism and confusion.
The economic background for DeFi is already well developed. DeFi is created on the Ethereum base, which proceeded with transactions for $1.5 trillion last quarter, which is half of VISA’s volume. In addition, decentralized markets give loans worth billions of dollars every month.
DeFi draws attention from large companies, businesses, big and small institutions. Let’s find out then why it appears to be so interesting, what future awaits it, what troubles it may face, and whether it will be adopted by the masses, and how.
What is DeFi and Where Did it Come From?
Decentralized finance is based on three eras of blockchain. Each of which was not accepted at first and was met with a lot of criticism, however, over time, received the masses’ adoption.
The first era started along with the introduction of Bitcoin that brought the concept of blockchain into the masses. The second era started with Ethereum based on distributed, censorship-resistant, architecture but with a difference in the programming language that was Ethereum’s native – Solidity. This language may be used to build any application, making it a global supercomputer. Afterward, the third era started with the initial coin boom in 2017, when many projects received investments and started working as decentralized financial platforms.
The fourth era that emerged now is DeFi’s, which combines all the previously mentioned innovations. DeFi enables anyone to perform various operations like lending, trading, borrowing, avoiding interactions with a bank. All one has to do is simply download his wallet. On top of that, activities such as trading with leverage, synthetic assets, insurance, and market-making are also available in the DeFi landscape. Thus, a user is able to manage his assets and control the operations without asking for third-party assistance.
DeFi protocols adhere to being permissionless and transparent — these are the Ethereum network features that are the foundation for most decentralized apps. Permissionless means that anyone worldwide can reach DeFi and use its opportunities no matter the gender, age, or country. And this concerns both users and app developers. Besides, any developer or a team may create their applications running on DeFi platforms without fear that authorities may access or cancel them in any way.
Transparency stands for DeFi’s basic nature. A decentralized open-source platform provides that underlying code and capital are always open for audit. Since all the operations are fixed in a blockchain, they can always be seen for learning or analysis purposes or to build a business.
Boosting the DeFi Sector: Numbers and Reasons
Bitcoin hoisted to $52,000 and remained at that level for a while, and pulled the whole DeFi market up. The profitability of services that allow opening deposits at a percentage or lend in cryptocurrency increased several times. Investments in DeFi reached $60 billion in just a month.
After the May downward trend, Bitcoin began its steady growth at the end of July: between July 20th and September 10th, the price increased from $29,800 to $47,000 (data provided by the Binance exchange). During the same period, the Ethereum rate increased from $1800 to $3300.
The growth of Bitcoin and Ethereum has pulled the decentralized finance (DeFi) market up. Between July 20th and August 24th, that is, in a little more than a month, the volume of investments in DeFi increased from $96 billion to $155.7 billion. That means, during a month, the DeFi market received an investment flow of roughly $2 billion.
There are many ways to make money in the DeFi field. Similar to the traditional finance market, investors take loans, open deposits, lend, insure investments, buy, and sell derivatives. As a rule, transactions are carried out in cryptocurrencies (Bitcoin, Ethereum, etc.) or in less volatile dollar stablecoins – digital coins tied to the dollar’s value (one stablecoin is roughly equal to $1).
As was mentioned previously, with increased money flow to the DeFi economy, profitability on platforms where investors can open a deposit in cryptocurrency, take loans or borrow cryptocurrency without intermediaries, has also increased several times.
These are the most popular services – about 40% of all money in DeFi is invested in them, according to the data of the analytical platform DeFi Llama. The segment leaders are Aave and Compound protocols, which account for 15% of the total market. Interest rates in them change automatically in real-time. Back in mid-July, it was possible to “invest” the main stablecoins in the Aave project at an average of only 1.5-2.5% per annum, and in mid-August – at 4-7%. In USDT stablecoin, the annual yield reached 31% per day. On the Compound platform, the annual yield in mid-July barely reached 2%, and by mid-August, it had grown to 3%, and in some stablecoins – even up to 6%. It is thus a given that Compound is one of the most conservative platforms that does not boast high profitability.
Institutional Money Flowing Into the Crypto and DeFi Market
Profitability in DeFi has increased along with the growth of the Bitcoin rate and other cryptocurrencies. Growing rates most likely means that more people began to invest in cryptocurrency. When the value of cryptocurrencies grows against the dollar, many people want to start earning on such an upward price movement. To that end, investors take loans in stablecoins and convert them into cryptocurrency to increase the income from the growth of quotations – in other terms, they trade with leverage. So, the demand for crypto loans is growing, which means that rates are also increasing.
In other words, DeFi rates grow with increasing liquidity, just like what happened this month. Due to the increase in liquidity and thus rate, several large companies have entered the DeFi market in the past month.
At the end of July, Goldman Sachs applied to the SEC to create an ETF foundation in DeFi. It will invest in companies operating in decentralized finance and using blockchain technology. Moreover, in July 2021, Goldman Sachs published the results of a study saying that 15% of surveyed family offices invest in cryptocurrency, according to the information provided by The Block Crypto. That is probably the way the investment bank seeks to satisfy the demand for crypto-instruments.
Digital asset management company Grayscale also created the ETF foundation. At the same time, Bitwise Investments launched new funds to invest in the Aave protocol and Uniswap decentralized exchange. Such funds allow investors to invest in DeFi without buying tokens or cryptocurrency. They make DeFi investments easier and lower the barrier between traditional and decentralized finance.
More and more companies from traditional finance are involved in the world of DeFi. For example, PayPal CEO Dan Shulman announced the company could integrate DeFi services into its platform. The payment system Square plans to create a platform for developing DeFi-services, as the head of the company Jack Dorsey announced.
