Yet here we are in 2023, and it seems like things may finally begin to improve.
The statistics of the bear market.
The indicators of a bear market.
Themes that can influence the upcoming DeFi summer are discussed in the future of DeFi.
Numbers for Defi Winter
The fact, as unpleasant as it may be, is that DeFi is now in a horrible place.
TVL, or total value locked, in DeFi. Many measures suggest that the industry's worth has dropped by 75% since the beginning of 2022.
A teeny-tiny increase in TVL occurred in the beginning of 2023. However, another indicator is worth considering: DEX volume. The most promising vertical in DeFi is decentralized exchanges.
That's all there was to the unpleasant news. It's not all bad news, either.
As a result of layer-two chains siphoning off transactions from the mainnet, optimism has plummeted. First:.
Following the merger and increasing capital flows to L2s, Ethereum's scaling will continue in 2023.
volume of spot trades on Some people think DeFi has hit bottom, though it's impossible to say for sure until after the fact.
Spot volume on decentralized exchanges remained steady even throughout the chilly DeFi winter of 2022.
In other words, at first glance, the stats don't appear good, yet there is cause for hope.
DeFi in the Present: A State of Affairs
Just kidding, it's not that terrible.
The largest DEX is still Uniswap.
The largest DEX is still it. The curve is following its course, exchanging steady currency.
executing its intended function of stable-coin trading. Aave: working on a number of exciting new projects.
Creating a number of exciting new endeavors Synthetix is still creating artificial assets.
Those artificial assets are continually being constructed. Decentralized derivatives exchanges dYdX and GMX are vying for supremacy.
There are plenty more protocols being developed behind the scenes, but these are the ones that matter the most right now. Liquid staking derivatives for ETH will be discussed separately.
Because no one else can compete, market leader DEX continues to rule. Due to its capacity to deliver focused liquidity and its emphasis on working capital needs, only the billion dollar DeFi protocol has competitors. Uniswap benefits from the fact that bots account for 70% of all network volume, notwithstanding this. UNI's treasury value can rise since the network can support a lower take rate for LPs. Since no one else can match Thestill, they are unchallenged and hence dominant. Competitors like Sushiswap, which are preoccupied with their own internal problems, are unable to match their value offers. Due to its capacity to offer focused liquidity and its emphasis on working capital needs, Uniswap continues to be the. This is a benefit for Uniswap even though Messari expects it to be so. UNI's treasury value can rise since the network can support a lower take rate for LPs.
Whether the DEX is bullish or bearish, Curve still accounts for 10-15% of the total volume. Despite this, whether you're a bull or bear. The exchange offers a distinctive value offering and hasn't lost any market share to rivals, despite the fact that the Curve Wars story has subsided somewhat.
GHO and Lens Protocol are its decentralized stablecoin.
Due to its debt holdings in other protocols, GHO will be a crypto-backed asset. To illustrate, suppose you have some will be a stablecoin collateralized with debt holdings in other protocols and you wish to cash them in. For instance, you could wish to cash in on an arbitrage opportunity but not lock up your capital. You may immediately free up capital by selling your debt position to Aave thanks to GHO.
Users can own their data through NFTs thanks to the decentralized social graph Lens Protocol.
Since then, interest in synthetic assets has waned, but momentum for the protocol remains strong. Another "DeFi bluechip" that received significant attention during DeFi summer was A Synthetix. The initial excitement has subsided, but momentum for the protocol itself remains strong.
competition for the crown of decentralized derivative exchange. Although dYdX has a commanding lead and currently owns almost 80% of the derivative DEX market, GMX was one of the best-performing tokens of 2022 and is making steady progress. dYdX has a significant lead and owns around 80% of the derivative DEX market, although GMX was one of the best-performing tokens of 2022 and is making progress.
There is still life in these protocols.
DeFi Issues
It's difficult to know where to begin fixing DeFi because there is so much wrong.
there are four primary issues with their I would suggest starting with the issues identified by the experts.
Speculative foundations underpin all successful DeFi offerings. New user onboarding is a time-consuming procedure that necessitates extensive training. Keeping people around over the long haul is a difficult task. The space's overall user experience is subpar.
Let's address each of them individually.
The simple appeal of dopamine spikes is a blessing. However, it is also a disadvantage because most DeFi is useless in the real world. Some people are fortunate enough to "make it," but most fail because they risked more than they could afford to when trying to get ahead.
Because legal (=regulation, regulations) and social (=credit checks) security cannot yet be applied to DeFi, economic security (=collateral) is the sole option for protecting it. Overcollateralization enables individuals with money to speculate, and automating collateralization is the simplest method.
It's simple to get new people started with crypto. That's why companies like FTX (cough) spend so much money on flashy ads and sponsorships. However, getting new customers set up with DeFi is a pain.
It's a huge accomplishment just to get your money to a DEX and accept the fact that you'll be on your own if SHTF. It has to be a lot simpler to onboard new employees.
cling on to them as customers. Due to the fact that once those users have mastered DeFi, they may be rather picky about what they expect from it. Let's pretend that a made-up Moonlambo Protocol has users who are actively engaged in speculation and staking. Once consumers understand how to utilize DeFi, they may be extremely picky, therefore the protocol must include some solid ponzi tokenomics.
There is no such thing as brand loyalty outside of all the irrational FDV prices and token unlocks. They're just a gimmick to keep customers around in exchange for a small cost. Customers have a hard time deciding between competing items since they are so similar.
