Decentralized Finance Industry Outlook 2024: Key Trends and Development Directions

In recent years, decentralized finance ( DeFi ) has experienced rapid development and transformation. From its initial experimental projects, DeFi has become an indispensable cornerstone in the cryptocurrency space. During this process, some projects have stood out, but competition has also become increasingly fierce. Various protocols attract users by lowering fees and improving efficiency, while continuously developing new products to expand market share. Looking ahead to 2024, the DeFi space may present the following key trends:

Protocol Platformization

With the maturity of Decentralized Finance, major protocols have begun to transition from single-function to comprehensive service platforms. Over the past year, we have seen some well-known DeFi protocols start to expand their business scope:

• A sub-DAO of a certain lending protocol has been launched and quickly became one of the main lending platforms on Ethereum.
• A certain DEX and a certain lending protocol have launched their own stablecoins.
• A certain DEX launched a wallet application and acquired an NFT platform.
• A certain protocol on the new public chain has developed multiple functions at once, including stablecoins, DEX, Launchpad, and liquidity staking.

This platformization trend is expected to further strengthen in the future, reflecting the maturity of Decentralized Finance and the intensifying competition.

The advantages of leading protocols continue

Top DeFi projects such as certain DEXs and lending protocols were all born before the last bull market. They have continuously strengthened their positions in the evolution of the market, demonstrating strong network effects and brand influence. These projects are constantly updating and iterating:

• A certain DEX announced version 4, allowing the addition of custom features through "hooks".
• A certain DEX has proposed a new solution for off-chain order signing and on-chain settlement.
• A certain lending protocol v3 version improves capital efficiency and expands across multiple chains.

In the short term, these leading projects will still occupy a major market share and are difficult to replace.

Liquidity mining is declining, and funds are chasing efficient projects

In mature public chain ecosystems like Ethereum and Solana, liquidity mining is gradually becoming a thing of the past. Projects are relying more on "real yields" to attract funds, while capital is also inclined to flow to more efficient places.

Recently, the development of the Solana ecosystem has raised some questions about Ethereum. Against the backdrop of frequent trading of MEME coins, the DEX on Solana has demonstrated strong capital efficiency. Currently, the liquidity providers for these projects mainly rely on real trading fee income, which may attract more funds in the short term.

This does not contradict the advantages of leading projects. The fundamentals of leading DeFi projects are better, safer, and more stable, but their growth rate is relatively slow. Emerging projects may maintain a faster growth rate during a favorable period, but whether they can sustain it is a question.

LST Leads New Public Chain TVL Growth

Although liquid staking projects have long existed, the liquid staking token (LST) began to be widely discussed only before the Ethereum Shanghai upgrade. Now a certain LST project has become the DeFi protocol with the highest TVL.

A similar trend has also emerged on Solana, with two liquid staking projects occupying the top two spots in ecosystem TVL. These projects have driven the recent TVL growth on Solana, partly due to airdrop expectations attracting staking, and partly due to ongoing incentives for using LST in Decentralized Finance.

Other public chains seem to have discovered the secret of LST in promoting ecological development. For example, in a new public chain ecosystem, the APR for LST trading pairs on a certain DEX is as high as 49%, mainly from official rewards. In another public chain ecosystem, a leading lending platform has also developed LST services, and currently, the TVL brought by LST has exceeded that of lending.

Perp DEX or new competitive projects

Decentralized perpetual contract exchange ( Perp DEX ) was once promising and has given birth to some well-known projects. However, there are still some issues with the existing mainstream Perp DEXs:

• A certain project is unbalanced between long and short positions during a one-sided market, which is not friendly to liquidity providers.
• A certain project v2 introduces a slippage mechanism, but it brings uncertainty to users.
• The funding rate of a certain project fluctuates greatly, and there is a delay in order placement.

Recently, some new Perp DEXs have shown attractive features, such as a certain project's DLP pool offering high returns, while others propose solutions with higher capital efficiency. This field may see the emergence of new competitive projects.

Real-World Assets

Real-world assets ( RWA ) is a controversial direction. It involves off-chain components, may rely on a single entity or face regulation, which does not fully align with the decentralized characteristics of Decentralized Finance.

Currently, it seems that US Treasury bonds are the only direction for RWA that can be applied on a large scale. Other assets such as real estate and artworks can be tokenized, but they still find it difficult to obtain liquidity.

With the expectation of interest rate hikes in the U.S., short-term U.S. Treasury yields are expected to decline in 2024, directly impacting the returns of RWA products. Meanwhile, the crypto market may enter a bull market, leading to increased demand for stablecoins, which could decrease the attractiveness of RWA products.

Nevertheless, RWA still attracts the exploration of entrepreneurs. This process may introduce traditional financial institutions as collaborators for RWA, and at the very least, it will become an appealing narrative.