Another reason for increasing money flow in DeFi is the renewal of the Ethereum blockchain network, a foundation for most DeFi protocols. Until recently, the main problem for Ethereum was high fees.
According to BitInfoCharts, in May, along with high cryptocurrency prices, the average fee size reached $70. Due to the high fees in Ethereum, DeFi was attractive mainly for large investments. After all, even the high yield on small checks was melted away due to the high cost of transactions. Experts believe the update allowed to reduce the fees for users by reducing mining rewards. That increased the attractiveness of DeFi transactions and drew more investments.
The rates in the protocols for the issuance of “loans” will not always be high. However, the faster DeFi develops and the more money flows in it, the sooner the rates will go down. Thus, along with high liquidity, platforms will not need to attract investors with large rewards. That will lead to a situation similar to traditional finance: a lot of money in the markets makes deposits and loans lower.
New investors are partly pushed into the DeFi market by the traditional financial system – low rates in Europe and the United States are forcing them to look for more profitable instruments. And while some come to the stock market, others prefer to invest in cryptocurrency and receive passive income either through the growth of quotations or by opening “deposits” in landing protocols such as Aave or Compound.
So far, the opportunity for growth in the DeFi market is limited by its isolation. Most of the money invested in DeFi has been earned in cryptocurrency. Investments in DeFi from outside are rare and minor. Those who invest in cryptocurrency are, as a rule, under 40, while most of the savings are held by people over 50. So far, traditional investors are not ready to recognize the crypto industry as an alternative to the financial market. Therefore, as long as the transfer of capital does not occur, there is unlikely to be any large inflow of funds from traditional finance into DeFi.
How the LocalTrade ecosystem copes with the urgent issues of DeFi
Most financial market players still do not consider DeFi as a profitable and promising landscape for economic activities yet. Thus DeFi received neither publicity nor wide recognition. The LocalTrade platform is aiming to change it. Operating in the cryptocurrency landscape and connecting crypto and financial industries into one smart ecosystem, this platform provides general exchange services and financial products to its users worldwide. LocalTrade contains both a centralized exchange and decentralized platform for investments, called DeFi Lab. This is a place where investors and traders may use both centralized exchange services and join the DeFi world all the while operating efficiently and simply as if it was a regular financial product they’re used to.
The platform is aimed at making DeFi services widely used and common, yet, accessible for just everyone eager to operate in this field. Due to the centralized platforms’ opportunities, a user may also reach decentralized services, and the process is much simpler than if one had to start from scratch. Thus, anyone on a budget, however small, can begin investing and operating on DeFi through CEX. This part of the ecosystem is called DeFi Lab, and it provides the DeFi Wallet, a Launchpad for crowdfunding, and yield farming. This is why LocalTrade is a truly unique project that unites so many tools of centralized and decentralized platforms.
LocalTrade’s DeFi Tools
LocalTrade’s DeFi Wallet is a convenient and easy-to-use mobile application that supports multiple currencies. It provides safety for your funds and privacy for your data as it implements full data encryption, 2FA, and biometric authentication for enhanced protection. It has a fairly straightforward interface that’s easy to handle. The app allows exchanging cryptocurrencies from different blockchains, all in one place. This is the first decentralized crypto wallet that allows cross-chain operations.
LocalTrade’s DeFi Lab covers a variety of investment tools that are sorted into categories according to their risk factor. This set of tools is available for all investors depending on their needs and the level of experience.
NeoBroker Smart Fund allows users to purchase shares of companies before they conduct an IPO. This is a low-risk option for investment. Once the user gets shares, one starts to own the company partially.
The LocalTrade Launchpad is a tool for already experienced investors, allowing them to buy tokens during IDO at lower rates. This tool is also meant to provide support and decent exposure for young crypto projects. All the companies and projects hosted by LocalTrade’s DeFi Lab are checked thoroughly and pass verification and audit before launching their coins offering on the platform. Thus, it protects users from dealing with fraudulent companies.
Yield farming is the process of generating additional profit (usually in the form of governing tokens) by users of DeFi protocols for providing loans or obtaining loans, as well as for adding liquidity to decentralized exchanges (DEX). This tool is also available on the Local Trade exchange.
LocalTrade (LTT) is a BEP-20 token that also opens some earning opportunities on the platform. Being issued on the Binance Smart Chain, the token features utility and governance functions that enable the whole LocalTrade ecosystem to operate. Besides, the token connects LocalTrade CEX and DeFi platforms, running in both cases. Here are the earning opportunities the token provides:
- It implies a user joining the DAO Sharing Economy and becoming a part of the platform governance.
- Rewards for bringing new users.
- Adding liquidity to liquidity pools and getting benefits for farming.
- Discounts on trading operations on CEX.
The LocalTrade VISA card & The NeoBank application enable users to convert fiat money into crypto. The conversion into crypto occurs in a matter of minutes, and the user may pay for any services or products with cryptocurrency. The user receives cashback in LTT tokens. In addition, one may withdraw cash at any ATM right from the card.
Conclusion
The decentralized finance sector is very appealing when it comes to investments. From that perspective, it’s safe to say that DeFi is not a short-term bubble with no future, albeit the vast majority of crypto investors not yet using decentralized finance tools. The developers of Local Trade are working day and night to make sure that anyone, even without digital currencies, has the opportunity to access DeFi. Taking into account the figures and current trends, this sector has all the chances to become absolutely massive in the distant future.
Image by WorldSpectrum from Pixabay
OhNoCryptocurrency via https://www.ohnocrypto.com/ @Bitcoinist, @Khareem Sudlow