Spend under 2 mins reading TL;DR, spend more if you want to find more details.
Bold text: Very short final conclusion.
Normal text: Detail aspect I consider to reflect the final conclusion.
Underlined text: Expectation on new innovation.
Let’s dive in.
Although the Total Value Locked (TVL) in DeFi is about 60% of its all-time high due to the influence of token prices, daily trading volume has returned to previous peak levels, reaching around $5-15 billion. This shows that activity is starting to pick up again across the DeFi market.
Based on the data on daily active addresses, DeFi accounts for a significant portion of the total crypto market as of the end of September 2024. Note: Data may be affected by bots.
Looking at revenue figures, DeFi projects reached new highs in Q2-Q3 2024, well above levels seen during the DeFi Summer of 2021.
From this, we can conclude that DeFi has always been there and remains a key sector of the crypto market. However, market attention is currently shifting towards other areas like meme coins and AI, so DeFi has been mentioned less lately.
The bull markets of the 2016-2018 and 2020-2022 cycles, which were also the golden periods for DeFi, occurred during times when the Fed significantly lowered interest rates (approaching zero). DeFi benefited in two main ways:
By the end of 2023, it’s clear that even with high interest rates, DeFi has maintained growth. Thus, as interest rates begin to decrease, DeFi is likely to explode.
2.1: RWA
RWA Marketcap. Source: Binance Research
As of the end of August 2024, the RWA (Real World Assets) sector has reached a new market cap of over $12 billion, more than double the same period in 2023. In this:
Private Credit: Loans provided by non-bank financial institutions to small and medium-sized enterprises.
https://x.com/MorphoLabs/status/1828764717332251011
Recognizing this lucrative market,@MorphoLabs""> @MorphoLabs has taken steps towards these assets by collaborating with Coinbase’s KYC verification system to support lending pairs for Centrifuge Anemoy’s Liquid Treasury Fund (LTF), Midas Short Term US Treasuries (mTBILL), and Hashnote US Yield Coin (USYC). Therefore, in the near future, integrating these types of assets into DeFi seems quite clear.
2.2: CEX
Cash flows are also seeing a shift from CEX (Centralized Exchanges) to DEX (Decentralized Exchanges) through both derivatives and spot trading. According to The Block, the market share on DEX for these two areas has seen strong growth since late 2023, with spot trading reaching a new peak of over 15%.
Looking more broadly, centralized exchanges are also trending towards bringing off-chain users on-chain through initiatives like launching Appchain L2s, such as Coinbase with Base and Kraken with Ink…
2.3: Bitcoin
The integration of BTC into DeFi is receiving significant attention from major institutions, especially@coinbase""> @coinbase with the launch of cbBTC, following concerns about the security of WBTC. In just one month, the market cap of cbBTC reached $500 million and is primarily used in DeFi protocols on Ethereum and Base. If this trend continues, it’s clear that billions of dollars in BTC could be brought into DeFi.
As of the end of October 2024, the combined market cap of WBTC and cbBTC accounts for only about 1/1300 of Bitcoin’s total market cap, indicating that there is still a large amount of untapped cash flow from this largest crypto asset.
Fee and Incentives. Source: Artemis
DeFi has always been a key sector of the crypto market, and over time, its model has gradually proven product-market fit. This is evident in the sustained demand for usage, even as incentive programs like token rewards continue to decline. This is clearly shown in major projects like Aave (lending), Uniswap (DEX), and Lido (liquid staking), where generated fees remain high, while the price and quantity of tokens incentivizing users have steadily decreased each quarter since 2021.
When comparing this with other narratives in the crypto market, we can see:
As mentioned earlier, decreasing FED interest rates are a necessary condition to stimulate cash flow from traditional sources (both individuals and institutions) into DeFi for yield-related opportunities. However, yields in DeFi are unstable and depend on market conditions. For example:
Additionally, DeFi protocols face issues with fragmented liquidity across different chains, leading to increased volatility in interest rates and lower capital efficiency, especially as hundreds or even thousands of chains are set to launch soon.
Aave V4 Unified Liq Layer Concept. Source: Aave
Recognizing this issue, well-known DeFi projects have proposed several solutions to unify liquidity, such as Aave’s development of a cross-chain liquidity layer and Uniswap joining the Superchain initiative. However, at present, these solutions have not yet been implemented.
2.1: Modular DeFi
DeFi may return in a modular form rather than through liquidity mining.
This shift is likely to be led by the legendary trio—Uniswap, Aave, and MakerDAO (now Sky).@SkyEcosystem""> @SkyEcosystem has recently rebranded to Sky Money and continues to execute its Endgame strategy.@Uniswap""> @Uniswap V4 is set to launch in Q4 of this year with a new model called Hooks, allowing anyone to develop their own AMM on the Uniswap platform and liquidity.@aave""> @aave V4 is also planned for release in early Q2 2025.
