Top 5 Decentralized Finance Trends to Expect in 2024: Analyst Insights

Top 5 Decentralized Finance Trends to Expect in 2024: Analyst Insights

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.

Total Value Locked per Protocol Job.
Total Value Locked per Protocol Job. Source: Exponential.fi

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).

Total Value Locked in DeFi Yield Markets.
Total Value Locked in DeFi Yield Markets. Source: Exponential.fi

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 contractstokenization, 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”.

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Decentralized Transactions Challenge Howey Test’s Application to NFTs

Decentralized Transactions Challenge Howey Test’s Application to NFTs
  • The key question is whether NFTs meet the Howey test criteria for classification as securities under federal laws.
  • In the NFT industry, adopting best practices includes transparency, fraud prevention, respecting intellectual property, and ethical conduct.

Non-fungible tokens (NFTs) are unique digital assets that can represent anything from art and music to virtual land and gaming items. They have exploded in popularity and value in recent years, attracting the attention of celebrities, investors, and regulators alike. The legal status of NFTs remains unclear and controversial, especially in the United States, where the Securities and Exchange Commission (SEC) has the authority to regulate securities and protect investors from fraud and manipulation.

One of the key questions that arises is whether NFTs are securities under the federal securities laws, and specifically, whether they meet the criteria of the Howey test, the legal framework established by the Supreme Court in 1946 to determine whether an instrument is an investment contract and thus a security. Howey test has four elements, I will argue that NFTs are not securities. On top of that, I will also address some of the counterarguments and challenges that NFTs may face in the future, and suggest some possible solutions and recommendations for the industry and the regulators.

NFTs are not investments of money, but rather purchases of digital goods

The first element of the Howey test is whether there is an investment of money or something of value in exchange for the instrument. This element is usually easy to satisfy, as most financial transactions involve some form of payment. However, in the case of NFTs, the payment is not an investment, but rather a purchase of a digital good.

They are not shares, bonds, or derivatives that represent a claim or a right to a future cash flow or a share of profits. Rather, they are digital tokens that prove ownership and authenticity of a unique digital asset. In my point of view, they are similar to other digital goods, such as e-books or music downloads, that consumers buy for personal use and enjoyment, not for investment purposes.

NFTs are not common enterprises, but rather individualized and decentralized transactions

The second element of the Howey test assesses the presence of a common enterprise, where investors’ fortunes are tied to the success of an issuer or third party. However, in the case of NFTs, no such common enterprise exists. Transactions are decentralized and individualized, with various artists and creators minting NFTs across different blockchain networks like Ethereum or Solana. NFT buyers rely on blockchain‘s public ledger to verify authenticity, rather than trusting a specific issuer or promoter.

NFTs do not generate profits, but rather subjective value and utility

The third element of the Howey test concerns whether there’s a reasonable expectation of profits. Unlike traditional investments, NFTs don’t generate income or appreciate based on others’ efforts. Instead, their value comes from subjective qualities like rarity, originality, and cultural significance, rather than anticipated financial returns. NFT buyers don’t expect profits but rather value the assets for their intrinsic qualities and utility.

NFTs are not dependent on the efforts of others, but rather on the creativity and innovation of the creators and the community

The fourth element of the Howey test examines whether profits stem from the efforts of others. Unlike traditional securities, NFT profits aren’t reliant on issuer or third-party services. NFT value is driven by the creativity and innovation of artists and developers, not centralized platforms. Buyers assess and appreciate digital assets based on personal judgment, rather than external influences.

Counterarguments and challenges

Despite the arguments in favor of NFTs, potential challenges from regulators and courts may arise in the future. One such challenge is the classification of certain NFTs as securities under regulatory tests like the Howey or Reves tests. Depending on their characteristics, some NFTs could represent real-world assets or rights, potentially falling under the definition of securities, especially if they promise future cash flows or resemble investment instruments.

Moreover, even if NFTs don’t meet all elements of the Howey test, they might still be deemed securities through a flexible analysis. For instance, if they are marketed as investments or show characteristics of speculative opportunities, they could create expectations of profit, thus falling under securities regulations. Additionally, if buyers pool funds or share risks and rewards, or if the NFTs’ value depends on underlying asset performance, regulators might consider them securities.

