Re-examination | The Next Steps of DeFi in the Eyes of OKX Web3 Product Manager

As an important growth engine in the crypto market, DeFi seems to have been in a lull over the past two years.

Despite the emergence of new exchanges on Ethereum Layer 2 that are actively attracting liquidity, established DeFi protocols like MakerDAO and Unichain are also making some adjustments. However, these "innovations" tend to focus more on business transformation/adjustment rather than technical and model innovation.

As a Web3 super gateway that channels traffic, the OKX Web3 wallet places greater emphasis on enhancing user experience and helping users easily navigate the on-chain world. Therefore, this article aims to explore the DeFi landscape and its next steps from the perspective of OKX's Web3 product manager.

Overall Situation of the DeFi Market and User Profile

The heat of the DeFi track has decreased in 2024, especially after the LSD and Pendle craze in the first half of the year, the market has gradually calmed down, lacking new narrative drives. However, from the beginning of the year to now, the LSD and LRT tracks have still maintained strong growth, particularly with EigenLayer as a representative of re-staking projects, which has brought nearly $20 billion in incremental value to DeFi. Meanwhile, the yield market led by Pendle has also performed well, with its market capitalization growing nearly fourfold since the beginning of the year, with Pendle contributing most of the increase.

Additionally, the total locked value (TVL) in the RWA track has doubled since the beginning of the year, with private lending, tokenization of government bonds, and the entry of traditional financial institutions being the main driving forces. BTCFi has been driven by the narrative of inscriptions, with developers working to activate BTC's funds and users by implementing smart contract-like functions on the BTC mainnet, further building the DeFi ecosystem and bringing a wave of new growth.

Currently, the total locked value in the DeFi market has risen from $50 billion at the beginning of the year to a peak of $120 billion, and has now fallen back to about $80 billion. The LSD track still occupies the largest market share, followed by lending and DEX fields.

At the beginning of this year, the total locked value (TVL) of the DeFi market was $50 billion, which then peaked at $120 billion and has now fallen back to about $80 billion. The LSD track occupies the largest market share, followed by lending and DEX fields.

In terms of users, current DeFi users can be mainly categorized into the following types:

1. Crypto native ordinary users: Their primary need is for more on-chain yield channels, such as earning returns through stablecoins; while advanced users pursue more complex DeFi strategies, constructing nested strategies for higher returns.
2. On-chain DAOs and other institutions: These users focus on treasury management and stable returns, preferring low-risk foundational DeFi protocols, especially RWA that bring off-chain assets (like U.S. Treasury bonds) into on-chain yield channels.
3. Traditional financial institutions: They are gradually recognizing the efficiency and composability advantages of DeFi, starting to tokenize traditional assets on-chain and seeking more distribution channels.
4. Users unfamiliar with DeFi: Although these users are interested in higher on-chain yield opportunities, the entry barrier to DeFi is high and requires guidance from mentors.

Users suitable for participating in DeFi typically possess a certain level of risk tolerance and strong learning ability, especially those who have some understanding of the on-chain ecosystem and crypto assets and are eager to explore further tend to be active in DeFi.

Risks and Common Sources of Yield in DeFi

The main risks currently facing the DeFi field include the following:

1. Security of underlying smart contracts: This is the biggest risk in DeFi, as vulnerabilities in smart contracts can lead to protocol attacks and subsequent theft of funds.
2. Reputation risk of project parties: Project parties may engage in rug pulls or similar situations, affecting the safety of user funds.
3. Regulatory risk: As the scale of DeFi expands, the attention from governments and regulatory bodies increases, and stricter regulatory requirements may be faced in the future, involving compliance issues such as KYC and AML.
4. Liquidity risk: DeFi protocols rely on liquidity providers, and any sudden withdrawal of liquidity (such as whale behavior) can lead to market imbalance, increasing trading costs or triggering liquidations.
5. Market risk: Many DeFi platforms' functionalities depend on other mainstream cryptocurrencies, such as Ethereum. The prices of these assets can be highly volatile, leading to potential losses for users, and in severe cases, significantly impacting the DeFi ecosystem. Additionally, the popularity of DeFi often changes rapidly, requiring users to keep up with trends and adjust positions in real-time, or they may miss high-yield opportunities.

