"CRYPTO THESES 2024" Ten major trends in the DeFi field

Previous sections of the report:

Starting today, I will share the DeFi section:

DeFi has demonstrated stability amidst financial turmoil. Despite currently accounting for less than 0.01% of global financial assets, its growth potential is enormous. The IMF pointed out that DeFi reduces marginal capital costs to just one-third of traditional methods.

1. DEX Platforms

Uniswap remains the leader in the Ethereum DEX space, with trading volumes even surpassing Coinbase during significant events.
The Uniswap DAO launched products on rollups, Uniswap Labs introduced a mobile wallet, and announced plans for V4, including “hook contracts” and a fee-charging frontend.
Other major chain DEXs also performed strongly, such as TraderJoe on Avalanche, Osmosis on Cosmos, Orca on Solana, and PancakeSwap on the BNB Chain.

2. Trading aggregators and frontends

Uniswap Labs announced that it will charge a 0.15% fee on trades made via its Web UI and wallet upon the launch of Uniswap V4 for reasons including:

Regulatory pressure: The unstable regulation of DeFi in the U.S. may lead to legal issues for Uniswap.
Clear decentralization: Given the regulatory context, it is important to distinguish Uniswap Labs from the protocol and foundation it has created.
User choice: Users can choose not to use the Uniswap frontend and instead use other aggregators like 1inch or Matcha by 0x.

On Solana, traders tend to prefer the community-leading aggregator Jupiter over the mainstream DEX Orca. This reflects a future trend where interfaces add value by providing additional tools (such as DCA tools from UniswapX or aggregators like Jupiter), thus succeeding in customer acquisition and capturing value.

3. Payment

The upcoming killer payment protocol will revolutionize the way cryptocurrencies are transferred with efficiency far exceeding traditional banks, featuring:

Streams: Continuous, real-time micropayments suitable for content, subscriptions, token ownership, etc.
Splits: Intelligent distribution of payments among multiple recipients according to predefined logic, such as royalties.
Smart payments: Handling complex payment logic, representative companies include Sphere, Decent, and Solana Pay.

These tools will be used by AI agents and DePIN networks for payments, becoming the financial backbone of new DeSoc networks like Lens V2, rewarding collaborative behaviors among users.

4. On-chain perpetual contracts

dYdX dominates the on-chain perpetuals space with over 70% market share. 2024 will be a pivotal year as the dYdX V4 upgrade is coming soon. dYdX leverages StarkWare's L2 infrastructure, is the fifth largest rollup by TVL, and has launched its own Cosmos chain.

Other notable platforms include Solana’s DEXs (such as Drift and Jupiter) and DeFi veteran Synthetix. Synthetix’s upcoming Andromeda version will introduce new features such as cross-margining, multiple new collateral types, and trading improvements. Its fully diluted valuation is one-third of dYdX and it ranks as the fourth best-performing DEX year-to-date.

5. DeFi Lending

The tokenization of real-world assets in DeFi lending has grown significantly, for example, Maker's tokenized U.S. Treasury bonds increased from $40 million to nearly $3 billion.
Due to its high transparency and global scalability, DeFi lending demonstrated better stability compared to centralized finance (CeFi) during the 2023 financial crisis.
Interest-bearing securities (such as Lido's stETH) have become popular as collateral in DeFi, accounting for 26% of deposits in Maker, enhancing the attractiveness of DeFi lending compared to CeFi.
Aave's total value locked (TVL) grew by 80% in 2023 due to the adoption of Aave V3 and the addition of liquid staking tokens (LSTs) as collateral assets, with the new efficiency mode increasing loan-to-value ratios and staking yields.

6. LSTs (Liquid Staking Tokens)

Liquid staking tokens (LSTs) are now the largest TVL category in DeFi, acting as yield-generating debt instruments.
The Ethereum Shapella upgrade has boosted ETH staking.
With a TVL of $15 billion, offering an annual return rate of 3.7%, it generates $2.3 billion in revenue.
Innovative products such as Alluvial and Ether.Fi's LSTs, along with Distributed Validator Technology (DVT), are under development.
LSTs have a significant impact on the DeFi ecosystem, with notable proportions of LST deposits in Aave and Maker. The emerging market for stablecoins backed by LSTs is growing rapidly.
LST-finance saw a breakthrough in 2023, providing DeFi with new and sustainable sources of returns. The PENDLE token surged over 2000% in 2023.
Every PoS network may see the emergence of an institution similar to Lido, such as Jito's role in the Solana network.

7. Bridges and Message Passing

Cross-chain bridges face challenges in the field of cryptocurrency security. Major hacking incidents in recent years, such as Ronin, Poly Network, Wormhole, and Nomad, account for nearly half of the total amount of DeFi hacks over the past six years, with most of the stolen funds flowing to North Korea's Lazarus hacking group.

The progress of response measures includes:

Research on "Omni-Chain Fungible Tokens" (OFTs), which standardizes tokens across different chains through LayerZero's Endpoint smart contracts.
Chainlink launches CCIP (Cross-Chain Interoperability Protocol), entering the "Layer0" domain.
UMA's Across Protocol secures a place in the bridging market with its fast and cost-effective optimistic oracle design.

These advancements demonstrate significant developments in cross-chain communication and security.

8. Oracle

Pyth, a Solana-based oracle network, gained attention after its token launch in November 2023. It differs from traditional models by incentivizing market makers to provide trading data, rather than merely aggregating exchange platform data, thus building more reliable order books and price sources.
This model changes the traditional role of market makers as payers for market data, making Pyth an important low-latency price source provider in perpetual contract DEXs.
Meanwhile, Chainlink is developing a low-latency alternative called Data Streams, demonstrating the market's demand for diverse oracle solutions, such as Synthetix using both Chainlink and Pyth as data sources simultaneously.

9. Real-World Assets (RWA) Diversification

Wall Street is gradually moving towards tokenization to meet the demand of wealthy investors for on-chain products. While commercial real estate tokenization may not be realized soon, the creation of network states is underway. In the era of RWA on public blockchains, DeFi natives are more likely to lead the trend than traditionally suited individuals.

Cryptocurrency holders are diversifying their investments, often preferring purchases through platforms like Coinbase over traditional financial institutions. Since January last year, they have started buying and selling crypto assets in Wall Street ETFs.

10. Stacks and BRC-20 Tokens

The new technological upgrade of Bitcoin Core offers new possibilities for expansion and enhanced functionality within the Bitcoin ecosystem. New transaction types such as BRC-20 tokens, Stamps, Runes, and recursive Inscriptions are beginning to flood the Bitcoin network, increasing transaction fees and testing the technology.

These fees could help address Bitcoin's long-term security budget issues but also raise concerns about the size of the Bitcoin blockchain. For example, BRC-20 tokens create a permanent set of transactions that might impact Bitcoin's decentralization because full nodes require more storage space.

Other L1 networks such as Avalanche, Near, and Solana are also facing challenges similar to those caused by BRC-20 tokens. Stacks, as the leader of a vibrant Bitcoin L2 ecosystem, offers access to BTC liquidity and uses a unique integrated consensus mechanism. In addition, several teams are exploring the implementation of rollup technology on Bitcoin, such as Chainway, ZeroSync, and Kasar Labs.