Revival of decentralized finance: make DEFI great again

Article Author: Arthur Cheong, Eugene YAP; Article Compilation: BLOCK Unicorn

The European Renaissance, which began in the 14th century, ignited the fire of the revival of art, culture and thoughts, and completely changed modern civilization.

Today, we have witnessed similar awakening in the encryption field -the revival of decentralized finance (DEFI).Just like the Renaissance in history, this movement is breaking the barriers and reshaping our awareness of currency and finance.Driven by blockchain and smart contracts, DEFI makes financial services democratize, so that people around the world can enter a economic system without traditional financial agencies.It may completely reshape finance.

As the European Renaissance relies on technological progress and social change, the development of Defi Revival is also from some key factors. These factors are helping it to get rid of early challenges and enter a new stage of growth and innovation.

1. DEFI is getting out of the dungeon

In 2020 and 2021, DEFI experienced a surge, when people had high hopes for it, thinking that it would completely subvert traditional finance (Tradfi).However, like most emerging technologies, early speculation has caused disappointment, because the infrastructure is not complete, which has led to a period of downturn in 2022.

However, just like any revolutionary movement, DEFI has become more tough, and it successfully crosses the “disillusionment low valley” and began to climb the “Enlightenment”.The Gartner hype cycle is an effective framework that can explain this process well. At present, DEFI is showing signs of recovery.

After two years of adjustment, key indicators such as the total locking value (TVL) are rebounding, as shown in the figure below.Although the improvement of some indicators is due to the rise in crypto asset prices, the transaction volume on the Defi platform has also increased significantly, and it is almost restored to the level of 2022, proving that this recovery is real.

In fact, some basic DEFI projects, such as AAVE, even exceeded the peak of 2022 on multiple indicators.For example, the quarterly revenue of AAVE has exceeded the level of the fourth quarter of 2021 -that period is considered to be the pinnacle of the last bull market.

This shows that DEFI is mature, entering a new stage of productivity, and preparing for long -term scalability.

2. The new interest rate cycle will make the DEFI return more attractive

Defi’s recovery is not only driven by internal factors, but the external economic changes have also played a key role.With the changes in global interest rates, high -risk assets such as encrypted assets, including DEFI, have become more attractive for investors seeking higher returns.

With the Fed’s implementation of 50 basis points in September, the market is preparing for a period that may be low interest rates, similar to the environment that promotes the cryptocyst bull market in 2017 and 2020, as shown in the figure below.Bitcoin (and cryptocurrency) bull markets show in green areas that they usually appear in low interest rate environments, while bear markets are displayed in the red area, which usually occurs during a period of soaring interest rates.

DEFI benefits from two key aspects in low interest rate environments:

1. Capital opportunity costs are reduced -due to lower returns due to the decline in interest rates of government bonds and traditional savings accounts, investors may turn to DEFI agreements and obtain higher returns through revenue agriculture, pledge and liquidity provision.

2. Decreased loan cost -the financing cost becomes lower, encourages DEFI users to borrow and use funds for productive use, thereby promoting the activity of the entire ecosystem.

Although interest rates may not fall to the level of nearly zero in the past cycle, the chance of participating in DEFI will be significantly reduced.Even if a moderate interest rate decreases, the differences between interest rates and income can be amplified through leverage, which is still enough to have a significant impact.

In addition, we expect that the new interest rate cycle will become an important factor in promoting the growth of stable currency, because it greatly reduces the capital cost of traditional finance funds to enter DEFI to seek income.In the previous cycle, Federal Fund interest rate (FFR) and stable currency supply growth was reverse, as shown in the figure below.As interest rates decrease again, it is expected that the supply of stable currency will increase, providing more funds for the accelerated development of DEFI.

3. Financial: The largest product market coincidence point of cryptocurrencies

A variety of application scenarios have been tried in the encrypted field, such as NFT, Yuan Universe, games and social networking.However, from most objective indicators, they have not really found the product market fit (PMF).

For example, despite a short -term recovery of Bitcoin Ordinals in 2024, the daily transaction volume of NFT continues to decline.

As for the Yuan universe and games, there is no breakthrough web3 game that global fans are widely accepted.Two OG -level web3 yuan universe project Decentraland and Sandbox, daily active users are even difficult to exceed thousands, while Roblow’s daily active users are as high as 80 million.Although the daily living users of TON games are impressive, once there is no economic incentive, it is not sure how many people will stay on Ton game.

In contrast, DEFI has proven its product market fit.Core DEFI categories such as mobile pledge and borrowing increase, which has expanded more than 100%year -on -year, which is a proof of its strong attractiveness.At the same time, new, valuable categories such as Eigenlayer and Ethena (Ethena) are emerging, and their total locking volume (TVL) a year ago was almost zero.This explosive growth shows the combined and non -licensed characteristics of Defi. In DEFI, the new financial “Lego” can be superimposed to each other to unlock the new application scenarios.

Regulatory obstacles have long limited the potential of Defi to subvert traditional finance (Tradfi), but its inherent advantages are obvious.For example:

• Cross -border transactions and remittance costs are 6%on average, and the transfer takes 3 to 5 working days.

• The background system of the stock exchange is bloated and business hours are limited, and the efficiency is low.

