DeFi is reshaping the financial markets in the Gulf countries

Decentralized exchanges, one of the largest contributors to DeFi growth, reported more than $1 trillion in trade volume over the last year. Many DeFi projects look towards the Gulf countries as a decentralized finance hub.

One of the biggest contributors to the recent exponential growth of the crypto market was the decentralized finance (DeFi) sector, which aims to provide permissionless and fully automated banking services. Cryptocurrencies grew exponentially over the last decade, reaching a market capitalization of over $2.2 trillion by the end of 2021.

Total-value-locked (TVL) represents the sum of all assets deposited in DeFi protocols. According to data from Defillama, TVL grew from just over $18 billion at the beginning of 2021 to $240 billion by year-end, a 1,200% increase. Although TVL is a useful metric to gauge the overall DeFi market, it does not necessarily lead to outperformance. In the previous year, only Curve was able to outperform the price increase of Ether. Compared to the TVL of $24O billion, DeFi exposure represents only 0.016% of global banks’ assets under management, indicating that global adoption is truly at its beginning.

Meanwhile, decentralized exchanges (DEXs), one of the largest contributors to DeFi growth, reported more than $1 trillion in trade volume over the last year, an 858% increase from 2020. Volume on DEXs jumped by a large percentage due to several factors: One of them is their unique and permissionless nature, allowing platforms to list a vast array of tokens utilizing an automated market maker (AMM), a novel asset pricing algorithm. AMMs allow digital assets to be traded automatically by using liquidity pools instead of traditional orderbooks where buyers are matched with sellers.

Many DeFi projects look towards the Gulf countries as a decentralized finance hub. This is largely attributed to the focused attention that government officials give to innovation. Last year, DMCC announced its crypto center to attract companies working within the industry. Crypto Oasis was established and over 500 organizations are already operating out of the region.

“We have decided to bring our Crypto Valley experience to the Middle East because we believe in the potential of this region,” says Ralf Glabischnig, a founder of Crypto Oasis. “Dubai is the heart of the Crypto Oasis, the local version of Crypto Valley.”

Abu Dhabi Global Market also made extensive moves since 2018 to accelerate global blockchain and crypto development while the UAE’s Securities and Commodities Authority issued far-reaching regulations on crypto assets in late 2020. Establishing a regulated environment will drive the sustainability of DeFi protocols and enable institutional adoption as ambiguity and lack of clarity hold institutions back far more than established rules and regulations.

However, though AMM algorithms in DeFi protocols are a breakthrough in digital asset pricing, trading against liquidity pools can present its challenges, as unscrupulous token issuers can drain liquidity pool funds, sending a token’s value to zero, hence why we see many “rug pulls” in the sector.

“Rug pulls” appear in DeFi because, with the right technical know-how, it’s cheap and easy to create new tokens or others and get them listed on decentralized exchanges (DEXes) without a code audit. That last point is crucial – decentralized tokens are meant to be designed so that investors holding governance tokens can vote on things like how assets in the liquidity pool are used, making it impossible for the developers to drain the pool’s funds.