Kristjan Kangro, CEO and Founder of cryptocurrency investment platform Change, discusses what the next twelve months have in store for cryptocurrencies and blockchain
2021 was another busy year in the cryptocurrency industry. Prices reached record highs, NFTs gained in prominence, we saw new use cases for blockchain and a lot of regulatory debate and action. The cryptocurrency industry is also fairly unique in that it creates very strong and mixed opinions. Ask a room full of people about NFTs and you will have some arguing they will revolutionise nearly every aspect of our lives, and others who consider it a confusing bubble. With such varied views it can be hard for the casual observer to understand what is really going on. However, if you ignore the loud opinions, and dig a little deeper into the underlying trends, you can start to see a much clearer picture emerging. In mine and many other people’s opinion, one of the most important and exciting innovations to gain ground in the past twelve months is decentralised finance.
If you are unaware, decentralised finance (DeFi) is the concept of moving power and control away from traditional financial institutions, such as banks and brokerages and into the hands of people like you and me. It brings to life a world where financial transactions and products are all run on a public blockchain without a middleman. In this way, complicated procedures, checks and security requirements such as KYC are all made more efficient.
Take, for example, a startup seeking to take out a loan. In a traditional, centralised setup this might involve a lengthy application process, numerous checks and anti-laundering procedures. Even should the candidate be found to meet the set criteria; final approval is often at the discretion of the bank manager or other representative. DeFi revolutionises this by eliminating the need for an intermediary to process, validate, or authenticate transactions, meaning investments are built purely on factual data. In this way, it creates a more transparent, open and free financial system.
Applied en masse, it will result in a truly global economy, where anyone, irrespective of the financial infrastructure or controls in their own country will have the same access and opportunities as everyone else. Given that many millions of people are currently ‘underbanked’ or ‘unbanked’ it could help play a big role in tackling poverty. For those already in the traditional financial world, the improved transparency and accountability makes the financial system as a whole more stable – meaning scenarios like the 2008 financial crisis which was caused by a systemic lack of transparency and accountability in the financial system would become far less likely to happen.
Over the course of 2021 we’ve seen more companies and countries look at ways to embrace DeFi. Scores of DeFi projects have been launched and according to accountancy giant EY – the value of assets locked into DeFi grew from less than $1 billion in June 2020 to more than $98 billion in September 2021.The very fact that major companies like EY are writing detailed reports (The DeFi Wave is Approaching) about DeFi tells you a lot about how the trend has evolved. Meanwhile, others in the space such as MetaMask, which offers a wallet which is fully compatible with DeFi services and apps or ‘DApps’ on the Ethereum blockchain recorded 500% growth in Q1 of 2021 and, as of August 2021 has 10 million monthly active users. Indeed, DeFi now has sizable players replicating nearly every aspect of the traditional financial system – for example, lenders like Maker, Aave and Compound, derivative traders like Synthetix, insurers such as Nexus Mutual and asset managers like yearn finance.
The creation and widespread adoption of something as radical as DeFi is not going to be straightforward. 2021 has seen some pushback from regulators across the world. How this process evolves in 2022 will have a profound influence on how quickly DeFi matures. In principle, much of the arguments around tighter regulations centre around ‘know your customer’ (KYC) requirements. Essentially, regulators say they are concerned about money laundering and protecting consumers. Of course, guidelines designed to root out dodgy practices and companies, and enhance consumer protections should be welcomed. However, as we’ve seen with the draconian bans in places like China, some regulators appear to be opposed to the principles of DeFi. You could argue their priority seems to be more geared towards maintaining the status quo. In other regions, especially in the developing world, DeFi has been readily embraced. European regulators too seem to be more willing to see how DeFi evolves – especially when compared to some of the more cautious noises coming out of the SEC. This push-pull between creating a safe DeFi system versus governments seeking to maintain control and protect vested interests will be a recurring theme in the next year.
Outside of regulatory battles, I think a lot of DeFi innovation will focus on improving security and tackling scalability issues. Much like the challenges that Bitcoin has overcome. There’s also plenty of work that needs to be done to make DeFi more accessible to people and generally improve the user experience. With respect to NFTs (a tangible example of DeFi in action), I also expect that as initial enthusiasm cools somewhat, we will see more focus on new use cases – with potentially very exciting results.
