Written by: Sean Lee, Forbes Compiled by: Vernacular Blockchain
As the crypto market enters a new round of bull market phase, the most concerned question is whether decentralized finance (DeFi) will become the focus again. Although the DeFi craze in 2020 has promoted the development of the entire blockchain ecosystem, this cycle may take a more mature and rational approach, emphasizing practicality and long-term sustainability.
1. Why DeFi is more important than ever
DeFi has surpassed its experimental origins and become the cornerstone of blockchain innovation. By leveraging smart contracts and decentralized infrastructure, it provides democratized financial service channels to millions of users around the world.
DeFi is no longer a marginalized experiment, but a proven disruptive technology. In 2021, approximately 1.4 billion people worldwide do not have bank accounts, and another 1 billion people belong to the underbanked population. DeFi provides a path to financial inclusion, enabling users to bypass traditional financial intermediaries. Today, stablecoins have become the mainstay of the market, while DeFi lending platforms, decentralized exchanges (DEX), and staking protocols have completely changed the way funds flow.
2. Current bull market
To assess the possibility of a DeFi cycle, we need to analyze the current market dynamics. In the ongoing bull market, Bitcoin and large asset prices have risen again, and the total market value has exceeded 3 trillion US dollars. However, the growth of DeFi does not rely solely on market optimism. Key indicators to pay attention to:
1) Market liquidity The rise in the total locked value (TVL) on DeFi platforms indicates that user confidence is increasing. The latest data shows that TVL has steadily climbed and now exceeds 75 billion US dollars.
2) Institutional interest Institutions such as BlackRock and Goldman Sachs are exploring DeFi infrastructure, indicating that a trend towards mainstream adoption is taking shape.
3) User growth Wallet activity in DeFi protocols grew 30% month-on-month, reflecting the growing engagement of users.
3. The rise of DeFi innovators
The growth of DeFi’s total locked value (TVL) has spawned a number of new innovative solutions on the market. Among the emerging players shaping the next stage of development, Nudge stands out. The company has introduced a new fundamental mechanism in the DeFi ecosystem: programmable incentive payments, called “nudges” (push).
Nudge’s approach is called “reallocation primitives” and represents a shift in how resources are used on DeFi platforms. Users can earn rewards for reallocating assets, while protocols gain measurable and scalable user acquisition and retention tools. This concept goes beyond traditional token rewards and provides a more targeted and efficient mechanism for ecosystem growth.
Maier added: "The boost mechanism was inspired by the numerous protocols competing for the same pool of users and capital. By allowing users to profit by reallocating resources, we create new incentives that align their actions with the success of the broader ecosystem."
Other emerging companies include Convex Finance and Tokemak. Convex Finance is built on Curve Finance and increases yield opportunities for liquidity providers and Curve stakers by simplifying rewards and increasing incentives. On the other hand, Tokemak acts as a decentralized liquidity provider, optimizing capital deployment across the ecosystem through its unique liquidity reactor.
While retail-focused DeFi solutions such as Nudge aim to make financial tools more accessible to individual users, there is another class of DeFi applications that focus on institutional utilities, bridging the gap between traditional finance and decentralized systems. For example, Singapore's Project Guardian is exploring institutional DeFi by experimenting with tokenized bonds and deposits to assess the potential of decentralized financial infrastructure. With the support of the Monetary Authority of Singapore (MAS), it aims to combine tokenized assets with licensed liquidity pools to provide a secure and scalable blueprint for institutional adoption.
4. The role of regulation
One of the key factors affecting the future of DeFi is regulation. As governments around the world grapple with the challenges of regulating decentralized systems, the impact of new policies on DeFi cannot be underestimated. Regulatory clarity could either propel DeFi into the mainstream or curb its growth.
Recent developments show that the industry has mixed results. The EU’s Markets in Crypto-Assets (MiCA) regulation aims to create a comprehensive framework for crypto assets, including DeFi protocols. While this provides a path to legalization, critics argue that overly stringent requirements could hinder innovation.
In the United States, the Securities and Exchange Commission (SEC) has stepped up its scrutiny of DeFi platforms, emphasizing the need to comply with existing securities laws. This has prompted many projects to consider adopting a decentralized autonomous organization (DAO) structure to address regulatory hurdles. “While regulation is necessary, it must be balanced to promote innovation,” Maier said.
For a deeper understanding of regulatory considerations, I recommend reading “Key Elements of an Effective DeFi Framework,” published by the Crypto Innovation Council, of which I am one of the co-authors. Here, we outline principles for developing policies that encourage innovation while ensuring consumer protection and financial stability.
5. What can drive this DeFi cycle?
Amid this bull run, several factors could reignite the DeFi cycle:
1) Institutional interest: As traditional financial institutions explore blockchain technology, DeFi can serve as a bridge between centralized and decentralized systems.
2) Layer 2 scaling solutions: Emerging players in the space are making DeFi more accessible and cost-effective, potentially driving user adoption.
3) Tokenization of real-world assets: Integrating real-world assets into DeFi platforms can attract a wider audience and increase utility.
Maier added: "The next DeFi cycle will prioritize practicality over hype."
6. Conclusion
Despite continued uncertainty around regulation and market sentiment, DeFi's fundamentals remain strong. With innovative platforms such as Nudge leading the way and continued advancements in blockchain technology, DeFi is poised to recover in this bull run. The next few months will be critical in determining whether DeFi can overcome challenges and regain its position as a driving force in the crypto ecosystem.
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