It’s been an amazing year for Decentralized Finance. As of writing this, DeFi has grown from $293M to $665M since the start of 2019. Not only should the community celebrate the tremendous growth this year, but also the many brighter days ahead. Let’s look to what the future holds for DeFi with four trends you should keep your eyes out for in 2020.
Privacy Solutions and Mixers
Research into zero knowledge proof technology was extremely fruitful in 2019. For starters, the gas cost of ZK-SNARKs has greatly been reduced through new EIPs. Not to mention, new ZK proving systems like PLONK, Sonic, etc. are faster than ever. Additionally, EY has continued its work on zero knowledge transaction batching, achieving a 400-fold improvement in gas efficiency.
Aside from the admirable research completed in 2019, many prominent privacy solutions, especially those utilizing ZK-SNARKs, launched new contracts and upgrades onto the mainnet. As with most new technology, testing and audits were necessary for these projects to gain public confidence. For example, Tornado Cash, an ETH mixer using ZK-SNARKs, just passed a security audit. Not to mention, Istanbul enabled DeFi smart contracts that are interoperable with Zcash. With the steps taken in 2019, expect mixers and other privacy solutions to continue to gain traction in 2020.
Layer 2 Economics
Many layer 2 solutions require users to stake or put down a bond for the opportunity to earn protocol fees from layer 2 transactions. Let’s take a look at Optimistic rollup as an example which requires bonded aggregators to bundle user-submitted transactions into rollup blocks submitted on their layer 2 sidechains. Users pay aggregators fees to submit their transactions and the new sidechain state root (AKA the optimistic rollup block) to the mainnet.
Anyone can become an aggregator by putting down a bond. Also, anyone can collect rewards for slashing aggregators who submit or build on invalid rollup blocks. We’re likely to see more solutions like rollups to be deployed in 2020 due to their scaling advantages. It’ll be interesting to see how the economics behind staking and bonded aggregator mechanics shake out in the year ahead.
DEXes and DeFi Grow Together Challenging Centralized Exchanges
In 2020, DEXes will grow as more people are drawn to the unique opportunities available in DeFi. Increasingly efficient non-custodial financial tools will continue to attract more traders away from centralized exchanges. However, it’s worth noting that most activity in decentralized finance requires liquidity to function. More users, more liquidity necessary to operate. For example, margin trading on Fulcrum involves swapping between multiple tokens.
Therefore, incentivizing external and native liquidity is key for DeFi platforms. DEX aggregators like DEX.AG offer users an efficient way to access both, promoting decentralization. A prime example of this is the recent integration of Synthetix’s native exchange into DEX aggregator DEX.AG. Users of both platforms benefit from the additional liquidity and SNX holders collect more native exchange fees. So keep your eyes on how the relationship between DEXes and DApps evolves in 2020.
Discovery Period for Staking
Ethereum 2.0’s set to launch in early 2020. And so, ETH holders will be able to stake 32 ETH and earn fees for validating blocks. We’ll have to wait and see how many DeFi users will stake. And based on that, what will the returns be like? How will staking influence the greater DeFi community?
What will be the most popular way to stake ETH and cryptocurrency in general? Exchanges and custody services are already offering Tezos staking and will likely offer custodial ETH staking.
What kind of DeFi products and services will launch to suit the needs of ETH 2.0? For example, Rocket Pool is arguably the most popular decentralized staking pool in development. Learn more about the changes coming soon with Ethereum 2.0 here.