How DeFi trading is evolving after a whirlwind 2020

When the history books are written about cryptocurrency, 2020 will be remembered as the year decentralized finance exploded in popularity.

A powerful illustration of how this young, often misunderstood space has grown comes from DeFi Pulse. At the start of January, the total value locked in DeFi protocols stood at $675 million. Since then, records have continued to be smashed — and at one point in December, this figure hit a staggering $15 billion. That’s a surge of 2,100% in less than 12 months.

Even though there have been signs of a bubble, crypto heavyweights such as Binance CEO Changpeng Zhao have said that they expect DeFi is here to stay — and that there’s “a lot of growth potential” in this burgeoning space.

Nonetheless, critics argue that DeFi needs to evolve and mature as we head into 2021. This year has also been dominated by endless forks — and a series of projects emerging with near-identical (and often food-related) names. There’s been a lack of sustainability as traders flock from one protocol to another in search of the healthiest returns, and the sudden creation of new platforms by opportunistic developers has led to devastating security vulnerabilities that have sometimes caused tens of millions of dollars to vanish into thin air.

Indeed, Cointelegraph recently reported on new research by the data company BraveNewCoin, which warned there are 18 serious “non-financial” risks in the DeFi sector. Scalability dominated this list — with network congestion resulting in high gas fees and failed transactions, causing protocols to malfunction.

The dangers don’t end here. Smart contract vulnerabilities can be exploited through flash loans, oracles can cause protocols to receive inaccurate price data, inter-connectedness can mean many protocols need to rely on others to function, and there’s a risk of centralization creeping into the industry too.

Realizing long-term benefits

It’s worth noting that many critics are enthusiastic about how DeFi can deliver secure, robust and permissionless transactions in a way that centralized platforms simply cannot match. However, their argument is that DeFi is underdeveloped in its current form — meaning that the infrastructure required to deliver true change just isn’t ready yet.

Parallels have been drawn with the stock market in the 1980s and 1990s, when orders were called in by phone and traders were left uncertain about the precise time they would be executed — and how much it would end up costing.

In some cases, DeFi protocols have been compared to a manufacturer of a cutting-edge electric vehicle who boasts about how sophisticated their battery technology is… without paying attention to the tires.

For the industry to evolve, advocates say that a solid bridge is needed to connect DeFi with the traditional financial world — helping it to evolve beyond an experimental playground. This would deliver the technological robustness that’s needed to avoid devastating exploits, encourage greater involvement in the space, and result in the infrastructure that’s needed for large transactions to take place securely, cheaply and immediately with little to no slippage.

Moving away from farming and mining

New entrants into the market such as iob.fi DAO believe that, in the not-too-distant future, the discussion surrounding DeFi will move away from mining, farming and flash loans to “real, sustainable and consistent returns.”

The platform describes itself as the first tokenized, actively managed DeFi hedged pools — an environment where traders can gain exposure to cryptocurrencies, stocks, commodities and indices in one place… all from a Web3 wallet.

According to iob.fi DAO, this can deliver advantages because most asset classes have different price cycles. Whereas Bitcoin may be in the ascendancy one week, it may trade sideways the following week as Wall Street embarks on its bull run.

Iob.fi DAO says it is establishing a bridge between professional Wall Street firms and crypto through Prodefy — a suite of tools that is set to connect traditional high-performance trading systems with Web3-enabled DeFi platforms in 2021. The use of Web3 is described as crucial because of how it is future proof and can be easily upgraded as better technologies become available.

Iob.fi DAO says that Prodefy will be crucial to achieving adoption because traders in the City won’t need to significantly modify their trading systems or create a new one. This will break down barriers between the two markets — at a time when institutional interest in cryptocurrencies is continuing to grow, and a number of companies are buying tens of thousands of Bitcoin to hold in reserve.

An advanced automated trading system has also been developed called ioBots — a collection of tools that takes a different approach to asset management, trading decisions and risk management in light of crypto’s on-chain nature.

Overall, iob.fi DAO says that its goal is to deliver consistency — describing it as the most important ingredient in successful trading.