Decentralized finance (DeFi) has been a key component of the crypto industry since the "Summer of DeFi" in the summer of 2020. The "Summer of DeFi" not only brought the concept of decentralized finance into practice, but also greatly promoted the explosive growth of DeFi protocols and applications. Although the market has experienced periodic adjustments since then, there are signs that DeFi is ushering in a new round of revival, and the next round of DeFi bull market may be coming soon.
1. Background of “Summer of DeFi”
The summer of 2020 marked the mass adoption and explosion of DeFi protocols. The rapid development of protocols such as decentralized exchange (DEX) Uniswap, lending protocol Aave, and algorithmic stablecoin Sky (formerly MakerDAO) attracted a large number of users and funds to flow into the DeFi ecosystem. The total locked value (TVL) in DeFi applications soared from US$600 million at the beginning of 2020 to US$16 billion at the end of the year, and reached an all-time high in 2021 - more than US$210 billion.
The two main driving forces during this period were:
DeFi Protocol Breakthrough: Decentralized finance protocols have made significant progress in scalability and practical use cases.
The Federal Reserve’s loose monetary policy: substantial interest rate cuts and ample market liquidity have driven investors to seek new high-yield opportunities, and DeFi has become an ideal choice at the time.
But like many emerging technologies, the growth of DeFi followed a typical technology hype cycle. As market speculation increased, the value of DeFi began to gradually decline, and the subsequent bear market brought the market into a period of relative stagnation.
2. Signs of DeFi’s Revival
Despite the ups and downs of the market, DeFi has never really declined, but has continued to evolve. Today, the next round of DeFi recovery seems to have begun, and similar factors to the last DeFi bull run are driving this revival.
2.1 The arrival of DeFi 2.0
Over the years, DeFi protocols have evolved from early versions to more mature forms. With the rise of the DeFi 2.0 movement, many technical limitations and problems that existed in the past have been effectively solved, forming a more robust and innovative ecosystem. DeFi 2.0 is not just an improvement on early protocols, but a broader technical upgrade and the emergence of new use cases.
Some key improvements include:
Better user experience: Lowers the threshold for new users, making it easier for ordinary users to participate in DeFi.
Cross-chain interoperability: Seamless asset transfer and interaction between different blockchains becomes easier.
Improved financial architecture: The protocol design is more secure and reliable, reducing potential vulnerabilities and attack risks.
Enhanced on-chain governance: Decentralized governance mechanisms are more transparent and easier to implement.
New financial primitives: such as re-staking, liquidity staking, new stablecoin solutions, and real-world asset (RWA) tokenization, further enrich the DeFi ecosystem.
In addition, the emergence of emerging financial instruments such as on-chain credit default swaps (CDS) and fixed-rate/term loans has greatly expanded the functionality of DeFi.
2.2 Resurgence of DeFi Activities
Since the end of 2023, with the emergence of a new wave of DeFi protocols, the activity of the entire DeFi ecosystem has rebounded significantly. Looking at the total locked value (TVL), it increased from US$41 billion in October 2023 to US$118 billion in June 2024. Although it has fallen back, it currently remains at around US$85 billion. This shows that the fundamentals of DeFi are gradually recovering, and the upward trend of TVL may be the precursor of a new round of DeFi bull market.
What’s more interesting is that the proportion of decentralized exchange (DEX) trading volume relative to centralized exchange (CEX) trading volume is increasing. This means that more trading activities are moving to the chain, which is also an important indicator of the development of DeFi.
2.3 Entry of Institutional Participants
Unlike the DeFi bull market dominated by individual users in 2020, the participation of institutional investors has been significantly strengthened in the new round of DeFi recovery. The entry of large-scale institutional funds and traditional financial institutions has made the DeFi ecosystem more widely recognized.
In 2023, 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)", which marked the beginning of traditional financial giants' active attempts at blockchain technology. Similarly, the PYUSD stablecoin launched by PayPal has exceeded $1 billion in market value in just one year, further illustrating the interest and confidence of traditional financial institutions in DeFi.
The participation of institutions not only brings more funds and liquidity to DeFi, but also enhances the credibility of the entire industry.
2.4 The Federal Reserve’s Monetary Policy
Another key catalyst for the recovery of DeFi comes from the Federal Reserve’s monetary policy. Currently, the Federal Reserve’s easing cycle is underway, and the 50 basis point interest rate cut in September indicates that the US monetary policy has shifted.
This has two impacts on the DeFi bull market:
Increased liquidity: As interest rates fall, liquidity in the market increases and more funds will flow into financial markets, of which DeFi may be the main beneficiary.
The attractiveness of DeFi yields increases: As traditional risk-free rates fall, investors will seek high-yield opportunities such as DeFi. Stablecoin rates and other strategies offered in DeFi will become more attractive in terms of relative yields.
3. Future Prospects
The recovery of DeFi is not limited to existing protocols and functions, and more innovations and application scenarios will emerge in the future. The tokenization of real-world assets (RWA) is a new trend that may bring more funds into DeFi in the future. At the same time, the advancement of on-chain governance and the enhancement of cross-chain interoperability will further promote DeFi's goal of a globalized and borderless financial system.
The entry of institutional participants shows that DeFi is no longer a niche experiment, but is becoming an important part of the global financial market. As more traditional financial companies and large institutions enter this field, DeFi's market share and influence will further expand.
IV. Conclusion
Overall, DeFi is making a strong comeback, and the next round of DeFi bull market seems to be brewing. The maturity of the DeFi 2.0 protocol, the entry of institutional funds, and the shift in the Federal Reserve's monetary policy have laid a solid foundation for a new round of DeFi recovery. Despite many challenges, DeFi's resilience and innovation capabilities make it likely to continue to lead the development of the crypto financial market.
If market conditions continue their current positive trend, DeFi will see greater adoption and prosperity in the coming years, becoming an integral part of the financial system.