The user experience (UX) comes next. It is "far from ideal," Delphi Digital said to put it politely. DeFi UX lacks a number of features that are standard for fintech apps, such as native wallet swaps, user-friendly UI, improved account management, and more. The single largest barrier to widespread acceptance for DeFi is its user experience and absence of a mobile interface.
It was possible to retrieve 7.6% of the stolen volume. DeFi is thus regarded as the crypto industry with the highest level of danger by lawmakers. It's hardly fair, but it's hard to blame them for being confused by such advanced technology. The fall of the FTX may have been a blessing in disguise for DeFi, as SBF was lobbying for the DCCPA (one of the only According to The Block ). Therefore, it should come as no surprise that lawmakers view DeFi as the most precarious crypto industry. It's unjust, but it's understandable that they wouldn't be able to grasp such a complicated innovation. Since SBF was promoting the passage of the DCCPA (one of the crypto bills in Congress), DeFi may have escaped a potential disaster with the FTX collapse.
DeFi's Future
There are a lot of issues with DeFi, but there are also a lot of opportunities.
Because users act as their own custodians, their assets are never lost or stolen.
You don't need permission; you can't be stopped (well, at least with a VPN). Yes, the answer is that you are immune to blocking attempts (well, at least with a VPN).
the code is immutable and cannot be changed in any way. In other words, the code is immutable.
The code is open and accessible to all users in the same way.
Let's consider some potential scenarios for DeFi in light of this and the fact that liquidity measures are in freefall.
Assets in the Real World
Blockchains are starting to accept physical assets.
In addition, Aave is collaborating with BlockTower Credit, an institutional credit fund, to move $220 million in collateralized lending activities on the blockchain. BlockTower is keeping a substantial chunk of Maker's money because it is responsible for monitoring the onboarding, execution, and upkeep of the assets. Collateralizing physical assets on a blockchain might be risky, especially in the case of a liquidation. Yet the benefits of the strategic alliance outweigh the potential hazards (or so does Aave think).
Then there are other real-world assets, such as forex and synthetic stocks.
Oracles or non-dollar stablecoins can be used to bring forex trading onto the blockchain. In any case, the market appears to have a thirst for it, so expect more of the same in the near future.
DEXes
The catastrophic implosions of numerous CeFi institutions in 2022 provide tailwinds for decentralized exchanges. This is evidenced by the consistent ratio of spot trading on DEXs to CEXs.
Although DeFi funds cannot be stolen, the user experience is still subpar. DEXs would become serious rivals if they were able to draw market makers away from centralized platforms and provide them with a means of putting up capital using the well-known order book paradigm.
As Ethereum grows in capacity, this may change, and users will find decentralized exchanges to be more convenient and affordable as a result.
Appchains
An other trend to keep an eye on is the development of appchains and DeFi-specific blockchains like Sei. Despite GMX charging twice as much as dYdX, the derivative DEX operating on its own blockchain, garnered 50% more income. They should be much easier to create with the help of middleware like EigenLayer.
Lending with Insufficient Collateral
It's possible that the problem of undercollateralized lending is just too enormous to solve. It's essential for decentralized financial systems to compete with centralized ones. DeFi might not wish to compete with TradFi in this respect, though. It makes little sense to compete on counterparty and liquidity issues, since centralized platforms have a natural advantage.
Yet, it makes sense for competitors to prioritize openness.
Undercollateralized lending has a chance if DeFi lenders are aware of where their money is going and the risk profiles of the borrowers. However, it is still a hassle to scale it.
The ideal margin lending system would be spam-proof (i.e., not vulnerable to sybil assaults), system-safe (i.e., the default of a single loan wouldn't bring the system crashing down), and incentive- (people actually want to use it). A suitable layout would allow that to function.
Margin loans, however, still require collateral that is either legal or social. Despite the fact that the idea of using biometric logins and social graphs will make crypto natives jump the shark, they may be vital if this product is to scale. Capital efficiency and lender security will always be at odds with one another.
Enhancements to the User Experience
According to Delphi Digital, DeFi apps shouldn't be the main offering to customers.
This "liquidity infrastructure" of dApps enables users to carry out their tasks quickly and effectively. The real access and interaction are provided by the UX layers. As an alternative to a fully centralized system, Delphi proposes a single app that performs all necessary functions and is held by the organization, which would have access to only one of the multi-sig keys.
Simple trades may be made using aggregators on the DEX.
Lido/Rocket Pool ETH staking.
Money market leverage is low.
Using riskier goods, high leverage
For experts, there may be derivatives and options.
The only potential stumbling block is commercialization itself, since some cryptocurrency users may be unwilling to pay for services. They would be outraged if there was a subscription price.
However, the UX still has to be improved immediately.
Ethereum Staking Derivatives That Can Easily Be Converted Into Fiat Currency
Liquid staking derivatives will continue to exist even after ETH staking withdrawals are made possible. Nothing will stop them from rising to even greater prominence. Expect the larger DeFi infrastructure to be integrated with protocols that provide LSD.
Conclusion
DeFi winter seems to be coming to an end. Slowly but surely, the snow is beginning to melt, and we can finally make out the horizon now that the blizzard has passed.
As a whole, the market is what determines that. Though pinpointing its exact arrival time is impossible, a second DeFi summer wave appears to be very conceivable.
Winter is still here, so keep your coats on.
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