2023: A Look at the Emerging DeFi Landscape

2023: A Look at the Emerging DeFi Landscape

Stuart Hollinger

Stuart Hollinger

Editor at Large

January 23, 2023

The world of decentralized finance (DeFi) has rapidly evolved in recent years with a Total Value Locked of $42.4 billion as of November 2022, which is a 400% increase since July 2020. From decentralized exchanges (DEXs) to lending and borrowing platforms, the possibilities for DeFi are endless. In this article, we'll look at some of the key trends as told by experts expected to shape the DeFi landscape in the year 2023 and beyond.

“As the DeFi space continues to evolve, 2023 has the potential to revolutionize the financial sector. From increasing mainstream adoption to the expansion of DeFi lending and borrowing, I strongly believe CeDeFi institutions providing a seamless link between Defi and Traditional Finance should fill the gap in the next few years. Crypto winter is a good time for new promising fintech to be born and the genuinely good projects will make it through.” 

Gediminas Kiveris, Chief Investment Officer at MELD

DeFi trends to watch for in 2023

Contents

  • Increasing Mainstream Adoption of DeFi
  • Continued Growth of Decentralized Exchanges (DEXes)
  • Rise of DeFi Insurance Products
  • Expansion of DeFi Lending and Borrowing
  • More Utility NFTs 
  • Conclusion

Increase in Mainstream Adoption of DeFi 

Institutional adoption of crypto has come a long way since, with banks showing increasing interest, and mega companies like Disney, Starbucks, Adidas, and many other household brands embracing crypto technology. It is clear that slowly but surely, DeFi is becoming more and more commonplace in the world as we know it. 

Total DeFi users over time

We predict that this mainstream adoption will continue in 2023 with more institutional investors resulting in more excellent stability of the sector as a whole. As Farid from Dapp Central puts it, “As more individuals and institutions become aware of the benefits of decentralized systems, the demand for high-quality DeFi and centralized financial services (CeFi) products will only increase. However, for this growth to occur, it is important that the industry also prioritizes education and awareness. With the increasing adoption of DeFi comes a responsibility to ensure that users understand the risks and benefits of these innovative systems.” 

Alongside growing institutional adoption, DeFi platforms are also becoming more beginner-friendly, adopting themes from Web2 design to provide users with a more familiar, interactive environment. Requiring less technical know-how and removing existing barriers to entry. This increased accessibility is likely to further drive mainstream adoption in 2023.

Heavier Regulation for Centralized Exchanges 

In 2022, the industry saw several major events that have set the stage for a shift towards heavier regulation for centralized cryptocurrency exchanges in 2023. From high-profile hacks, mismanagement of user funds, and fraud, to increased scrutiny from governments. Looking forward, it is expected that regulators are likely to step in and impose stricter rules on centralized crypto exchanges. 

From Digital Asset News, Rob had this to say “We will see heavier regulations on centralized exchanges, yield-generating programs, and loan applications. DeFi will be the choice after appropriate safeguards have been put in. There have been so many rug pulls and hacks, I cannot foresee considerable funds filtering through these platforms without some form of protection and insurance. This is not sustainable until such things have been fleshed out.”

As stricter regulations are implemented on centralized exchanges, it will become more challenging for them to operate. This will create opportunities for DEXs(Decentralized Exchanges), as they are not subject to the same regulatory requirements, making them a more attractive option to users looking for a decentralized, trustless trading experience.

Growth of DEXes and DEX Aggregators 

As centralized cryptocurrency exchanges face increased regulation in 2023, it will become more challenging for them to operate and it is likely that decentralized exchanges (DEXes) will benefit from this trend. DEXes, which allow users to trade cryptocurrencies without the need for centralized intermediaries, are considered to be more secure and transparent than their centralized counterparts and therefore not subjected to the same regulatory requirements. This will make them a more attractive option to users looking for a decentralized, trustless trading experience.

