Will the revival of DeFi, the entry of institutions, and new gameplay recreate its glorious history?
Overall, it seems that multiple factors are converging, signaling a revival of DeFi.Original Title: “The great return of DeFi”
Author: flow
Compiled by: Shenchao TechFlow
The summer of 2020, known as the "Summer of DeFi," was an incredible period for the cryptocurrency industry. DeFi was for the first time not just a theoretical concept but a concept that proved effective in practice. During this time, we witnessed a surge of multiple DeFi native protocols—including the decentralized exchange (DEX) of Uniswap, the lending protocol of Aave, the algorithmic stablecoin of SkyEcosystem, and many more projects.
Subsequently, the total locked value (TVL) in decentralized finance (DeFi) applications saw significant growth. From about $600 million at the beginning of 2020, the TVL rose to over $16 billion by the end of the year, reaching an all-time high of over $210 billion in December 2021. This growth was accompanied by a strong bull market in the DeFi space.
TVL chart of cryptocurrencies from 2020 to the end of 2021
Source: DeFi Llama
We can consider that there were two main catalysts for the "Summer of DeFi":
Breakthrough advancements in DeFi protocols that enabled scalability and provided clear use cases.
The beginning of the Federal Reserve's monetary policy easing cycle, during which interest rates were significantly lowered to stimulate the economy. This created ample liquidity in the system and incentivized people to seek more exotic yield opportunities, as traditional risk-free rates were very low. This created perfect conditions for the flourishing of DeFi.
Federal funds rate chart from May 2018 to January 2022
Source: Fred St Louis
However, like many emerging disruptive technologies, the adoption of DeFi exhibited a common S-curve trend, often referred to as the Gartner hype cycle.
The chart shows the adoption of various consumer products over time, reflecting this trend
Source: The Bullish Case for Bitcoin
Overall, it works as follows: in the early stages of the "Summer of DeFi," early investors had strong confidence in the transformative nature of the technology they were investing in. For DeFi, this confidence stemmed from the idea that it could fundamentally change the current financial system. However, as more people entered the market, enthusiasm peaked, and buying behavior became increasingly driven by speculators, whose interest in quick profits overshadowed their focus on the underlying technology. After this euphoric peak, prices fell, public interest in DeFi waned, and we faced a bear market, followed by a prolonged period of stagnation.
Gartner hype cycle chart
Source: Speculative Adoption Theory
It can be clearly stated that this dull period of stagnation was not the end of DeFi but the beginning of a true journey toward mass adoption. During this time, developers continued to build, and the number of steadfast believers in DeFi gradually increased. This laid a solid foundation for the next iteration of the Gartner hype cycle, which could bring a larger scale of users and potentially be even more substantial.
DeFi Renaissance
Currently, the outlook for a DeFi renaissance seems very optimistic. Similar to the catalysts of the last Summer of DeFi, we now have: a new generation of more mature DeFi protocols being developed; healthy and continuously growing DeFi metrics; the arrival of institutional participants; and the ongoing easing cycle of the Federal Reserve. This provides a perfect environment for the flourishing of DeFi.
To better understand this situation, let’s analyze these components:
Moving Towards DeFi 2.0
Over the years, DeFi protocols and applications have undergone significant evolution from the initial hype wave of 2020. Many of the issues and limitations faced by first-generation protocols have been addressed, resulting in a more mature ecosystem. This is the emergence of what we now refer to as the DeFi 2.0 movement.
Some key improvements include:
Better user experience
Cross-chain interoperability
Improved financial architecture
Enhanced scalability
Strengthened on-chain governance
Improved security
Appropriate risk management
Additionally, we have seen the emergence of multiple new use cases. DeFi is no longer limited to trading and lending in its early stages. New trends such as restaking, liquid staking, native yield, new stablecoin solutions, and tokenization of real-world assets (RWA) have made the ecosystem more vibrant. More excitingly, we see new infrastructure continuously being developed. Recently, I noticed on-chain credit default swaps (CDS) and fixed-rate/term loans built on existing lending infrastructure.
Healthy and Growing DeFi Metrics
Since the end of 2023, DeFi activity has revived, and we have witnessed a wave of new DeFi protocols emerging.