Recently, only smaller protocols have completed new models, such as Morpho and Euler. Morpho allows Curators to design lending markets using liquidity from Morpho Vaults.@eulerfinance""> @eulerfinance has launched v2 with the Ethereum Vault Connector (EVC), creating a connection between lending pools (Vaults) on Euler.
A common trend in this development phase of DeFi is the expansion of collateral asset types, opening up new applications to reach and serve new user segments.
However, looking at the activities of Morpho Labs—the company that initiated this trend—we do not see an increase in loans.
→ Thus, DeFi may transition to a modular model, but it will need time to demonstrate the effectiveness of this approach.
2.2: Restaking
Despite launching only at the beginning of 2024, the Total Value Locked (TVL) in Restaking has reached $15 billion (5% of ETH’s market cap), primarily concentrated in@eigenlayer""> @eigenlayer on Ethereum with about $10 billion. However, the AVS using Restaking as a security economic layer is nearly zero. This poses a long-term challenge as there is no stable yield source for stakers beyond the project tokens, and if this continues, it could lead to a significant decline in TVL.
2.3: BTCFi
BTCFi TVL. Source: Coinmarketcap BTCFi Report
In addition to bringing BTC into the DeFi ecosystem through WBTC or cbBTC, the idea of building a separate ecosystem for Bitcoin has also been formed and developed primarily on sidechains like Stacks, Merlin… Although this concept originated in 2021 (with the launch of the Stacks mainnet), its TVL remains relatively small at around $1 billion. This may be due to the fact that these projects:
DeFi has always been a key growth niche in the crypto market. Over time, the old DeFi model has proven its product-market fit.
In the near future, various cash flows from traditional markets, RWA, CEX, and Bitcoin may flow into DeFi, potentially causing this narrative to explode further.
Currently, the development of new models for DeFi remains unclear and ineffective, largely relying on old models, which reduces the stimulation needed for growth. However, we can also have hopes for solutions like Modular DeFi, cross-chain liquidity, or even fee switch mechanisms from major DeFi protocols in the upcoming phase. Once cash flows are unleashed and new models demonstrate demand, DeFi could experience unprecedented growth.
Spend under 2 mins reading TL;DR, spend more if you want to find more details.
Bold text: Very short final conclusion.
Normal text: Detail aspect I consider to reflect the final conclusion.
Underlined text: Expectation on new innovation.
Let’s dive in.
Although the Total Value Locked (TVL) in DeFi is about 60% of its all-time high due to the influence of token prices, daily trading volume has returned to previous peak levels, reaching around $5-15 billion. This shows that activity is starting to pick up again across the DeFi market.
Based on the data on daily active addresses, DeFi accounts for a significant portion of the total crypto market as of the end of September 2024. Note: Data may be affected by bots.
Looking at revenue figures, DeFi projects reached new highs in Q2-Q3 2024, well above levels seen during the DeFi Summer of 2021.
From this, we can conclude that DeFi has always been there and remains a key sector of the crypto market. However, market attention is currently shifting towards other areas like meme coins and AI, so DeFi has been mentioned less lately.
The bull markets of the 2016-2018 and 2020-2022 cycles, which were also the golden periods for DeFi, occurred during times when the Fed significantly lowered interest rates (approaching zero). DeFi benefited in two main ways:
By the end of 2023, it’s clear that even with high interest rates, DeFi has maintained growth. Thus, as interest rates begin to decrease, DeFi is likely to explode.
2.1: RWA
RWA Marketcap. Source: Binance Research
As of the end of August 2024, the RWA (Real World Assets) sector has reached a new market cap of over $12 billion, more than double the same period in 2023. In this:
Private Credit: Loans provided by non-bank financial institutions to small and medium-sized enterprises.
https://x.com/MorphoLabs/status/1828764717332251011
Recognizing this lucrative market,@MorphoLabs""> @MorphoLabs has taken steps towards these assets by collaborating with Coinbase’s KYC verification system to support lending pairs for Centrifuge Anemoy’s Liquid Treasury Fund (LTF), Midas Short Term US Treasuries (mTBILL), and Hashnote US Yield Coin (USYC). Therefore, in the near future, integrating these types of assets into DeFi seems quite clear.
2.2: CEX
Cash flows are also seeing a shift from CEX (Centralized Exchanges) to DEX (Decentralized Exchanges) through both derivatives and spot trading. According to The Block, the market share on DEX for these two areas has seen strong growth since late 2023, with spot trading reaching a new peak of over 15%.
