As the crypto market experienced a quick recovery and NFT popularity is causing a booming market, the DeFi market is growing up to 18% this month. This DeFi market popularity reflects users’ understanding that smart contracts can replace the traditional loan system.
This is observed from the adoption revelation happening with the private investors. They now prefer to have their funds locked in a decentralized platform than in the traditional financial network. As such, there is an increased institutional adoption across various sectors. This is bringing DeFi to the next growth phase.
The smart contract functionality available on the Ethereum blockchain gave DeFi the required soft landing to build its ecosystem. This provides the Ethereum blockchain with an edge over other platforms. Looking into the potentials of DeFi, many blockchains now incorporate smart contract functionality. They are achieving this by leveraging layer-1 or layer-2 solutions.
Some of these networks are Avalanche, Binance Smart Chain, Polygon, Solana, and others. Not long ago, the Cardano network incorporated a smart contract in their Alonzo hard fork. Despite these networks experiencing organic growth, the gas fees on the Ethereum blockchain contribute to this. The London hard fork launch helps enhance scalability and causes gas fees reduction.
In the past weeks, the Ethereum network has experienced a big spike in its average transaction fee despite the fees not being as outrageous as during the May bull run. Between September 7 and September 27, the gas price increased by 16%.
It is widely known that the NFT congestion has contributed to the increase in the Ethereum gas fee. This has helped accelerated other networks’ adoption within the space. Ethereum is becoming more scalable due to the layer-2 solutions being deployed.
NFT popularity is growing, and it is contributing to the growth in the DeFi space. Dappradar revealed that this exponential growth experienced a huge increase in trading volume of about 704% increment in about six months before extending to 54X the former increment every year.
Alternate blockchains are now in competition with the Ethereum network in NFT sales. Meanwhile, the major sales happened on the Ethereum network at the beginning of the year. But blockchains like Avalanche, Solana and Polygon now compete with the Ethereum blockchain. Recently, Solana network experienced its biggest NFT sales of Solana Monkey Business worth over $2,100,000.
Amidst all these developmental races, there are skeptics in the NFT space. They question its sustainability due to the rapid growth happening in the space. Meanwhile, NFTs have more values than being attached to JPEGs or images. NFTs can be adapted into different industries beyond digital assets like establishing ownership of collectibles or fractionalized assets.
The DeFi Ecosystem Setbacks
Despite the accelerated growth occurring in the DeFi ecosystem, different setbacks are impeding its expansion. This causes various exploits and hacks cases due to the misunderstanding existing in the space and the unethical activities of some individuals.
An instance is what happened with DeFi during the last days of September. Compound Finance announced a token distribution bug in its new development of Proposal 062 implementation. Due to this bug, users mistakenly received about seventy million dollars of COMP tokens.
Meanwhile, this places another COMP tokens worth $65 million at risk because the updated code won’t work until after three days, resulting from a time-lock. As a result, the bug made a sum of $162,000,000 become a giveaway, costing Compound Finance a huge sum. However, the protocol proposed to fix this during the early week of October.
Another case was Bittfinex experienced while trying to make a transaction on the Ethereum blockchain. A technical error made Bittfinex paid more than $23,000,000 as a transaction fee to send Tether (USDT) worth $100,000 to DiversiFi—a layer-2 subsidiary platform—on the Ethereum blockchain. Thanks to the goodwill of the miner that refunded the funds.
Despite the promise DeFi holds for the future of finance and the economy, these widely distributed setbacks such as bugs and hacks can make it detrimental for institutional adoption. As a result, retail investors are more at risk of financial loss because they do not have the sophisticated tools and institutional knowledge investors possess. Meanwhile, institutional investors are models for retail investors.
Priorities from Observation
Despite having the required sophistication and knowledge, institutions will not make the quantum leap into DeFi. Rather, they will observe the market, witness the market cap growing due to retail involvement and keep tapping into the economic opportunities DeFi presents.
This will lead to their entrance into the space and will push DeFi to the mainstream discussion groups. This visibility will increase retail familiarity, participation, and exploration. As much as there are instances of setbacks, they are only scratches on the surface. The DeFi market keeps evolving while revolutionizing the financial industry.
This independence and innovation DeFi protocols bring its users will further accelerate the growth of the space.