First, observing the total locked value (TVL) in the crypto ecosystem, we find that after a prolonged period of stagnation, momentum has begun to pick up. From $41 billion in October 2023, the TVL nearly tripled, reaching a local peak of $118 billion in June 2024, before falling back to the current level of about $85 billion. While this is still below the all-time high (ATH), it represents a significant upward trend. There are strong reasons to believe that this may be the first wave of a long-term upward trend in TVL.
The chart shows the evolution of TVL in the crypto space
Source: DeFi Llama
Another interesting metric is the spot trading volume between decentralized exchanges (DEX) and centralized exchanges (CEX), which measures the relative trading activity between the two. Similarly, we notice a positive long-term trend indicating that an increasing amount of trading volume is shifting on-chain.
The chart shows the spot trading volume between DEX and CEX
Source: The Block
Last but not least, the attention that the DeFi sector occupies within the broader crypto ecosystem has increased in recent months. In a competitive market where everyone is vying for attention, DeFi is starting to regain focus.
The attention on DeFi continues to rise.
If Trump wins, it’s hard to imagine which industry would benefit more.
The Arrival of Institutional Participants
During the "Summer of DeFi," the first wave of DeFi participants were primarily individuals trying to grasp this new technology, while a new wave of DeFi protocols is beginning to attract some large traditional financial institutions into the DeFi space.
In March of this year, the world's largest asset management company, BlackRock, 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-chain. This is BlackRock's first DeFi initiative, which has achieved significant success, with assets under management exceeding $500 million.
The BlackRock tokenized physical asset fund $BUIDL surpassed the $500 million milestone within four months of its launch, as the tokenized treasury market continues to expand.
Another notable example of growing institutional interest is PayPal's PYUSD stablecoin, which recently reached an important milestone: its market capitalization exceeded $1 billion just one year after its launch.
PayPal USD stablecoin is part of PayPal's global mission to innovate commerce. This weekend, we reached an important milestone: a market cap exceeding $1 billion! This is just the beginning, and we are excited about continued growth in the future.
These examples indicate that the broader financial industry is finally beginning to recognize the value proposition of building financial systems based on decentralized blockchain technology. As PayPal's CTO stated, "If it can lower my overall costs while providing benefits, then why not embrace it?" As more institutional participants begin to experiment with this technology, we can consider this a powerful catalyst for the development of the DeFi space.
The Federal Reserve is in an Easing Cycle
In addition to the previously mentioned points, the current direction of U.S. monetary policy is another potential catalyst for DeFi. In fact, we have just crossed an important turning point in the economy. This is the first time since the Federal Reserve began combating inflation in the post-pandemic period that a 50 basis point rate cut was made at the recent September FOMC meeting, strongly indicating that a new easing cycle is underway. This is further evidenced by the expected trajectory of the Federal funds rate.
Frederik Ducrozet: Federal Reserve pricing compared to previous easing cycles.
The beginning of this new monetary easing cycle provides two key supports for the DeFi bull market argument:
This easing cycle will undoubtedly increase liquidity within the system. Liquidity is a key element of financial markets, and excess liquidity is beneficial because it means more funds can enter the market. Therefore, DeFi and the broader crypto market should benefit from this.
The decline in the Federal funds rate will relatively enhance the attractiveness of DeFi yields. Simply put, as traditional risk-free rates decrease, investors will begin to seek other yield opportunities. This could lead to a rotation into DeFi, as DeFi offers a range of attractive yields in stablecoins and other more exotic strategies—these yields are safer and more reliable compared to a few years ago.
Will History Repeat Itself?
Overall, it seems that multiple factors are converging, signaling a revival of DeFi.
On one hand, we are witnessing the emergence of several new DeFi infrastructures that are safer, more scalable, and more mature than a few years ago. DeFi has proven its resilience and established itself as one of the few areas in cryptocurrency with mature use cases and real applications.
On the other hand, the current monetary environment is also driving the revival of DeFi. This is similar to the situation during the last Summer of DeFi, and the current DeFi metrics suggest that we may be at the beginning of a larger upward trend.
While history may not repeat itself exactly, similar scenarios often arise.