Furthermore, beyond securities laws, NFTs could be subject to various other regulations based on their nature and function. Anti-money laundering and sanctions regulations might apply if NFTs facilitate illicit transactions. Tax regulations could come into play if NFT transactions generate taxable income or capital gains. Consumer protection laws might be relevant if NFTs involve deceptive practices or breach contracts. Intellectual property regulations could be triggered if NFTs infringe upon original creators’ rights.

My take: Possible solutions and recommendations

Given the uncertainty and complexity of the legal landscape surrounding NFTs, it is important for the industry and the regulators to work together to find possible solutions and recommendations that can balance the interests and needs of all the stakeholders. Here are some suggestions from me that may help to achieve this goal:

  • Industry stakeholders should adhere to best practices and standards to improve transparency, accountability, and compliance in the NFT market. This includes clear disclosure of terms and conditions for NFT transactions, implementing measures to prevent fraud and illegal activities, and respecting intellectual property rights. Additionally, they should engage in responsible and ethical behavior, avoiding harm to the environment, society, or public interest.
  • Regulators should adopt a flexible approach to regulate the diverse NFT market. Avoiding overly restrictive frameworks is crucial to foster innovation and growth. Recognizing nuances among NFT types and consulting with industry and community for feedback is essential. Continuous monitoring and evaluation of market evolution are necessary to update policies accordingly.

Conclusion

NFTs are a new and exciting phenomenon that has revolutionized the digital economy and culture. They offer unprecedented opportunities and challenges for the creators, consumers, and regulators of the digital assets.

The legal status and implications of NFTs are still unclear and uncertain, and may vary depending on the facts and circumstances of each case. Therefore, it is important to understand and address the potential legal issues and risks that may arise from the creation, distribution, and consumption of NFTs, and to seek appropriate solutions and recommendations that can foster a healthy and sustainable NFT market.

 

Source: https://www.financemagnates.com/cryptocurrency/decentralized-transactions-challenge-howey-tests-application-to-nfts/

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”.

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Why regulated decentralized exchanges are the wave of crypto trading’s future

Why regulated decentralized exchanges are the wave of crypto trading’s future

The world of cryptocurrency trading is undergoing a profound metamorphosis, fueled by a growing wave of investors seeking alternatives to the well-established centralized exchanges (CEXs) that have long reigned supreme. These CEXs have traditionally acted as intermediaries, facilitating transactions between buyers and sellers of digital currencies like Bitcoin and Ethereum. While CEXs offer certain advantages such as liquidity, convenience and security, they also carry significant downsides, including hefty fees and privacy concerns as well as susceptibility to hacking and fraud.

Rise of decentralized crypto trading

Crypto’s shifting landscape has propelled decentralized exchanges (DEXs) into the limelight. DEXs are platforms that empower users to engage in direct peer-to-peer trading of crypto assets, eliminating the need for intermediaries. Harnessing the power of blockchain or distributed ledger technology, DEXs introduce a range of advantages over their centralized counterparts, including:

1. Lower fees: DEXs typically impose more favorable fee structures than CEXs, which often burden users with high commissions, spreads and withdrawal charges.

2. Enhanced privacy: Unlike CEXs, which demand personal information and identity verification, DEXs operate with greater privacy, sidestepping anti-money laundering (AML) and know-your-customer (KYC) regulations.

3. Greater control: DEXs empower users by allowing them to maintain full control over their crypto assets and private keys, unlike CEXs that hold users’ funds in their own wallets or custodial services.

4. Fostering innovation: DEXs provide access to a broader spectrum of crypto assets and services, including lending, borrowing, staking, yield farming, non-fungible tokens (NFTs) and more.

Nonetheless, decentralized exchanges grapple with their own set of challenges, such as:

1. Limited liquidity: DEXs often face lower trading volumes and liquidity compared to CEXs, resulting in higher price slippage and longer transaction processing times.

2. Increased complexity: DEXs may require users to possess a higher degree of technical expertise compared to CEXs, potentially discouraging novice or casual traders.

3. Security concerns: DEXs are not immune to cyberattacks or technical glitches, posing risks to the platform’s integrity and the functionality of underlying smart contracts.

4. Regulatory uncertainty: Operating within a legal gray area, DEXs often lack clear definitions or regulations in most jurisdictions, raising questions about their compliance.

