DeFi projects received much attention during the summer, attracting many investors with very high returns. However, in the autumn, the returns fell substantially. Although many people would argue that DeFi received a significant amount of hype, its user base continued to grow exponentially over the past few months despite a dramatic token price drop. While high yield and liquidity mining might be viewed as unsustainable, this article explains why DeFi is here to stay.
To understand why the DeFi trend is sustainable, an overview of traditional finance can be helpful. Financial corporations are highly regulated, operating in a relatively mature and closed financial ecosystem. Although regulations are intended to protect investors, they hurt innovation in the field tremendously. For instance, applying for access to an API at Bank of America could take years and become an insurmountable process. Also, since financial corporations highly value business continuity and service robustness, they tend to use mature and proven technolgoies, such as mainframe. However, it is difficult for such antiquated backend systems to support development and innovation in the same manner as server-client-based architecture and a cloud ecosystem.
In contrast, DeFi projects do not struggle with technological debt because they use the most cutting-edge technology: blockchain. The transparent and open nature of blockchain technology makes the DeFi ecosystem open and inviting. For instance, DeFi lending protocols tend to open-source their interest rate calculation formula so that borrowers can see why they are being charged a specific rate.
Furthermore, the infrastructure of DeFi projects — public blockchain — is permissionless. Anyone can join the system and plug a project into all other projects built on the same blockchain. This type of access to DeFi projects has spurred massive innovation in the space. Many DeFi projects have built services based on other projects, creating more significant value for their users because they are bundled together.
Based on these characteristics, the DeFi sector has grown exponentially this year. Uniswap is a clear example of this explosive growth. One year ago, Uniswap only experienced a few million dollars in trading volume. However, this year, Uniswap already has tens of billions dollars in monthly trading volume, surpassing Coinbase. The exponential growth demonstrates that users find much value in DeFi projects such as decentralized exchanges.