Introduction:

This article delves into the development trends of the DeFi ecosystem and discusses the challenges and opportunities that projects face in the constantly evolving market.

Over the past few years, DeFi has undergone rapid development and evolution, transforming from experimental projects into essential cornerstones in the crypto space. Projects like Uniswap, Curve, Aave, Compound, among many others, have emerged as key players in this process. However, the competition in this space is intensifying, with DEXs continuously reducing fees to attract trading volume and lending protocols enhancing loan-to-value ratios to improve capital efficiency. Each project is actively developing new products to capture more market share. What trends might DeFi exhibit in 2024? PANews shares key trends and predictions in the DeFi space.

Protocol Platformization

As the DeFi sector develops and matures, major DeFi protocols are no longer satisfied with their core businesses. They are shifting from single-function projects to platforms that provide comprehensive services.

In the past year, within familiar DeFi protocols, MakerDAO’s SubDAO Spark was launched, reaching a TVL (Total Value Locked) of $1.65 billion on Ethereum as of December 29, becoming a major lending protocol.

Curve and Aave have independently developed their stablecoins, crvUSD and GHO, respectively. Uniswap has launched its wallet application and, prior to that, acquired the NFT platform Genie. Thala on the new blockchain Aptos has single-handedly developed stablecoins, a DEX, Launchpad, and liquidity staking functionality, encompassing nearly all commonly used DeFi services except for lending.

The platformization of DeFi protocols has become a trend, symbolizing the maturity and continuous evolution of DeFi. This trend is likely to continue and intensify in the future.

Leading DEX and lending protocols will continue to maintain dominance

Uniswap, Aave, MakerDAO, and other leading DeFi protocols originated before the last bull market. They have strengthened their positions in the market’s continuous evolution, demonstrating strong network effects and brand influence, and they are constantly updating. For a period, they will still dominate a significant market share and are challenging to replace.

Uniswap announced the v4 version, allowing the addition of various custom features through “hooks.” Uniswap X proposed a solution similar to Cowswap, where orders are signed off-chain and settled on-chain through a Dutch auction. Aave v3 has improved capital efficiency, expanded across multiple chains, further solidifying its position as a major lending platform in the DeFi ecosystem.

The dashboard of Dune co-founder hagaetc indicates that Uniswap still holds approximately 55% market share among DEXs on major EVM chains.

Liquidity mining is gradually becoming the past, and funds will flow to more efficient places

In public chains with mature ecosystems such as Ethereum, Solana, and BNB chains, liquidity mining has gradually become the past. Projects rely on “real benefits’’ to attract funding, and the money is more likely to go to more efficient places.

Recently, the price increase and ecological development of SOL in Solana have triggered FUD on Ethereum and its ecosystem. Against the backdrop of frequent MEME currency transactions, DEX on Solana has demonstrated strong capital efficiency. With current liquidity providers relying primarily on real revenue generated from transaction fees, these projects are likely to attract more funds in the short term.

Taking the data on December 30 as an example, in the past 24 hours, the SOL/USDC and SOL/USDT pools with the most liquidity in Orca, the daily average income of providing liquidity based solely on transaction fees was close to or exceeding 0.5%, and the handling fee charged by the SOL/USDC pool with a fee ratio of 0.04% reached 2.396% of liquidity in a single day.

This is unimaginable on other chains. For example, on Ethereum, the top three trading pairs of ETH/stablecoin liquidity provide daily income of 0.068%, 0.077%, and 0.127% respectively.

In situations where profitability is significantly unequal, professional liquidity providers are more likely to shift towards areas with stronger profitability and higher capital efficiency. This is not contradictory to the previous point—top-tier DeFi projects generally have better fundamentals, are more secure and stable, but they also exhibit a relatively slower growth rate. Emerging projects tend to experience faster growth when riding on favorable trends, and expectations for future growth are reflected in token prices. However, the sustainability of such growth remains a question.

