There is still hope for DeFi, which missed the opportunity after FTX’s bankruptcy — 2024 is the “Year of DeFi” | CoinDesk JAPAN

DeFi (decentralized finance) was supposed to shine in 2023. In late 2022, the FTX collapse triggered a near-bank run on centralized exchanges (CEXs) and a flight to the transparency that DeFi offers.

But DeFi wasn’t ready. Failed to pass the baton. Due to immature infrastructure and overly complex UI/UX, DeFi was unable to take full advantage of the “black swan” event of centralized finance (CeFi).

That said, there’s no reason to think this was DeFi’s only opportunity. There is still plenty of hope. In fact, several major factors indicate that 2024 may be the year for a real breakthrough.

A lackluster 2023 for DeFi

In 2023, DeFi assets under custody (TVL) were almost flat. According to data from DefiLlama.com, DeFi’s TVL was approximately $38 billion (approximately 5,624 billion yen, equivalent to 148 yen to the dollar) at the beginning of the year, and reached a peak of approximately $53 billion in April. In contrast, the all-time high was $175 billion in November 2021. At the time of writing this article, it is hovering around $46 billion.

It’s easy to argue that DeFi is a wasted opportunity. While the FTX collapse opened the door to new entrants, DeFi was caught off guard and completely unprepared to take on the potential influx of trading volume it suddenly had.

The poor UI/UX of DeFi was said to be a large part of the blame. Indeed, the complex interfaces of most DeFi platforms can only be handled by experienced traders. There is a lot to do and the barrier to entry is high.

According to a Uniswap survey released in May 2023, 42% of users surveyed who only use CeFi are hesitant to use DeFi due to lack of knowledge.

However, the same study also shows that the main hurdle for both DeFi and CeFi users is actually uncompetitive pricing. Noted by 45% of respondents in this group.

Fundamentally, this comes down to the issue of DeFi capital and liquidity inefficiency. Without getting into the technical aspects, the centralized order book model is infinitely more efficient than the DeFi approach, but it lacks transparency. In such a model, it is easy for platforms to invest against their users and even misappropriate their funds.

Instead, DeFi platforms tend to opt for automated market makers (AMMs), but these have so far struggled to compete with the efficient trading environment provided by CEX.

AMM’s on-chain approach is highly transparent, but struggles to deal with high slippage (the difference between orders and executions) when liquidity is low. High slippage is something investors want to avoid.

But progress is being made on all these fronts, giving me and many others an optimistic outlook for 2024.

The year of DeFi

Towards the end of 2023, general interest in the crypto asset (virtual currency) market was on the rise again, both among individual and institutional investors. A big factor was Grayscale’s victory with the U.S. Securities and Exchange Commission (SEC), increasing the chances of approval for a physical Bitcoin ETF (indeed, a Bitcoin ETF was approved).

This sense of optimism has spilled over into DeFi as well. The excitement surrounding ETFs suggests that more professional market participants will become involved. It can be said that professionals are needed to stabilize and legitimize crypto assets and DeFi.

TradFi (traditional finance) players are accelerating their involvement in crypto finance, not just ETFs. Standard Chartered recently launched its tokenization platform, Libeara. One of the first assets to be tokenized is a Singapore dollar government bond fund.

I hope that such high-level crypto asset financial ventures will rapidly increase in 2024. The example given is the movement of centralized TradFi, but news like this brings widespread credibility to crypto finance in general, which is not a bad thing for DeFi either.

Returning to the Web3-native world, zero-knowledge proof (ZK) rollup and scaling solutions are becoming increasingly popular. More protocols are being deployed with these Layer 2 scaling solutions, expanding the use of solutions to high gas fees (transaction fees) and infrastructure-level efficiency issues.

In 2024, these solutions will mature and their adoption will increase, greatly benefiting DeFi. Lower fees and increased network capacity should allow DeFi to compete more evenly with CeFi.

Additionally, significant progress is already underway in combining the strengths of order book models and AMM, which I personally feel is an extremely bullish factor.

Integration and innovation in this space, especially with the introduction of on-chain order books, provides a solid solution to DeFi’s capital and liquidity problems. Such a model combines the trustless nature of an on-chain approach with the capital efficiency of an order book.

In 2024, more DEXs (decentralized exchanges) are expected to explore and implement such models, resolving one of the major hurdles to mainstream adoption.

Advantages of small-scale DeFi

Another noteworthy point is that the DeFi team’s cash burn rate (cash burn rate: consumption cost in management) is significantly lower than that of its CeFi rivals.

With on-chain processes handling most of the day-to-day administrative work, DeFi teams tend to remain small and therefore able to deploy significant capital even during bear markets.

The funding environment may remain challenging well into 2024, while overall transaction volumes may remain low, impacting fee-based revenues. When these factors come together, centralized CeFi will face greater challenges compared to smaller, decentralized projects.

Simply put, DeFi is better suited to survive deep and long winters, giving it an edge as markets take longer to recover. In other words, DeFi is not over yet. 2023 may have been disappointing, but it’s not the end.

Currently, DeFi is still lagging behind CeFi, but there is a possibility that DeFi will catch up all at once in 2024. Everyone has been developing behind the scenes, putting in place internal infrastructure, and establishing and deepening meaningful industry partnerships. I am convinced that 2024 will be the year of DeFi, and I can’t wait to see what happens soon.

Rachel Lin: CEO of decentralized derivatives trading platform SynFutures. He previously specialized in derivatives at Deutsche Bank’s Global Markets division and is a founding partner of Matrixport, one of Asia’s largest crypto neobanks.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: Shutterstock
｜Original text: DeFi Fumbled Its Post-FTX Advantage in 2023, but There’s Still Hope for 2024