Original title: The great return of DeFi
Author:flow
Compiled by: TechFlow
The summer of 2020, dubbed the “Summer of DeFi,” was an incredible period in the cryptocurrency industry. For the first time, DeFi was not just a theoretical concept, but one that worked in practice. During this period, we witnessed the proliferation of multiple DeFi-native protocols — including Uniswap’s decentralized exchange (DEX), aave’s lending protocol, SkyEcosystem’s algorithmic stablecoin, and many more.
Subsequently, the total locked value (TVL) in decentralized finance (DeFi) applications grew significantly. From about $600 million at the beginning of 2020, TVL rose to more than $16 billion by the end of the year and reached an all-time high of more than $210 billion in December 2021. This growth was also accompanied by a strong bull market in the DeFi field.
Cryptocurrency TVL chart from 2020 to the end of 2021
Source: DeFi Llama
We can think of the main catalysts for the “Summer of DeFi” as two-fold:
Breakthroughs in DeFi protocols have given them the ability to scale and provided clear use cases.
The beginning of the Fed’s monetary policy easing cycle, during which interest rates were slashed to stimulate the economy. This made liquidity abundant in the system and incentivized people to look for more exotic yield opportunities, as traditional risk-free rates were very low. This created the perfect conditions for DeFi to flourish.
Fed Funds Rate Chart from May 2018 to January 2022
Source: Fred St Louis
However, like many emerging disruptive technologies, DeFi adoption has followed a familiar S-curve trend, often referred to as the Gartner hype cycle.
This trend is reflected in the chart showing the adoption of various consumer products over time.
Source: The Bullish Case for Bitcoin
In general, it works like this: In the early days of the “Summer of DeFi,” early investors had strong confidence in the transformative nature of the technology they were investing in. For DeFi, that confidence stemmed from the idea that it could revolutionize the current financial system. However, as more people entered the market, enthusiasm reached a peak and buying became increasingly driven by speculators who were more interested in quick profits than in the underlying technology. After this carnival peak, prices fell, public interest in DeFi waned, and we had a bear market followed by a long period of plateauing.
Gartner Heat Cycle Chart
Source: Speculative Adoption Theory
It can be clearly stated that this boring plateau is not the end of DeFi, but the beginning of the real journey towards mass adoption. During this period, developers continue to build, and the number of firm believers in DeFi is gradually increasing. This lays a solid foundation for the next iteration of the Gartner hype cycle, which may bring a larger scale of users and may be even larger.
DeFi renaissance
At this point, the prospects for a DeFi renaissance seem very positive. Similar to the catalysts of the last DeFi summer, we currently have: a new generation of more mature DeFi protocols being developed; healthy and growing DeFi indicators; the arrival of institutional players; and the Fed’s easing cycle is underway. This provides a perfect environment for DeFi to flourish.
To get a clearer picture, let's analyze the components:
Towards DeFi 2.0
DeFi protocols and applications have undergone significant evolution over the years from the initial wave of hype in 2020. Many of the issues and limitations faced by first-generation protocols have been addressed, resulting in a more mature ecosystem. This was the emergence of what we now call the DeFi 2.0 movement.
Some key improvements include:
Better user experience
Cross-chain interoperability
Improved financial architecture
Improved scalability
Enhanced on-chain governance
Improved security
Proper risk management
Additionally, we’ve seen multiple new use cases emerge. DeFi is no longer limited to trading and lending in its early stages. New trends like restaking, liquid staking, native yield, new stablecoin solutions, and tokenization of real-world assets (RWA) make the ecosystem more vibrant. Even more exciting is that we see new infrastructure still being developed. What caught my attention recently is on-chain credit default swaps (CDS) and fixed rate/term loans built on existing lending infrastructure.
Healthy and growing DeFi metrics
Since late 2023, there has been a resurgence in DeFi activity and we have witnessed a wave of new DeFi protocols emerging.
