The Role of DeFi in Web3

Galina Mikova

Galina Mikova

November 14, 2022

5 min read

The Role of DeFi in Web3

The rise of decentralized crypto networks, also known as Web3.0, marks a shift in how people and organizations interact. These new networks will replace traditional intermediaries such as Web 2.0 and allow people to conduct transactions more securely and openly.

The decentralized digital economy, also referred to as Web3, consists of various protocols and features. One of these is DeFi, which is the Internet finance system that’s inherent to the global-reaching, decentralized Web 3.0 era. As we’re nearing wider Web3 adoption, DeFi is now still considered merely a part of the blockchain industry, and more popular than Web3.

The rise of Web3 has given us reasons to believe that the future of economics will be based on on-chain transactions. Some of the things that users can do in Web3 are to manage their funds using wallets all around the world. They can also program and trade real estate assets and NFTs in a trust-minimized manner.

In addition to being able to provide users with a variety of products and services, Web3 also requires higher variety and stability. For instance, the core assets of the market need better transparency, programmability, and availability. Despite the technological advancements that Web3 has brought to the market, the performance of these assets has been mixed.

What are DeFi’s Innovations?

One of the innovations of DeFi is the over-collateralization to “solidify” value. This concept is similar to the traditional model of protecting LP's assets from risks. However, it is a kind of value solidification from a different perspective. For instance, let's say that Alice purchases a piece of code from Bob for $100. The price of the code has been set at 100 USD. In a volatile market, it is hard to tell its value. However, given Alice's purchase price of 100 USD, a 70% discount would give people more confidence in accepting the deal. It is reasonable to assume that the new consensus will be around $30.

This new consensus regarding the value of Web3 has given us a reason to believe that the solidified will eventually be more reliable. This is because the code that is used to validate the value will become valuable.

Further Release of Liquidity

DeFi is evolving in the direction of “everything can be staked”, which is the biggest difference from existing synthetic protocols. This new approach to the way assets are valued will allow investors to benefit from the low liquidity and high value of real assets off-chain. It will also provide them with a solid underlying asset base.

The development of StakeFi will serve as a steady cash flow in the crypto market, which will be a cornerstone for DeFi’s future development. It allows for the capture of on-chain liquidity by allowing for the generation of protocols using various cryptocurrencies, including NFTs and native tokens. Additionally, it allows for the creation of required subchains and enterprise staking solutions.

The emergence of receipt tokens is a significant step in the evolution of DeFi, as it allows liquidity providers to offer a more efficient and effective trading experience. However, these types of tokens are not widely used as financial assets.

Through the use of on-chain liquidity, investors can easily manage the multiple risks associated with their assets in a single crypto wallet. These synthetic assets are designed to meet the needs of investors, as they are upgraded versions of TradeFi's assets.

Due to the increasing number of decentralized finance and blockchain technologies, the fragmentation of liquidity in the crypto market has become an inevitable challenge. The market is currently dispersed across different blockchains and DeFi protocols. Under this circumstance, it is crucial to fill the gap between the overly volatile assets and stable assets to facilitate the transition of value to Web3.

Efficient development requires gradual understanding

Experts predict open finance transactions will be several times larger than those conducted through the current DeFi when it enters a mature stage. Open finance may even completely outshine the status-quo financial sector.

In light of the technological advancements in the field of finance, many have lost faith in Ethereum remaining the preferred network for developing open finance applications. The cost of developing Web 3.0 applications using Layer2 is still too high, and the lack of upgradeability and customization are also factors that prevent it from becoming a viable platform.

By moving DeFi to a new public chain, and then building a Web 3.0 appchain around it, would mean that both Web3.0 and DeFi can accelerate their adoption.

For new technologies, such as multichain networks, researchers should start to gain a deeper understanding of the infrastructure that supports and surrounds them. However, it can be very challenging to maintain a priori faith in the principles of Web3.0.

The development of blockchain technology is expected to be similar to that of urban development. Cities and markets eventually develop due to the availability of various resources and convenient transportation of resources. The network effects will eventually drive a few cities to become financial centers that serve a wide range of industries.

We are very confident in Ankr as a Web3 and DeFi infrastructure provider. The company's traction has gained in just a short amount of time into a new era of multichain development powering Web3 devs with purpose-built APIs. As the ANKR ecosystem continues to evolve on the conception of a contemporary internet, the expanding framework with a cross-chain staking DeFi functionality will facilitate staking and dApp improvement in the context of Web3.