In the last two months, the decentralized finance industry has seen a dramatic surge of interest, as new platforms promising to disrupt the way people manage their money, transact, earn and entertain themselves have launched in rapid succession in recent months.
Much of this growth has been catalyzed by the meteoric rise of DeFi lending platforms like MakerDAO and Aave, which together now compose more than 40% of the DeFi market. But a wave of new DeFi products that are targeting practically every traditional and digital industry is now making the rounds, expanding the benefits of DeFi to casual consumers and cryptocurrency users alike.
In 2020, DeFi projects and products can be described as either base-level protocols or new experiences built on top of these protocols; or they can be considered refinements or enhancements to pre-existing products and services.
Step 1: Define the transaction rules
Since the industry is still very much in its earliest stages of development, a large proportion of the new projects launched fall under the “protocol” category — these are essentially the cooking methods that allow entrepreneurs and trailblazing firms to launch their own products and services because they can be woven together into complex platforms that offer new functionality.
These protocols define what can be done within a DeFi application, including which types of digital assets can be issued, managed or used, as well as how the platforms built on top of the protocol are able to communicate with one another. In this case, the interplay of different raw materials, such as Wrapped Bitcoin (WBTC), Wrapped Ether (WETH), stablecoins and popular crypto project tokens like Basic Attention Token (BAT), Chainlink and Curve (CRV), among others, can be used to create entirely new combinations (or recipes).
The interplay of multiple different DeFi platforms has led to the rapid growth of the industry, as users stack the benefits of each platform on top of one another to achieve new, ever more creative uses for the technology.
For anybody building their own DeFi initiative, this usually means either working with a handful of plug-and-play solutions to build something new or introducing a new protocol into the mix, with the hopes of adding value to others. When defining the transaction rules for this protocol, developers need to consider its intended use case and find the right balance between versatility, security and usefulness. Developers in the DeFi space typically consider how their own assets (ingredients) fit in with the ecosystem and whether they can provide additional value to holders — beyond what is currently available.
If DeFi is a soup, then blockchain protocols and transaction rules are the cooking method, and the assets are the ingredients. By varying the combination of protocols (cooking methods) and assets (ingredients), it is possible to form a huge variety of products — giving rise to the diverse DeFi ecosystem we see today.
Step 2: Develop the asset(s)
In order to further expand the DeFi industry and bring in the next big wave of users, we need more raw materials. Arguably, one of the most promising raw materials would be tokens that represent sports rights and assets from the sporting industry. With more than 3.5 billion sports fans worldwide, the majority of whom are aged 18–49, there is an excellent opportunity to expand the DeFi industry by offering additional value to sports fans.
For people looking to develop a disruptive DeFi product that forms the interface between sports and blockchain technology, then sports would form the meat of their recipe.
The global sports industry is a $500-billion market that is ripe for disruption by innovative blockchain products, new products and new experiences. Firms have already begun building the basic protocols that can facilitate this disruption.
Some platforms enable fans to participate in the decision-making processes of their favorite sports teams by purchasing and using their chosen sports team’s fan tokens. Depending on the team, these fan tokens can also grant the holders access to a range of rewards, such as unique experiences and exclusive merchandise that is unavailable elsewhere. This can help to provide fans with more meaningful interactions with their favorite sports stars and clubs, while also generating a unique online economy around fan tokens.
But DeFi has the potential to extend this much further. With DeFi, users can engage with an entirely decentralized fantasy league, collecting and trading nonfungible tokens that represent players and teams, and setting up trustless betting contracts where players pit their teams against one another and wager on the outcome. Participants in the system don’t need to trust that the wager will be paid out correctly, as everything is completely transparent and trustless.
DeFi also extends its reach directly into the crowdsourced prediction and betting industry. With new DeFi protocols on the stage, users can turn live predictions into liquid assets, which can allow users to enter and exit wagering positions for practically any event, including sports, presidential elections, cryptocurrency price action and even black swan events. With the elaboration of DeFi exchange protocols, cryptocurrency users no longer need to rely on centralized platforms to conduct their trades, which means users can trade their DeFi ERC-20 tokens.
This development has come just at the right time. Many sports platforms are either looking into or have already begun tokenizing physical merchandise, including MLB Champions baseball cards and collectible crypto bobbleheads. It won’t be long until these tokens could also be used to redeem real-world merchandise, too — such as exchanging a sports jersey NFT won in a competition for an actual jersey, or, vice versa, by unlocking a new jersey NFT for a fantasy team by purchasing a jersey in real life.
Although the functionality of a DeFi product represents the meat or substance of our recipe analogy, a new wave of products built on top of DeFi protocols can be considered the garnish — or finishing touches.
Step 3: Optimize the user experience
The final layer of the DeFi space is the projects and platforms that either work to make the industry more accessible to everyday users and investors or offer new experiences entirely using the building blocks that are already available.
In the initial stages of the DeFi industry, and even for some DeFi projects today, the user interface was less than intuitive, and the concept behind the platform was difficult to grasp. As a result, just like the blockchain industry in general, the DeFi industry was initially adopted by financial professionals, savvy entrepreneurs and those with a passion for new technologies.
Now, however, the industry is far more accessible, as great strides have been made in terms of the user experience — or dining experience as far as our recipe goes. Dramatic changes in both ease of use and the elaboration of use cases that suit everyday investors and general consumers have helped to make DeFi more than just a niche that benefits the experts.
More mainstream use cases for the technology, like the potential to cross over NFT items in popular video game titles without game houses needing to sign IP license agreements, and adding digital currencies to video games are almost certainly on the horizon. Likewise, the Olympics, various soccer premier leagues, the National Football League and the National Basketball Association will almost certainly be poised to dive into the growing soup of DeFi projects to deliver an engaging sporting experience, player interactions and merchandise over the blockchain. And all of this is coming sooner than you might think.
Victor Zhang is the CEO and co-founder of AlphaWallet. He has spent the past five years working to transform the way banking and blockchain technology intersect. Prior to his venture into blockchain technology, Zhang worked for 17 years in international business in Asia and Australia.
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