The great thing about DeFi is that it’s a sandbox where everyone can play. Also, the problem with DeFi is that it’s still mostly a sandbox where people play with toy tokens and there is little connection to the ‘real world’. This will change, though. What are future use cases for DeFi that could catapult it into the mainstream and kick off the next bull market?
Let’s discuss some encouraging findings. First, DeFi has proven itself during multiple 50% plus downturns over the past two years. At least, from a technological point of view. The systems stayed up, and the pipelines didn’t clog. Users could deposit and withdraw just fine on lending apps like Aave and Compound. The Total Value Locked (TVL) in DeFi has dropped from 200 billion to 70 billion since the Terra ecosystem crash. Yet this did not lead to any major problems (relatively minor exceptions being the Solend and Bancor issues). Compare this to some of their Centralized Finance counterparts, that faced huge solvency problems and had to close shop.
Second, arguably the most solid use case of DeFi, namely stablecoins, is still firmly standing. Setting aside for a second the crash of algorithmic stablecoin UST, the stablecoin market hasn’t crashed: it has held up fine.
Now, let’s address some criticism about DeFi. Inflationary tokenomics caused a huge boom and subsequent bust. Clearly, insane yield farming APY’s were not sustainable. Sure, it might have been a profitable strategy to get in quickly after the launch of a new DeFi protocol and sell that initial wave of farming tokens. But the crash of token prices would come sooner or later. And indeed they crashed. Busted.
Real-World Assets on Chain: An explosive growth market
So is DeFi dead? No. First of all, the talent is still there and the venture capital is still there. The question now becomes, will DeFi come up with future use cases that justify these? For that to happen, DeFi has to bring Real-World Assets (RWA’s) on-chain. Mass adoption will only happen if we go beyond the sandbox and large numbers of people will want to use this technology for everyday use cases.
The DeFi sandbox has proven what it is good for. Namely to create global and liquid markets for tokens that didn’t exist a blink of an eye ago – but weren’t necessarily backed by anything valuable. Now, combine this with the fact that many things in ‘the real world’ have no such access to liquid markets, but do have actual value.
Just consider the chemical reaction – no, the explosion – that combining these two elements could cause? How about tokenizing real-world assets? Making things tradable that hitherto were not tradable? Mind …. blown.
1. Utility tokens for businesses
Utility tokens are a new way in which companies can hand out value to their customers. It’s like owning a piece of the product (a real-world asset). That piece is tradable on secondary markets AND redeemable for (a part of) the product. In a good article on her website, Tascha Che discusses what utility tokens could mean for businesses that adopt them. What role could they fulfill? Examples are:
- Loyalty programs: traditionally, reward tokens (frequent flyer miles, credit card points, etc) could only be exchanged for products. Tokenizing these would incentivize users to earn rewards since these rewards wouldn’t be confined any longer to the walled…
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
