2023 was a pivotal year for Decentralized Finance (DeFi), expected to capitalize on the post-FTX landscape where centralized exchanges (CEXs) faltered. However, despite the golden opportunity presented by the FTX crisis, DeFi struggled to seize the moment due to underdeveloped infrastructure and complex user interfaces. Rachel Lin, CEO of SynFutures and a veteran in the global markets division at Deutsche Bank, reflects on the journey and forecasts a brighter future for DeFi in 2024.
The Missed Opportunity of 2023
Following FTX’s downfall in late 2022, there was a significant shift towards DeFi’s transparent alternatives. Despite this, DeFi’s total value locked (TVL) showed a lackluster performance, hovering around $46 billion compared to its $175 billion peak in November 2021 (data from DefiLlama.com). The primary barriers were the sector’s immature infrastructure and user-unfriendly platforms, evident from a Uniswap survey where a significant portion of CeFi-only users hesitated to switch due to knowledge gaps.
Another critical issue was DeFi’s inefficient capital and liquidity. The sector predominantly uses automated market makers (AMMs), which, despite offering transparency, face challenges like high slippage in low liquidity scenarios. This inefficiency stands in stark contrast to the centralized order book models of CEXs.
A Glimpse of Hope in 2024
Despite the setbacks, there’s a renewed optimism for DeFi in 2024. This anticipation stems from several factors:
- Increasing Crypto Market Interest: The latter part of 2023 saw a resurgence in both retail and institutional interest in crypto markets, partly fueled by Greyscale’s victory over the SEC, allowing the launch of spot bitcoin ETFs.
- Involvement of Traditional Finance: Big players like Standard Chartered are venturing into crypto finance, boosting the sector’s credibility. Such movements, although centralized, positively influence the perception of crypto finance, including DeFi.
- Technological Advancements: DeFi is witnessing advancements in zero-knowledge rollups and Layer 2 scaling solutions, addressing issues like high gas fees and improving infrastructure efficiency. These developments are crucial for DeFi to compete with CeFi.
- Hybrid Models: The integration of order book models with AMMs is a significant innovation, promising to solve DeFi’s capital and liquidity efficiency problems. The emergence of on-chain order books combines the transparency of blockchain with the efficiency of traditional models.
- Lower Cash Burn Rate: DeFi projects generally have lower operational costs compared to CeFi, making them more resilient in prolonged market downturns. This factor could give DeFi an edge in the recovery phase.
Looking Ahead to 2024
Despite the challenges of 2023, DeFi isn’t out of the race. The sector is still evolving and catching up with CeFi. With continuous development and strategic partnerships, 2024 might be the year when DeFi fully realizes its potential, marking a significant milestone in the world of finance.
In conclusion, Rachel Lin believes that 2024 will be a defining year for DeFi, driven by technological advancements, increased traditional finance involvement, and a more resilient operational model. The future of DeFi looks promising, and the crypto community eagerly awaits its next chapter.