LST to Lead the TVL growth of New Public Chains

While there have been liquidity staking projects on numerous proof-of-stake blockchains, the discussion around Liquidity Staking Tokens (LST) gained centralized attention on Ethereum after the Shanghai upgrade. Today, the leading liquidity staking project, Lido, has become the project with the highest Total Value Locked (TVL), leaving no rivals behind.

A similar trend has emerged on Solana, where two liquidity staking projects, Marinade and Jito, respectively occupy the top two positions in the TVL of the Solana ecosystem. Liquidity staking projects have also led the recent growth in Solana’s TVL. On one hand, the anticipated airdrop before Jito’s token launch attracted staking volume. On the other hand, projects like Marinade and Jito, among others, continue to incentivize the use of LST in Solana DeFi protocols, promoting an overall increase in Solana’s TVL.

Other public chains looking to boost their TVL seem to have also discovered the key to ecosystem promotion through LST. In the Sui ecosystem, for instance, the APR for the haSUI-SUI trading pair on Cetus is 49.04%, with 48.09% of it coming from official rewards in SUI tokens. In the Avalanche ecosystem, the leading lending platform Benqi has also ventured into LST business, and the TVL brought in by LST has already surpassed that of lending.

Competitive projects may emerge in Perp DEX

The decentralized perpetual contract exchange, namely Perp DEX, was once favored by many people and has also launched projects such as dYdX, Synthetix, and GMX. dYdX is an order book type. As for the liquidity pool types Synthetix and GMX, although they are already the main Perp DEX, they still have their own advantages and disadvantages in using them.

GMX v1 has been criticized for being unbalanced in the long-short ratio during unilateral market conditions, which is unfriendly to liquidity providers; both long and short positions at the same time require currency borrowing fees and a high transaction fee ratio, and are not friendly enough to traders. But its slippage-free liquidity feature is something other projects don’t have.

GMX v2 introduces transaction slippage for long-short balance. Transactions that balance long-short will be compensated, and transactions that unbalance long-short will be punished. However, when opening a position, users cannot predict whether the long and short positions will be balanced when closing the position, which brings uncertainty. Punitive transaction slippage may reach 0.8% of the position or even higher. Taking into account the leverage ratio, such as 10 times leverage and a slippage of 0.8%, a single transaction will result in a loss of 8% of the principal.

Compared with GMX v2, the funding rate in Synthetix fluctuates more. Similarly, users may suffer losses due to the increase in funding rates after opening a position. In addition, Synthetix uses Pyth’s off-chain oracle, and there is an 8-second delay between order placement and execution, so what you see is what you get.

Some recent Perp DEXs have shown attractive features, such as Drift’s DLP pool, where BONK-PERP has shown a 30-day return on providing liquidity of 2000%, and HNT-PERP has a return of 439%. Although using leverage to provide liquidity in Drift’s DLP pool is very risky and you may lose all your principal, you may also get higher returns. In addition, projects such as Aark Digital and MXY Finance provide Perp DEX solutions with higher capital efficiency.

Real world assets

Real World Assets (RWA) are actually a controversial category of projects. First of all, it has off-chain assets, which may need to rely on a single entity and may also face supervision, which is not completely consistent with the decentralized characteristics of DeFi.

Although we believe there are better opportunities in the real world and everything can be tokenized, at this stage, U.S. debt seems to be the only direction that can be applied on a large scale. Although other real estate, artworks, etc. can also be tokenized and put on the chain, because they are non-standardized products, they are not originally liquid and still have no liquidity on the chain.

With expectations of interest rate hikes in the United States, short-term U.S. bond yields are expected to drop significantly in 2024, which will directly affect the yields of RWA products such as MakerDAO. The crypto market may enter a bull market during this period, demand for stablecoins will increase, and the appeal of such products may decrease. Judging from recent data from MakerDAO, the issuance of DAI has begun to decline since late October.

But this does not prevent Crypto entrepreneurs from exploring and being interested in this track. In this process, powerful traditional financial institutions may be introduced to RWA as partners, which will at least be a great narrative.

Disclaimer：

1. This article is reprinted from [panews]. All copyrights belong to the original author [Jiang Haibo]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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