The birth of RDEXs

Is it possible to marry the strengths of centralized exchanges and decentralized exchanges? Can we envision a decentralized exchange that adheres to regulatory standards? The answer is affirmative. Enter the regulated decentralized exchange (RDEX). An RDEX allows users to engage in direct crypto asset trading while adhering to relevant laws and regulations in its jurisdiction of operation. It preserves the fundamental tenets of decentralization — transparency, immutability and censorship resistance — while bolstering them with legitimacy, accountability and security.

So, how does an RDEX function? It achieves this delicate balance by incorporating a regulatory framework into its protocol design, employing smart contracts to enforce user and transaction rules and standards. For instance, it may mandate user registration with real identities and source of funds verification before permitting trading. It may also impose limits on trade amounts or frequencies and report transactions to authorities for tax and compliance purposes.

Some of them will adopt a hybrid approach, blending on-chain and off-chain components. By leveraging off-chain service providers for KYC/AML checks and liquidity pools, they maintain decentralization and security through cryptographic proofs, ensuring the honesty and integrity of these services.

Value of RDEXs

Why are RDEXs so vital in the crypto space? It presents a pragmatic solution to one of the crypto industry’s foremost challenges: regulation. As governments and regulators worldwide grow increasingly concerned about the economic and societal implications of crypto activities, regulation becomes inevitable. While constructive regulation can offer clarity, security and recognition, excessive restrictions can stifle innovation and growth.

RDEXs can serve as a bridge between the crypto industry and regulators. They demonstrate that crypto activities can be conducted in a responsible, compliant and transparent manner, preserving decentralization’s core values. By fostering trust among users, investors and authorities, RDEXs mitigate the risks of fraud, manipulation and abuse.

Moreover, RDEXs empower the future of decentralized trading by granting access to a broader array of crypto assets and services. These include the trading of security tokens, which represent real-world assets like stocks, bonds, real estate or art. While security tokens promise to revolutionize the financial industry, their strict regulations demand compliant platforms, which RDEXs can provide.

Central bank digital currencies (CBDCs) are another facet of the crypto landscape that RDEXs can facilitate. CBDCs, digital versions of fiat currencies issued by central banks, promise faster, cheaper and more secure transactions but pose unique challenges for the crypto industry. It can integrate CBDCs with other crypto assets and services, ensuring privacy, interoperability and competition.

RDEXs in action

RDEXs are not just theoretical concepts; they are tangible realities. Projects like eToroX, backed by eToro and licensed by the Gibraltar Financial Services Commission, is an example of the RDEX in action — enabling users to trade crypto assets, including security tokens and stablecoins pegged to fiat currencies while adhering to regulatory frameworks.

Injective Protocol, supported by Binance, another major player in the crypto space, offers a layer-2 DEX built on Ethereum. It facilitates the trading of crypto assets, including derivatives, futures, options and synthetics, and collaborates with central banks on CBDC integration.

Projects like Bitverse, supported by Bybit and the Mantle Network, are pioneering a credit rating system. This system allows users to leverage their crypto assets and reputation to access a range of financial services and products in the Web3 space. Regulators could explore such platforms to verify user creditworthiness, both on and off-chain. (I do not have any ties to any of the projects or companies mentioned in this piece.)

On the horizon

In summary, RDEXs represent a new breed of decentralized exchanges that adhere to regulation. They bridge the gap between the crypto industry and regulators, providing platforms that cater to both sides’ needs. It unlocks access to a broader spectrum of crypto assets and services, empowering the future of decentralized trading.

However, RDEXs are not the final destination of crypto’s evolution. Numerous challenges and questions remain, including those related to interoperability, scalability, security and the ever-growing complexity of crypto assets and services.

Furthermore, the crypto industry continues to dream beyond RDEXs. Web 4.0, the hypothetical next chapter of the internet, hints at an even more immersive, intuitive and intelligent way of interacting with information and value in the most decentralization manner governed by artificial intelligence may be the way forward. While Web4 remains speculative, it underscores the crypto industry’s relentless pursuit of innovation, openness, fairness and decentralization. This concept also works well with RDEXs, where no single person is running the exchange, it is run by codes and AI.

The crypto industry’s evolution is far from over, with more innovative solutions and revolutionary ideas on the horizon, all aimed at shaping a more decentralized future.

 

Source: https://finance.yahoo.com/news/why-regulated-decentralized-exchanges-wave-090100997.html

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”.

j j j