Bitcoin to become the primary collateral asset in DeFi, interpreting the top five predictions for the DeFi market in 2020

Decentralized Finance (DeFi) has become one of the primary applications on the Ethereum blockchain. At the core of DeFi is the provision of a new, permissionless, and decentralized financial ecosystem without any central authority, with applications spanning globally. This year, DeFi has also become a focal point of interest for the public and the crypto community. Despite its impressive growth, the realization of DeFi's true potential still faces significant challenges.

Looking ahead to 2020, issues such as scalability, user-friendly interfaces, and fiat integration may further improve. However, according to analyst Roy Learner from Canadian asset management firm Wave Financial, the current DeFi industry still has a long way to go in addressing challenges such as "credit scoring," "financial privacy," and most importantly, "risk management." He has put forward five major predictions for the DeFi market in 2020:

1. Stablecoin Market Cap to Exceed $15 Billion

In 2019, the stablecoin market cap rose by nearly 50%, growing from $3.3 billion to $5 billion, with Tether USDT dominating at 80%.

If the stablecoin market cap exceeds $15 billion next year, it may be due to the following reasons:

• Successful issuance of Facebook's Libra project
• Launch of new stablecoin projects such as CELO, Velo, Saga, Franklin Templeton
• Dai accepting new collateral assets (Bitcoin, government bonds)
• Desire for increased returns in a negative interest rate environment

2. Interoperability to be Achieved in 2020

In 2020, several cross-chain projects are expected to make significant progress, such as Polkadot, Interledger Protocol, tBTC, Thorchain, Ren, one-way pegs, two-way pegs, and atomic swaps.

Roy Learner stated:

I believe that cross-chain protocols will be achieved in 2020, but it is uncertain which project will become mainstream in the market.

Learner emphasized that cross-chain protocols will be built around Bitcoin. Based on this, cryptocurrency research firm Deribit Research proposed several key points for cross-chain solutions:

• Uncensorable: Anyone can create, exchange, and use tokens regardless of their identity or jurisdiction
• Non-custodial: Custodians and any third party cannot seize crypto assets in deposits
• Price stability: Proxy tokens need to be closely linked to Bitcoin prices and inherit its monetary attributes
• Operating costs: Attracting users and custodians at reasonable prices

3. Bitcoin to Become the Main Target Asset for DeFi

Roy Learner pointed out that many centralized institutions have begun expanding their Bitcoin collateral businesses:

• Bitcoin is the primary collateral for derivatives exchange BitMEX, with an annual trading volume exceeding $1 trillion.
• Mainstream lending institution Genesis Capital reported Bitcoin book profits of $215 million in the third quarter of this year.
• Crypto lending platform Celsius listed Bitcoin as the highest asset category in deposits of around $163 million.

Celsius also emphasized:

We believe that the significant growth of DeFi is largely driven by speculative activities (margin loans), but using Bitcoin as collateral in the long term will greatly increase the overall value locked in DeFi protocols.

4. Rollup Combined with Non-custodial Exchanges Will Amplify "DEX" Market Cap Tenfold

ZK Rollups are Ethereum's scaling and privacy solution aimed at bringing Visa-level transaction throughput to Ethereum.

Mainstream decentralized exchange IDEX recently released version IDEX 2.0 based on Rollups technology. DeversiFI (formerly Ethfinex) will also launch a non-custodial exchange supported by ZK-Rollups in early January next year.

If non-custodial decentralized exchanges can provide efficient trading experiences, avoid initial trading issues, and absorb liquidity from centralized order books, non-custodial exchanges in 2020 could capture a significant market share.

5. Collateral Ratios to Remain Above 100%

Given the inherent price volatility of crypto collateral, underlying assets may undergo significant changes before liquidation, making collateral ratios a meaningful buffer indicator. The author stated:

While I believe there will be some improvement in 2020, I think it will take at least a few more years before decentralized identity and credit scoring applications are implemented, so the issue of insufficient collateral for DeFi loans still exists.

Roy Learner concluded that introducing lower volatility collateral such as government bonds, stablecoins pegged to fiat, gold, tokenized real estate/bills, etc., will help reduce future collateral ratios. He also hopes to see more experiments in the open financial circle with endless possibilities after 2020.

Further Reading

• Ethereum Founder: Already Applied for "VOICE" Beta, Eagerly Anticipating Future Developments
• Crypto Analyst: Like the astounding surge in Netflix stocks, Bitcoin is expected to reach $100,000

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