DeFi, or Decentralized Finance, is a major talk of the town nowadays. The term was non-existent a few years back, and it is creating history today. A community of defiant individuals came up together with the goal of creating a novel financial standard where no third party or centralized authority is involved. DeFi started getting proper investor attention in 2018-19 and opened a new horizon! Today, Web3 organizations are looking to expand in the DeFi sector.

Let’s find out the top DeFi trends you should keep an eye on as a Crypto investor.

Before we move ahead, let’s first understand DeFi and its aim.

About DeFi

DeFi stands for ‘Decentralized Finance’ and refers to blockchain-based platforms that support various financial operations without a traditional middleman. Examples of these operations are loans, betting, lotteries, and stablecoin purchases. As it offers a level of protection and anonymity that is not present in more mainstream platforms, DeFi has grown popular with Crypto enthusiasts and players in the conventional financial markets.

DeFi aims to create an open-source, permissionless, participatory, and transparent financial ecosystem that operates without any central authority. The users will always have complete control of ownership of their assets, and interaction with the ecosystem happens through the peer-to-peer process and Decentralized Applications (DAPPs).

DeFi smart contracts are publicly auditable and thus provide immense transparency; they are also interoperable. DeFi is considered dynamic and ever-evolving. With its trustless feature, it is attracting both individual and institutional investors nowadays. New opportunities are being created every day; you can even lend & borrow Crypto using DeFi. To know more about this, click here.

Key features of DeFi

• DeFi is Permissionless 

DeFi is permissionless, which means that anyone can create dApps and participate in those transactions.

• DeFi Promotes Transparency

DApp code is permanent and transparent. Any regulator can audit the code, and any developer can check it for errors. At the same time, this transparency does not come at the cost of privacy since transactions are pseudonymous.

• DeFi Enables Autonomy

The absence of a central authority gives considerable autonomy to users. The assets in a DeFi system belong to the owners alone and cannot be seized or frozen by anyone else.

After understanding the basics of DeFi, let’s get to the main part of the article, the DeFi trends that a Crypto investor should keep an eye on in 2023.

Top 3 DeFi Trends to look out for in 2023

#1 Emergence of Real-World Asset (RWA) in 2023

Before 2022, DeFi protocols lacked the necessary infrastructure to adopt Real World Assets (RWAs), in which the majority of stakes lie in the global financial industry. However, the rise of yield farming speculation has allowed DeFi protocols to generate revenue in recent years. As RWAs move on-chain, they have unlocked liquidity and various use cases, presenting a prime opportunity for monetization with the DeFi trend. With digital asset prices falling and yield farming prospects dwindling, DeFi protocols are now incentivized to find new revenue sources by investing in real-world assets.

#2 Increase in Stablecoin adoption, the emergence of CBDCs

Central Bank Digital Currencies (CBDCs) are digital currencies issued by central banks, and their adoption has been slow despite their potential benefits. CBDCs and digitalized fiat currencies are similar from the consumer’s point of view, both being fast, free to use and government-backed. While CBDCs allow access to banking services without a traditional bank account and enable instant international transactions, their implementation may raise concerns about government control over personal finances. In 2023, as CBDC technology improves and its usage is better understood, we may see more widespread adoption. However, decentralized stablecoins currently dominate the DeFi market and are unlikely to be overtaken by CBDCs anytime soon.

#3 Enhanced importance of Layer-2 scaling and ZK technology

Despite being a highly anticipated event in 2022, the Ethereum Merge was overshadowed by market crashes caused by Terra Luna and FTX collapse. Additionally, gas fees and transaction speed remain barriers to mainstream adoption. In the upcoming year, DeFi engineers will continue to focus on developing zero-knowledge (ZK) innovation with layer-2s, also known as “the Surge.” ZK proofs are digital verifications that can greatly enhance the scalability and performance of blockchain networks, according to analysis sites like the-ethereumtrader.com. This development is expected to significantly improve blockchain networks’ performance and scalability.

Bottom line

The potential for DeFi to become an alternative financial hub with great security, transparency, data integrity, and accessibility is one of the most exciting advancements in financial technology today.

DeFi has gone through its initial cycle of innovation. It is expected to take multiple cycles of innovation and failure before it becomes the transformative technology it is envisioned to be, just like the internet. This bear market offers an excellent opportunity for the market to remove the fluff and hype that came with the starting boom of DeFi, and to observe which trends stay.

For long-term DeFi investors who are pretty serious about the sector and believe it will continue to develop in upcoming years, patiently researching during a bear market can offer clearer insights into trends.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.