Looking more broadly, centralized exchanges are also trending towards bringing off-chain users on-chain through initiatives like launching Appchain L2s, such as Coinbase with Base and Kraken with Ink…
2.3: Bitcoin
The integration of BTC into DeFi is receiving significant attention from major institutions, especially@coinbase""> @coinbase with the launch of cbBTC, following concerns about the security of WBTC. In just one month, the market cap of cbBTC reached $500 million and is primarily used in DeFi protocols on Ethereum and Base. If this trend continues, it’s clear that billions of dollars in BTC could be brought into DeFi.
As of the end of October 2024, the combined market cap of WBTC and cbBTC accounts for only about 1/1300 of Bitcoin’s total market cap, indicating that there is still a large amount of untapped cash flow from this largest crypto asset.
Fee and Incentives. Source: Artemis
DeFi has always been a key sector of the crypto market, and over time, its model has gradually proven product-market fit. This is evident in the sustained demand for usage, even as incentive programs like token rewards continue to decline. This is clearly shown in major projects like Aave (lending), Uniswap (DEX), and Lido (liquid staking), where generated fees remain high, while the price and quantity of tokens incentivizing users have steadily decreased each quarter since 2021.
When comparing this with other narratives in the crypto market, we can see:
As mentioned earlier, decreasing FED interest rates are a necessary condition to stimulate cash flow from traditional sources (both individuals and institutions) into DeFi for yield-related opportunities. However, yields in DeFi are unstable and depend on market conditions. For example:
Additionally, DeFi protocols face issues with fragmented liquidity across different chains, leading to increased volatility in interest rates and lower capital efficiency, especially as hundreds or even thousands of chains are set to launch soon.
Aave V4 Unified Liq Layer Concept. Source: Aave
Recognizing this issue, well-known DeFi projects have proposed several solutions to unify liquidity, such as Aave’s development of a cross-chain liquidity layer and Uniswap joining the Superchain initiative. However, at present, these solutions have not yet been implemented.
2.1: Modular DeFi
DeFi may return in a modular form rather than through liquidity mining.
This shift is likely to be led by the legendary trio—Uniswap, Aave, and MakerDAO (now Sky).@SkyEcosystem""> @SkyEcosystem has recently rebranded to Sky Money and continues to execute its Endgame strategy.@Uniswap""> @Uniswap V4 is set to launch in Q4 of this year with a new model called Hooks, allowing anyone to develop their own AMM on the Uniswap platform and liquidity.@aave""> @aave V4 is also planned for release in early Q2 2025.
Recently, only smaller protocols have completed new models, such as Morpho and Euler. Morpho allows Curators to design lending markets using liquidity from Morpho Vaults.@eulerfinance""> @eulerfinance has launched v2 with the Ethereum Vault Connector (EVC), creating a connection between lending pools (Vaults) on Euler.
A common trend in this development phase of DeFi is the expansion of collateral asset types, opening up new applications to reach and serve new user segments.
However, looking at the activities of Morpho Labs—the company that initiated this trend—we do not see an increase in loans.
→ Thus, DeFi may transition to a modular model, but it will need time to demonstrate the effectiveness of this approach.
2.2: Restaking
Despite launching only at the beginning of 2024, the Total Value Locked (TVL) in Restaking has reached $15 billion (5% of ETH’s market cap), primarily concentrated in@eigenlayer""> @eigenlayer on Ethereum with about $10 billion. However, the AVS using Restaking as a security economic layer is nearly zero. This poses a long-term challenge as there is no stable yield source for stakers beyond the project tokens, and if this continues, it could lead to a significant decline in TVL.
2.3: BTCFi
BTCFi TVL. Source: Coinmarketcap BTCFi Report
In addition to bringing BTC into the DeFi ecosystem through WBTC or cbBTC, the idea of building a separate ecosystem for Bitcoin has also been formed and developed primarily on sidechains like Stacks, Merlin… Although this concept originated in 2021 (with the launch of the Stacks mainnet), its TVL remains relatively small at around $1 billion. This may be due to the fact that these projects:
DeFi has always been a key growth niche in the crypto market. Over time, the old DeFi model has proven its product-market fit.
In the near future, various cash flows from traditional markets, RWA, CEX, and Bitcoin may flow into DeFi, potentially causing this narrative to explode further.
Currently, the development of new models for DeFi remains unclear and ineffective, largely relying on old models, which reduces the stimulation needed for growth. However, we can also have hopes for solutions like Modular DeFi, cross-chain liquidity, or even fee switch mechanisms from major DeFi protocols in the upcoming phase. Once cash flows are unleashed and new models demonstrate demand, DeFi could experience unprecedented growth.