Regarding common sources of yield and associated risks, DeFi has various underlying sources of yield, such as providing liquidity as an LP in DEXs to earn trading fees; lending out assets in lending protocols to earn interest; staking, LSD, and LRT yields come from staking rewards, such as Ethereum PoS rewards, as well as project tokens and points; for perpetual contract LPs (like GLP, JLP), yields come from counterparty trading fees or funding rates; finally, RWA (real-world assets) yields come from off-chain traditional assets, such as returns from U.S. Treasury bonds or real estate. Additionally, many DeFi projects also offer extra project token rewards and partner token rewards to liquidity providers.

Overall, the higher the risk, the higher the potential yield. More basic lending protocols and staking are relatively safe but offer lower yields; while more complex operations like providing liquidity in DEX V3 require real-time dynamic adjustments to the market-making range, although they offer higher yields, the risks also increase accordingly. Therefore, when trading, one should pay attention to selecting targets that match their risk tolerance.

Currently, OKX Web3 has taken certain measures in terms of security, as we believe that the security of DeFi projects is key to their widespread adoption. OKX DeFi conducts thorough research before integrating new protocols, with the BD team responsible for assessing the background of project parties and the technical team conducting in-depth reviews of smart contracts to ensure the presence of audit reports and other guarantees. As a DeFi aggregator, the OKX DeFi platform only integrates protocols that have been security-verified, and the platform does not hold user funds, serving merely as a bridge for users to participate in DeFi with one click. Additionally, OKX DeFi provides users with an extra layer of yield that comes from project subsidies, which are distributed directly to users rather than through the OKX platform, further reducing capital risk.

Current Status and Development Direction of OKX DeFi Products

Currently, RWA (real-world assets) may become a potential growth point for DeFi. As traditional assets such as real estate, bonds, and stocks are gradually introduced on-chain, higher liquidity and yields can be achieved through DeFi protocols. In 2024, more institutions will focus on the combination of RWA and DeFi, bringing more funds and opportunities to the DeFi ecosystem. At the same time, institutional investors' interest in DeFi continues to grow, especially in areas like stablecoin lending and yield products, prompting more traditional financial institutions to explore ways to participate in the DeFi market. The involvement of institutions will drive the DeFi market to become more mature and standardized, bringing in more capital inflow and more stable yield products.

Additionally, CeDeFi brings innovative products by combining CeFi and DeFi, such as Ethena, which integrates yield-bearing stablecoin solutions; while the BTCFi field has seen the emergence of innovative staking protocols based on BTC and their derived upstream LSD ecosystem, such as Babylon.

OKX's DeFi products mainly focus on creating a one-stop DeFi aggregator, allowing users to participate in various DeFi protocols across the network through the OKX platform, making position management more convenient. OKX not only helps users filter out most of the risks of protocols but also does not hold user funds, while providing an additional layer of yield outside the official DeFi protocol websites to enhance trading returns. Furthermore, OKX is designing exclusive DeFi strategy products aimed at helping users achieve higher yields through the team's professional capabilities.

Future development plans for OKX's DeFi include: creating the best one-stop DeFi yield aggregator across the network, aggregating all mainstream public chain DeFi protocols, and supporting emerging hot projects to provide more early yield opportunities; launching a powerful DeFi dashboard to display overall positions and PnL across the network; and simplifying the trading process by productizing complex DeFi strategies through a professional team, making it easier for more users to participate in the world of DeFi.

Disclaimer

This article is for reference only. It represents the author's views and does not reflect the position of OKX. This article does not intend to provide (i) investment advice or recommendations; (ii) offers or solicitations to buy, sell, or hold digital assets; (iii) financial, accounting, legal, or tax advice. We do not guarantee the accuracy, completeness, or usefulness of such information. Holding digital assets (including stablecoins and NFTs) involves high risks and may fluctuate significantly. You should carefully consider whether trading or holding digital assets is suitable for you based on your financial situation. Please consult your legal/tax/investment professionals regarding your specific circumstances. You are responsible for understanding and complying with applicable local laws and regulations.