The decentralized finance (DeFi) space is leaving the bear winter behind and entering a bull summer as industry interest continues to pick up and the market moves into incentive-driven growth that focuses on real utility and technological innovations.
Or at least, that is what experts in the DeFi space are saying.
A recent report published by Exponential found that the “latest indicators signal not just growth but a transformative shift” within the DeFi space with significant growth in interest in DeFi yields.
The total value locked (TVL) in yield-generating DeFi protocols has steadily increased from $26.5 billion in the third quarter of 2023 to $59.7 billion in the first quarter of 2024, according to the report.
This growth signifies a return of confidence and liquidity to the DeFi markets.
We spoke to experts to find out the latest DeFi trends for 2024.
Key Takeaways
- The DeFi industry continues to evolve with $43 billion already locked in low-risk yield contracts, indicating a shift towards more stable and reliable investment avenues.
- The merging of traditional financial systems with DeFi is a significant trend, with financial institutions expected to use DeFi innovations such as smart contracts and decentralized lending to improve their services.
- The DeFi space faces potential regulatory hurdles, exemplified by the SEC’s actions against Uniswap.
- The development of Layer-2 scaling solutions and crypto bridges are pivotal in enhancing transaction speeds and reducing costs, thus supporting the broader adoption of DeFi.
- Increased international regulatory cooperation is likely to result in a unified global framework for digital assets, balancing innovation with financial stability and opening up new opportunities for the DeFi sector.
DeFi Industry Is Maturing
As central banks signal towards more rate cuts, the DeFi yields space is gaining significant popularity as an attractive investment form with DeFi markets maturing, Anndy Lian, an inter-governmental blockchain advisor, told Techopedia.
This was also backed by the Exponential report, which noted that over $43 billion were locked into very low-risk DeFi yield contracts.
75% of DeFi total value locked (TVL) is currently in pools offering 0-5% of annual percentage yield (APY).
Additionally, new trends in the market are pointing towards more mainstream adoption, with DeFi projects continuing to grow and integrate more and more with traditional finance.
Lian said:
“The focus [of the DeFi space in 2024] seems to be on sustainable growth, improved security, and real-world applications that could lead to wider acceptance and use of DeFi platforms.”
Igor Telyatnikov, CEO and co-founder of AlphaPoint, a digital asset and cryptocurrency trading and investing platform, added that with over $90 billion locked in DeFi protocols, the DeFi market could very much reach and even surpass previous heights of $150 billion locked as previously seen in 2021. He said:
“Despite the challenges faced, DeFi has continued to attract both developers and users, showcasing its ability to innovate and adapt. We are seeing a maturing ecosystem with more robust infrastructure, improved user experiences, and increasing collaboration among projects.”
Decentralized Finance Trends 2024
Over the last year, DeFi applications have undergone significant changes, with a number of new trends starting to show up in the industry, stemming from crypto bridges to a number of Layer-2 (L2) scaling solutions.
Here are some of the biggest DeFi trends experts are paying attention to in the second half of 2024.
1. Traditional Finance Integration
The traditional finance market entering the DeFi space is perhaps the biggest trend in the current DeFi landscape.
Lian noted that the integration of traditional markets into the DeFi space could become a “significant step towards a more inclusive and efficient financial ecosystem,” with traditional financial institutions expected to collaborate more closely with the DeFi space, utilizing features like smart contracts, tokenization, and decentralized lending to enhance their products and services.
Lian said:
“A growing number of financial institutions are projected to adopt DeFi solutions, with significant investments to streamline operations and offer innovative services. The 24/7 operational model of DeFi breaks down traditional barriers of time and geography, offering constant accessibility and borderless transaction capabilities.”
Telyatnikov added that as regulatory clarity improves, the DeFi space could see a lot of exploration of new use cases in collaboration with more traditional institutions.
“Furthermore, the lines between DeFi and centralized finance will blur, leading to hybrid solutions that combine the best of both worlds.”
2. Layer-2 Scaling Solutions
Layer-2 scaling solutions are a prominent tech DeFi example that is expected to play a crucial role in the second half of 2024, AlphaPoint’s Telyatnikov noted. These solutions will enable faster and cheaper transactions while also maintaining the security of the underlying blockchain.
Lian added that the ability of L2 solutions to enhance the scalability and efficiency of blockchain networks is also vital for the growth of DeFi technology.
3. Crypto Bridges
However, major DeFi platforms have seen other emerging trends in the past year, including the development of crypto bridges and Know Your Customer (KYC’d) DeFi, according to Lian. He said:
“The emergence of crypto bridges has facilitated asset transitions to faster layer 2 networks like Arbitrum and Polygon, enhancing ERC-20 token trading while maintaining exposure to Ethereum.”
4. Regulation
AlphaPoint’s Telyatnikov added that over the past year, one of the most significant changes in the DeFi landscape was the heightened regulatory scrutiny.
One example is recent enforcement actions by the U.S. Securities and Exchange Commission (SEC) aimed at Uniswap Labs, which noted that the commission was planning to recommend legal action against the company.
Telyatnikov said:
“The recent Wells notice issued to Uniswap, the largest decentralized exchange by volume, and the ongoing Tornado Cash case have sent shockwaves and warning signals through the DeFi community, particularly in the US. Uniswap, being a significant utility in the DeFi ecosystem, is now facing a direct attack from regulators, creating uncertainty that may take a long time to resolve, similar to the Coinbase lawsuit.”
5. KYC’d DeFi
Such lawsuit cases bring direct challenges to the legal status of DeFi products, their tokens and use cases, which is why there could also be a potential rise of KYC’d DeFi. Know Your Customer procedures are known to align with regulatory standards and reduce illegal activities, which could serve as a limelight for a number of DeFi platforms.
For example, Singularity, a startup developing a protocol to provide institutions with confidential access to DeFi, attracted $2.2 million to develop a KYC-compliant DeFi platform for institutions.
Miko Matsumura, the managing partner at Gumi Cryptos Capital, said in a press release on February 22, 2024:
“Singularity addresses a crucial need in the market, providing institutional users with both the compliance and the commercial confidentiality necessary to participate in DeFi.”
Additionally, the SEC’s new regulatory definitions have the potential to bring decentralized exchanges (DEXs) within the scope of regulations for US broker-dealers, affecting their operations, which could also play a significant impact on the future of the DeFi space in the coming year.
However, global regulatory cooperation and the balance between innovation and safeguarding against financial stability risks will be crucial for further development of the DeFi space.
“The [current] focus seems to be on creating a regulatory environment that supports innovation while ensuring the security and integrity of the financial system,” Lian said.
The Bottom Line
As DeFi transitions from its speculative phase into a more mature and stable environment, the integration with traditional finance and the adoption of advanced technologies like Layer-2 solutions signify a robust future.
Despite facing regulatory challenges, the sector’s innovative response showcases its resilience and potential for sustained growth.
The growing acceptance and implementation of KYC procedures in DeFi could further enhance its legitimacy and foster broader adoption.
Overall, the future of DeFi looks promising, poised to redefine financial landscapes globally as it bridges the gap between traditional and decentralized finance while navigating regulatory challenges.
Source: https://www.techopedia.com/decentralized-finance-trends
Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.
Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.
An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.