First, looking at total value locked (TVL) in the crypto ecosystem, we see that momentum is starting to pick up after a long plateau. From $41 billion in October 2023, TVL almost tripled, reaching a local high of $118 billion in June 2024 before falling back to current levels of around $85 billion. While this is still below the all-time high (ATH), it is still a significant uptrend. There is a strong case to be made that this could be the first wave of a long-term upward trend for TVL.
Chart showing the evolution of TVL in the crypto space
Source: DeFi Llama
Another interesting metric is the spot volume between decentralized exchanges (DEX) and centralized exchanges (CEX), which measures the relative trading activity between the two. Again, we notice a positive long-term trend, indicating that more and more trading volume is moving on-chain.
Chart showing spot trading volume between DEX and CEX
Source: The Block
Last but not least, the attention that the DeFi space has captured in the wider crypto ecosystem has risen in recent months. In a highly competitive market where everyone is vying for attention, DeFi is starting to attract attention again.
Kaito AI:
DeFi continues to gain attention.
If Trump wins, it’s hard to imagine which industry would benefit more.
The arrival of institutional players
During the “Summer of DeFi,” the first wave of DeFi participants were primarily individuals trying to master this new technology, while a new wave of DeFi protocols began to attract some large traditional financial institutions into the DeFi space.
In March this year, BlackRock, the world's largest asset management company, launched its first tokenized fund on the Ethereum blockchain, the BlackRock USD Institutional Digital Liquidity Fund (BUIDL Fund), allowing investors to earn U.S. Treasury yields directly on the chain. This is BlackRock's first DeFi program and has achieved obvious success, with the fund's assets under management exceeding US$500 million.
CoinDesk：
BlackRock’s tokenized real asset fund $BUIDL has surpassed the $500 million milestone within four months of launch as the tokenized treasury market continues to expand.
Another notable example of growing institutional interest is PayPal’s PYUSD stablecoin, which recently reached a major milestone: its market capitalization exceeded $1 billion just one year after its launch.
PayPal：
The PayPal USD stablecoin is part of PayPal’s mission to revolutionize commerce around the world. This weekend, we reached a major milestone: our market cap exceeded $1 billion! This is just the beginning, and we’re excited for continued growth in the future.
These examples suggest that the broader financial industry is finally beginning to recognize the value proposition of building a financial system based on decentralized blockchain technology. To quote PayPal’s CTO: “If it can reduce my overall costs while providing benefits, why not embrace it?” As more institutional players begin to experiment with this technology, we can assume that this will become a powerful catalyst for the development of the DeFi space.
The Fed is in the middle of an easing cycle
In addition to the points mentioned previously, the current direction of US monetary policy is another potential catalyst for DeFi. In fact, we have just crossed a major turning point in the economy. The first 50 basis point rate cut at the recent September FOMC meeting since the Fed began its post-pandemic fight against inflation is a strong indication that a new easing cycle is underway. This is further evidenced by the expected direction of the Fed Funds rate.
Frederik Ducrozet: Fed pricing versus previous easing cycles.
The start of this new monetary easing cycle provides two key supports for the DeFi bull thesis:
This easing cycle will certainly increase liquidity within the system. Liquidity is a key element in financial markets, and excess liquidity is good because it means more money can enter the market. Therefore, DeFi and the broader crypto market should benefit from it.
A decline in the Fed Funds rate will make DeFi yields more attractive relative to the market. Simply put, as traditional risk-free rates decline, investors will begin to seek alternative yield opportunities. This could lead to a rotation into DeFi, as DeFi offers a range of attractive yields in stablecoins and other more exotic strategies - yields that are safer and more reliable than they were a few years ago.
Will history repeat itself?
Overall, it seems that multiple factors are converging to herald a resurgence in DeFi.
On one hand, we are witnessing the emergence of several new DeFi infrastructures that are more secure, scalable, and mature than they were a few years ago. DeFi has proven its resilience and established itself as one of the few areas in crypto with mature use cases and real-world applications.
On the other hand, the current monetary environment is also driving a DeFi renaissance. This is similar to the situation in the last DeFi summer, and current DeFi indicators suggest that we may be in the early stages of a larger upward trend.
Although history will not repeat itself exactly, similar situations will often occur.