State of DeFi 2024: Key Changes and Future Prospects

State of DeFi 2024: Key Changes and Future Prospects

How did Decentralized Finance change since the last bull run: new protocols, new blockchains, and new opportunities.

DeFi, or decentralized finance, played a major role in the last market cycle. The total value locked (TVL) in DeFi protocols skyrocketed from $1 billion in May 2020 to $260 billion by the end of 2021, then dropped to a new base level of $60 billion during the bear market. As the new growth cycle begins, TVL is on the rise again, now hitting $190 billion. Trading volume is rising accordingly, reaching up to $14 billion daily (data: DeFiLlama).

This cycle, however, is quite different from the previous one. The biggest protocols and the blockchains they are built on have changed significantly. Understanding these changes can provide valuable insights into the current risks and opportunities in the DeFi sector. But first, let’s break down what DeFi really means.

DeFi Protocols and Their Evolution

One of the earliest applications of DeFi was lending, with protocols like Compound Finance (2018) and Aave enabling users to lend and borrow each other crypto through a decentralized platform.

Decentralized stablecoins like DAI, issued by Maker DAO (also acting as a lending DApp since 2017), were developed as a decentralized alternative to coins like Tether or USDC.

Decentralized exchanges (DEXes) such as Uniswap (2018) were created to help users exchange cryptocurrencies directly, without entrusting it to centralized entities.

During the previous market cycle, these three use cases dominated, accounting for 30%, 13%, and 32% of TVL, respectively (TVL in bridges not counted). The remaining amount was distributed among derivatives, asset management, payments, launchpads, and insurance protocols, along with the emerging category of liquid staking that would soon overshadow them all.

With Ethereum’ Merge, or transitioning from Proof-of-Work to Proof-of-Stake in September 2022, liquid staking became the leading DeFi protocol. Liquid staking allows users to stake their coins within a PoS blockchain while receiving a receipt token in return, which they can use in other DeFi protocols (for example, as collateral), making their money work twice. With over $29 billion in staked tokens, Lido has become the biggest in this category.

As the new market cycle unfolds, the DeFi sector is growing alongside the broader crypto space. However, this sector’s composition is now very different from 2020. Liquid staking, along with the newly emerged restaking (offering yet another way of using the already staked coins, like the newly launched EigenLayer), now accounts for 41% of the total TVL. Lending-borrowing DApps gather 26% of TVL, DEXes 13%, and decentralized stablecoins 5%.

Why should we care about the composition? Some may argue that liquid staking and restaking protocols offer less value compared to the first generation of DeFi DApps. Not to mention the complexity of “liquid restaking” and other constructions built on top of already circulating coins (some of which are clearly pointless). This situation could suggest a certain stagnation within the sector, especially considering that a lot of new TVL comes from similar protocols built on new blockchains.

New blockchains in DeFi

Back in 2020, Ethereum dominated the DeFi landscape, holding a whopping 96% of the total value locked (TVL). Today, while Ethereum still commands a significant 66%, the rise of other blockchains is noticeable.

Blockchains like Tron (leading DApp JustLend, $6.5 billion TVL), Binance Smart Chain (Venus, $2.4 bn TVL), and Solana (Jito, $1.9 bn TVL), emerge as new DeFi hubs. They now hold each over 5% of the TVL and are actively building their own DeFi ecosystems.

If we look at the fees generated by DeFi protocols’ activity, the gap between the blockchains is even smaller. While Ethereum earns some $112 million per month, Solana and Tron earn respectively $34 million and  $38 million, and BSC $15 million (data: DefiLlama).

Additionally, with new layer-2 solutions on Bitcoin like the Runes protocol, we might see Bitcoin-based DeFi protocols in the future. This growing diversity is generally positive, but it also highlights that the same ideas are being replicated across different blockchains rather than introducing new ideas – which once again highlights the pressing need for innovation in DeFi.

What’s Next for DeFi?

There are several paths for DeFi innovators to explore, with the tokenization of real-world assets (RWA) among the most promising ones. The idea is that virtually any asset can be tokenized and traded, bypassing the complexities of traditional finance. This market is enormous, with Citi estimating it could reach $4 trillion by 2030, potentially giving DeFi a significant boost.

Currently, the TVL of decentralized RWA protocols is modest, hovering around $6 billion, with most protocols focusing on tokenizing US dollars, T-bills, and real estate. This slow growth can be attributed to regulatory gaps, especially in the US. In the EU, the situation is a bit more clear, but even the MiCA regulation doesn’t directly address Decentralized Finance.

Another challenge is the continuous exploits that plague the sector. According to IntoTheBlock, $58.78 billion was lost to DeFi exploits between 2020 and 2023. However, advancements in technology and DeFi insurance could help address these issues, offering yet another exciting avenue for innovation.