Monthly DEX volume by project

The emergence of decentralized options and futures exchanges like Hegic is likely to further increase the popularity of DEXes in the coming year. And as the competition among DEXes grows, we can also expect to see the rise of new DEX aggregators such as 1 inch that make it easier for traders to find the best prices across multiple exchanges. The user experience and accompanying features of these DEXes will be the deciding factors for traders to consider in 2023. As Nehal Khushal, Chief Strategy Officer at MELD put it, “With increased user-friendly features such as account abstraction and innovative DEX features like DCA, limit orders, and a streamlined user experience, the accessibility of DeFi is likely to further drive adoption in the coming year, creating a lot of room for innovation as the competition among DEXes grows.”

The Rise of DeFi Insurance Products

Insurance is an essential component of any financial system, and its integration into the DeFi ecosystem is a natural progression given the vulnerabilities of smart contracts, the incidents of hacks in the DeFi space, and the volatility of the market.  DeFi Insurance products provide a new way for individuals to protect their assets and manage risks in a trustless manner. For example, DeFi insurance products provide coverage for smart contract failures, and platform downtime, as well as protecting against hacking and other security breaches. 

Nexus Mutual

As the adoption of DeFi increases and more people get involved, the demand for products will increase. Additionally, as the DeFi industry matures, more insurance providers are likely to enter the market, offering a wider range of options for insurance products and services to users. Josh from Late Game Crypto explains it like this “The masses have often flocked to centralized institutions that have let them down. Alongside the R&D aimed at solving its historical vulnerabilities, DeFi is bolstering its service to humanity with advances like decentralized insurance products.”

Expansion of DeFi Lending and Borrowing

The last few years have seen immense growth in lending and borrowing protocols, and this trend is expected to continue in 2023. Decentralized lending protocols are projected to become more popular and we can expect to see the emergence of non-collateralized loans as more players enter the market. 

Furthermore, DeFi-powered credit scoring and underwriting are likely to become more commonplace, allowing users to access more personalized loan offers. We predict that the expansion of DeFi lending and borrowing will be driven by projects that offer user-friendly interfaces and easy-to-use platforms(one of MELD's main priorities), making it easier for individuals to access and use these services. As DeFi lending continues to grow, it could potentially disrupt traditional banking and credit systems. 

More Utility NFTs

Utility NFTs, or non-fungible tokens that have a specific function or use case within a decentralized application, are expected to be a major trend in the world of DeFi in 2023. These tokens, which are built on blockchain technology, allow for the creation of new types of digital assets that can be used in a variety of ways, such as providing access to exclusive content or experiences or allowing for the creation of DAOs. 

One of the key benefits of utility NFTs is that they can be easily traded and transferred on a variety of different platforms, making them highly liquid and accessible to a wide range of users. This has led to a growing number of DeFi projects and platforms that are leveraging utility NFTs to create new types of financial products and services, such as decentralized lending and borrowing platforms, prediction markets, and more.

Additionally, the increasing popularity of utility NFTs is also helping to drive the growth of the broader NFT market, which is expected to continue to expand in the coming years. This is due to the fact that utility NFTs can be used to create a wide range of new types of digital assets, from virtual real estate and in-game items to collectible art and more.

Conclusion

Overall, 2023 is set to be an exciting year for the DeFi landscape. From increased mainstream adoption to the expansion of DeFi lending and borrowing, the trends of the coming year have the potential to have a major impact on the broader financial industry and change the way we think about financial services.  As the DeFi space continues to evolve, it’ll be interesting to see how these trends play out in the months to come. 

Disclaimer

The opinions shared within this article are those solely of MELD Ltd. and contributors. Note that the content within should not be considered financial, legal, or tax advice. Neither the author nor MELD Labs PTE Ltd. are financial, legal, or tax advisors. None of this content should be used to make any form of financial, tax, or legal decisions. Do your own research and consult professionals as needed for official policies, restrictions, and requirements in your jurisdiction.

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Tags
defi
lending
borrowing
crypto

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