Decentralized Finance Ecosystem Outlook for 2024: Key Trends and Development Directions

In recent years, the DeFi field has undergone rapid development and transformation. From initial experimental projects to now becoming an indispensable infrastructure in the cryptocurrency space. While some projects have stood out, competition in this sector is also becoming increasingly fierce. Various projects are actively developing new products to expand their market share. So, what trends might the DeFi field present in 2024? Below are predictions and analyses of several key trends in the DeFi field.

Trend of Platformization in Protocols

With the continuous development and maturation of the DeFi sector, major DeFi protocols are beginning to be dissatisfied with a single core business and are looking to transform into platforms that provide comprehensive services.

Over the past year, we have seen many well-known DeFi protocols expanding their business scope. For example, a well-known lending protocol’s sub-DAO quickly reached a TVL of $1.65 billion after launching on Ethereum, becoming one of the major lending platforms. Some DEXs and lending protocols have also launched their own stablecoins in succession. Additionally, some protocols have introduced wallet applications and even acquired NFT platforms.

On emerging public chains, we have also seen some projects develop a variety of Decentralized Finance functions at once, including stablecoins, DEX, Launchpad, and liquidity staking, covering almost all common DeFi services except for lending.

The platformization of this DeFi protocol has become a notable trend, reflecting the maturity of DeFi development and the increasingly fierce competition. This trend is likely to continue to strengthen in the future.

Advantages of Leading Projects Continue

Some leading DeFi protocols are projects that existed before the last bull market, and they have continually strengthened their positions amid the ongoing evolution of the market, demonstrating strong network effects and brand influence, while also undergoing continuous updates and iterations. In the short term, these projects are likely to continue holding a major market share and will be difficult to replace.

For example, a leading DEX announced a new version that allows for various custom features to be added through “hooks”; at the same time, it proposed a solution for off-chain order signing and on-chain settlement through Dutch auctions. A major lending platform’s new version improved capital efficiency and expanded across multiple chains, further consolidating its market position.

Data shows that a leading DEX still occupies about 55% of the market share on major EVM-compatible chains.

The decline of liquidity mining, funds flowing to efficient projects

On public chains like Ethereum, Solana, and BNB Chain, which already have mature ecosystems, liquidity mining has gradually become a thing of the past. Projects rely more on “real yield” to attract funds, and capital is also more inclined to flow to places with higher efficiency.

Recently, with the development of the Solana ecosystem and the rise in SOL prices, the DEXs on it have shown strong capital efficiency. Current liquidity providers mainly rely on real trading fee income, and these projects may attract more funds in the short term.

Taking data from a certain day as an example, the liquidity of the SOL/USDC and SOL/USDT pools on a certain DEX on Solana, which have the most liquidity, generates an average daily income from transaction fees that is close to or exceeds 0.5%. In contrast, the top 3 liquidity pairs of ETH/stablecoins on Ethereum provide a daily income of only 0.068%, 0.077%, and 0.127%.

In a situation where there is such a significant gap in profitability, professional liquidity providers are likely to turn to projects with stronger profitability and higher capital efficiency. This does not mean that leading DeFi projects will lose their advantages; they still have better fundamentals, higher security, and stability, but their growth rate may be relatively slow. Emerging projects may maintain a faster growth rate during their peak period, and expectations for future growth will also be reflected in token prices, but whether this growth can be sustained is another question.

LST Leads New Public Chain TVL Growth

Although liquid staking projects have existed on many blockchains that adopt Proof of Stake mechanisms, liquid staking tokens (LST) only began to be widely discussed before the Ethereum Shanghai upgrade. Today, a leading liquid staking project has become the one with the highest TVL.

This trend is also seen on Solana, where two liquid staking projects occupy the top two positions in Solana’s ecosystem TVL. These projects not only led to recent TVL growth on Solana but also promoted the overall ecosystem TVL increase through airdrop expectations and continuous incentives for the use of LST in Decentralized Finance protocols.

Other public chains that hope to increase TVL seem to have discovered the importance of LST in promoting the ecosystem. For example, in the ecosystem of a certain emerging public chain, the APR for LST trading pairs on a certain DEX is as high as 49.04%, of which 48.09% comes from official rewards. In another public chain ecosystem, a leading lending platform has also developed LST services, and the TVL brought by LST has now surpassed that of lending services.

Perp DEX may迎来突破

Decentralized perpetual contract exchanges (Perp DEX) have been gaining a lot of attention, and several successful projects have emerged. However, the existing major Perp DEX projects still have their own advantages and disadvantages in terms of user experience.

For example, the v1 version of a certain project is unfriendly to liquidity providers when there is an unbalanced long-short ratio in a one-sided market; at the same time, the various fees charged to traders are also relatively high. The v2 version introduced trading slippage to achieve long-short balance, but this has brought uncertainty to users. In another project, the funding rate fluctuates significantly, and using off-chain oracles results in delays between order placement and execution.

Recently, some Perp DEX projects have shown attractive features. For example, in the DLP pool of a certain project, some trading pairs offer liquidity rewards of up to several hundred or even over a thousand percentage points for providing liquidity over 30 days. Although using leverage to provide liquidity carries significant risks, it may also bring higher returns. Additionally, there are some projects that offer more efficient Perp DEX solutions.

Opportunities and Challenges of Real-World Assets

Real World Asset (RWA) projects are somewhat controversial. They often rely on a single entity and may face regulatory challenges, which is not entirely consistent with the decentralized philosophy of Decentralized Finance.

At present, U.S. Treasury bonds seem to be the only direction for RWA that can achieve large-scale application. Other assets such as real estate and artworks can also be tokenized, but due to their non-standardized characteristics, they still lack liquidity on the chain.

With changes in expectations for interest rate hikes in the U.S., short-term U.S. Treasury yields are expected to decline significantly in 2024, which will directly affect the yields of RWA products. At the same time, if the crypto market enters a bull market, the demand for stablecoins will increase, potentially decreasing the attractiveness of these products. According to recent data from a well-known RWA project, the issuance of its stablecoins has already started to decline since late October.

Nevertheless, many Crypto entrepreneurs still maintain an exploratory interest in this track. This process may introduce influential traditional financial institutions as partners for RWA, and at the very least, it will become a captivating narrative.