Author: Flow, SwissBorg researcher; Translation: 0xjs@黄金财经
The summer of 2020, known as the "Summer of DeFi", was an incredible period for the crypto industry. For the first time, DeFi was no longer just a theoretical concept, but a concept that worked in practice. During this period, we witnessed a surge in popularity for several DeFi primitives - DEX (decentralized exchange) Uniswap, lending protocol aave, algorithmic stablecoin Sky (formerly MakerDAO), and many more.
Subsequently, the total locked value (TVL) in DeFi applications grew significantly. From about $600 million at the beginning of 2020, TVL rose to more than $16 billion by the end of the year and reached an all-time high of more than $210 billion in December 2021. This growth was also accompanied by a strong bull market in the DeFi space.
Source: DeFi Llama
We can say that there are two main catalysts behind the “Summer of DeFi”:
1) DeFi protocols achieved breakthroughs that enabled them to scale and provided clear use cases.
2) The Fed began an easing cycle during which it slashed interest rates to stimulate the economy. This makes liquidity abundant within the system and incentivizes people to seek more exotic yield opportunities because traditional risk-free rates are very low. These are perfect conditions for DeFi to thrive.
At a macro level, here’s what happened: At the start of the “Summer of DeFi,” early buyers had a strong belief in the transformative nature of the technology they were investing in. For DeFi, the idea was that it could fundamentally change the current financial system. However, as more people entered the market, enthusiasm peaked, and buying became increasingly driven by speculators who were more interested in making a quick profit than in the underlying technology. After this peak of excitement, prices fall, public interest in DeFi wanes, and we face a bear market followed by a long period of stagnation.
However, there are good reasons to suggest that this boring stagnation phase is not the end of DeFi, but the beginning of the real journey towards mass adoption. During this period, developers continue to develop, and the number of firm believers slowly grows. This lays a solid foundation for the next iteration of the Gartner Hype Cycle, which may bring more adopters and a larger scale.
As of this writing, this situation seems to be promising to drive a DeFi renaissance. Similar to the catalysts behind the last DeFi Summer, we currently have: a new generation of more mature DeFi protocols being built; healthy and growing DeFi metrics; the arrival of institutional players; and a Fed easing cycle underway. Once again, this is the perfect environment for DeFi to thrive.
To get a clearer picture, let’s analyze these components:
Over the years, DeFi protocols and applications have grown from the initial hype wave of 2020. Many of the issues and limitations faced by the first iterations of these protocols have been resolved, resulting in a more mature ecosystem. This is the rise of what we now call the DeFi 2.0 movement.
Some key improvements include:
Better user experience
Cross-chain interoperability
Improved financial architecture
Increased scalability
Enhanced on-chain governance
Increased security
Proper risk management
In addition, we are also seeing the emergence of some new use cases. DeFi is no longer just about trading and lending as it was in the early days. New trends such as re-staking, liquidity staking, native yields, new stablecoin solutions, and tokenization of real-world assets (RWA) make the ecosystem more active. But what's more exciting is that we are also seeing new primitives being built as we speak. The latest that caught my attention is on-chain credit default swaps (CDS) and fixed-rate/term loans built on top of existing lending infrastructure.
Since late 2023, we have witnessed a resurgence in DeFi activity as a new wave of DeFi protocols have emerged.
First, looking at the total value locked (TVL) in the crypto ecosystem, we observe that momentum is starting to resume after a long period of stagnation.From $41 billion in October 2023, TVL has nearly tripled, reaching a local high of $118 billion in June 2024 before stabilizing to around $85 billion today.While this is still below the all-time high (ATH), it is still a significant uptrend. There are good reasons to suggest that this could be the first wave of a long-term uptrend in TVL.
Source: DeFi Llama
Another interesting metric is the DEX to CEX spot volume, which measures the relative trading activity between centralized exchanges (CEX) and decentralized exchanges (DEX). Once again, we notice a positive long-term trend, indicating that more and more trading volume is moving on-chain.
Source: The Block
Last but not least, the market share held by the DeFi sector relative to the broader crypto ecosystem has been rising in recent months. In a market where everyone is vying for attention, DeFi is starting to make a splash again.
KaitoAI: DeFi continues to trend upward in mind share. If Trump wins, it's hard to see which industry would benefit more.
While the first wave of DeFi participants in the “Summer of DeFi” were mostly individuals trying to grasp the power of this new technology, a new wave of DeFi protocols has begun to attract several large traditional financial players to the DeFi space.
In March this year, BlackRock, the world's largest asset management company, launched its first tokenized fund on the Ethereum blockchain, the BlackRock USD Institutional Digital Liquidity Fund (BUIDL Fund), allowing investors to earn U.S. Treasury yields directly on the chain. BlackRock's first DeFi initiative has been a clear success, and the fund has attracted more than $500 million in assets under management.
Another notable example of growing institutional interest is PayPal’s PYUSD stablecoin, which recently reached a major milestone: just one year after its launch, its market cap exceeded $1 billion.
These examples show that the broader financial industry is finally beginning to recognize the value proposition of building financial systems on decentralized blockchain technology. To quote PayPal’s CTO: “If it can reduce my overall costs and bring me benefits at the same time, why not accept it?” As more and more institutional players begin to experiment with this technology, we can say that this should become a powerful catalyst for the DeFi space.
In addition to the above points, the current trend of US monetary policy is another potential catalyst for DeFi. In fact, we have just crossed a major inflection point in the economy. The Fed’s first 50 basis point rate cut at the recent September FOMC meeting since the Fed began fighting inflation after the COVID-19 pandemic is a strong signal that a new round of easing cycle is underway. This is further supported by the expected trend of the federal funds rate.
The start of a new round of monetary easing cycle supports two key arguments for the DeFi bull market:
1) This easing cycle will inevitably increase liquidity in the system. Liquidity is a key element of the financial market, and excess liquidity is beneficial because it means more funds can enter the market. DeFi and the broader crypto market will inevitably benefit from it.
2) The decline in federal interest rates will also mechanically increase the relative attractiveness of DeFi yields. In short, as traditional risk-free interest rates decline, investors will begin to seek other income opportunities. This could lead to a market shift towards DeFi, which offers a wide range of attractive yields on stablecoins and other more exotic strategies — more secure and reliable than they were a few years ago.
All in all, it seems that multiple factors are converging to point to a DeFi resurgence.
On one hand, we are witnessing the emergence of several new DeFi primitives that are more secure, scalable, and mature than they were a few years ago. DeFi has proven its resilience and has become one of the few areas in the crypto space with proven use cases and real adoption.
On the other hand, current monetary conditions also support a DeFi resurgence. Similar to what happened during the last DeFi summer, current DeFi indicators suggest that we may be at the beginning stages of a larger uptrend.
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