• Assets (RWA), such as real estate, can release liquidity if they pass to the tokenization, and achieve combinedability in DEFI, such as mortgage.

DEFI can operate 24/7 around the weather, with low cost, high liquidity, and no intermediary, making it a more efficient alternative.Technology has existed. The challenge is whether regulators will allow DEFI to subvert this $ 10 trillion global financial industry that rely on inefficient operations.

In order to show how DEFI is better than TRADFI in terms of efficiency, we will compare the costs of the two when running services.According to a study by the International Monetary Fund (IMF), the following is the cost segment:

• Labor cost: The labor cost of Defi is almost 0%, while the Tradfi is 2%-3%.For example, Defi loans are automatically processed without manual intervention, and Tradfi requires manual review and document work.

• Operating costs: The operating cost of DEFI is only 0.1%, while the range of Tradfi is 2%-4%.DEFI does not need a huge office or intermediary, smart contract processing transactions, and verification of blockchain.

Generally speaking, the marginal cost of traditional finance reaches 6%-8%in developed economies and 10%-14%in emerging markets, and these costs are finally passed on to end users.Defi eliminates these inefficient costs, which is so simple.

In addition, the Fintech field has almost no innovation in the past 15 years, echoing the results of Blockchain Capital.Although we have made great progress in the fields of artificial intelligence and global Internet access, Fintech still stays on outdated systems. For example, all banks use SWIFT systems with a history of 50 years, usually 1 to 4 working days to work to be able to makeComplete the transfer.

Most FINTECH progress, such as digital payment, fragmented stocks, and APIs, are mainly concentrated on improving user experiences, rather than solving the core inefficient problems of traditional finance (TRADFI).For example, Robinhood and Plaid provides convenient solutions for people to buy stocks, but they still rely on old financial infrastructure.The real problem is that Fintech is only connected to the outdated system in order to better use them instead of creating new things.Although these changes are helpful, they did not solve the deep problems that troubled Tradfi.

DEFI is different, and it has been designed to be completely digital from the beginning.DEFI is not working around the old financial system, but to embed financial services directly into the Internet.In DEFI, fragmented stocks, excess mortgage loans, and global payment are not innovation, but basic functions.This marks a fundamental change from small improvement to thoroughly innovating financial operations.

By adopting DEFI, we can surpass small adjustments, start to release huge new economic opportunities, improve financial acquisition, and create wealth in places where traditional finance often ignores.This is about re -inventing the financial system to make it better in the digital world.

Looking forward to the future, the US election in 2024 may bring a clear direction to regulatory supervision.The Trump government may introduce regulatory policies that are conducive to cryptocurrency, and the Harris government, which has recently become warm in the industry, may also maintain a positive position.Regardless of political results, the motivation behind Defi is undeniable.

DEFI has just started, the future of finance is decentralized, and it will be launched on the chain.

4. Improved user interface/user experience, infrastructure and security

The early interface of DEFI is complex and technical, which makes many users feel confused and alienated.However, in the past few years, user experience, infrastructure and security have been significantly improved, making DEFI more friendly to mainstream users.

One of the most important improvements is wallet infrastructure. In the past, managing seed phrases and private keys were a major obstacle, but the new smart wallet and embedded wallet greatly simplified this process to make it more secure.Such as social recovery, biometric certification, and password -free login, now that users do not need to face the complex operation of traditional web3 wallets, they can easily manage funds.

It has also been improved in terms of security, and a more thorough audit before the deployment of smart contracts has become a standard.Platforms like IMMUNEFI inspire moral hackers to discover vulnerabilities and security problems through vulnerabilities to ensure that before the vulnerability is used, it is resolved.These progress in wallet infrastructure and security make DEFI more secure and more efficient for all users, which is also reflected in the great reduction of the Defi hacker incident in the past year.

With these improvements, DEFI has become more friendly to mainstream users, including the adoption of institutions, thereby promoting its sustainable growth.

Make DEFI great again

Just as the European Renaissance reshapes society, DEFI is ready to completely change the financial field.DEFI’s innovation potential is huge, and we have just begun to see its influence.As more and more users and investors accept DEFI, the future of global finance will gradually turn to the chain, making the financial system more efficient and open, and easier to get everyone.

DEFI has the power to eliminate inefficient, break the barriers, and create new financial inclusive opportunities.It is not just a momentary trend, but the fundamental change of the world and money interaction.From global payment to the acquisition of democratic financial services, DEFI provides a future for everyone to participate in the financial system.

At present, the total market value of all Defi protocols is about $ 33 billion, accounting for only about 1.4%of the total market value of cryptocurrencies ($ 2.3 trillion).

Data as of October 13, 2024

Defi’s growth and success have been ignored by most people due to the recent challenges of market environment and industry conditions. However, as the DEFI protocol continues to grow at an alarming rate, and give back to the token holders of these growth to the tokens (eg, it is, AAVE’s recently proposed token economics changes), this situation will change.

Market participants will further recognize the fundamentals and potential of Defi and redefine their capital accordingly.

We predict that in the next two years, the share of Defi assets in the market value of the total encryption market will increase from 1.4%to 10%, because DEFI will continue to grow, and the market will realize its latest attractiveness and rejuvenating potential.

Make DEFI great again.