DeFi has come a long way since the boom-and-bust cycle of the DeFi summer of 2020. The early surge was largely driven by experimentation, hype, and unsustainably high incentives. Five years later, the foundations of DeFi look very different. The past year of experimentation was a quiet consolidation phase that laid the foundation for DeFi. 2025 may be remembered as the year DeFi surpassed centralized exchanges (CEXs). The bear markets of 2023 and 2024 eliminated many DeFi projects that lacked product-market fit and forced other DeFi platforms to mature, focusing on infrastructure development and achieving real adoption. While the collapse of Celsius and BlockFi, along with the bankruptcy of FTX, exposed many inherent weaknesses of centralized platforms, decentralized exchanges (DEXs) have been seeking to provide similar speed and user experience, leveraging high-performance chains and building their own infrastructure. Equally important, as blockchain latency has improved, fully on-chain order books have become feasible, enabling DeFi protocols to begin addressing previous pain points in capital and liquidity efficiency. New hybrid designs go beyond the pool-based models of early perpetual DEXs like GMX, combining automated market makers (AMMs) with order book exchange execution or supporting only direct order books, providing traders with more efficient liquidity provision by mitigating slippage and depth issues. DeFi Takes Market Share Looking solely at the data, the top ten DEXs facilitated $876 billion in spot trading in Q2 (a 25% increase from the previous quarter). In contrast, spot trading volume on centralized exchanges (CEXs) fell 28% to $3.9 trillion, causing the volume ratio between the two to fall to a historic low of 0.23 in Q2. DeFi's resurgence can be attributed to increased trading volume. For example, lending protocols have outperformed their centralized counterparts, with activity surging 959% since bottoming out in late 2022. Aave currently holds enough deposits to rank among the 40 largest banks in the United States, a testament to DeFi's growing scale and credibility. Meanwhile, Coinbase partnered with Morpho to launch Bitcoin-backed loans through cbBTC, routing them directly through Morpho's on-chain infrastructure and liquidity, signaling a broader shift toward DeFi-native infrastructure. After witnessing a series of CeFi lending platform bankruptcies, there's a clear preference for the transparency and automation of on-chain lending. DeFi has established a significant growth lead in both trading volume and credit supply. Regulation and Rebuilding Trust The flip side of the DeFi growth story is that the broader cryptocurrency market is finally providing a clearer regulatory framework. Rather than pushing innovation overseas, this shift is encouraging leading DeFi protocols to collaborate with regulators and operate within a clearer framework. For example, Uniswap has played a prominent role in championing sensible policy discussions that would legitimize DeFi's transparency and self-custody. Coincidentally, user preference for on-chain systems is particularly pronounced during periods of regulatory tension. For example, when the U.S. Securities and Exchange Commission (SEC) sued Binance and Coinbase, traders quickly migrated to decentralized exchanges, with trading volume surging 444% in the hours following the announcement. The message is clear: trading activity doesn't disappear when regulations tighten; it simply grows on-chain. Security and custody risks only reinforce this shift. Between 2012 and 2023, centralized exchanges lost nearly $11 billion due to hacks and mismanagement. This is more than 11 times the amount stolen directly from decentralized protocols or wallets. For many users, storing assets on large exchanges has proven far more risky than using self-custody and DeFi smart contracts. CeFi is Imitating DeFi, But Still Lagging Unable to ignore DeFi's momentum, some centralized exchanges (CEXs) have begun integrating on-chain infrastructure directly into their platforms. For example, Coinbase integrated Aerodrome, a leading decentralized exchange built on Coinbase's own Layer 2 network, Base, enabling users to access decentralized liquidity within a familiar interface—a noteworthy move, though Coinbase still serves as an issuance point. Binance's ecosystem provides another vivid example. The BNB chain reached an all-time high in October, attracting millions of active users. This growth was primarily driven by Aster, a perpetual decentralized exchange on the BNB chain, which sparked speculation about its direct connection to Changpeng Zhao (CZ). If many founders of centralized exchanges are now developing in the decentralized space, one might question the true degree of decentralization of these new ecosystems and products. Core metrics bear this out. By the end of 2024, total value locked (TVL) had rebounded to approximately $130 billion, nearing all-time highs and continuing to grow. DeFi's capabilities have surpassed traditional platforms in areas such as derivatives, asset management, and payments, offering greater transparency and permissionless access. Centralized exchanges are increasingly struggling to grow rapidly due to heavy compliance burdens and multi-jurisdictional operations. Many are divesting. Crypto.com recently scaled back its US operations, delisted several tokens, and even postponed the launch of new products pending regulatory clarity. Amidst shifting compliance expectations, OKX is also cautious about expanding its decentralized projects. By contrast, DEXs employ a leaner, code-driven architecture, enabling them to deliver updates and innovations at a fraction of the time and cost. They can deploy new features at the speed of software, whether it's support for tokenized real-world assets, innovative yield strategies, or integration with AI-powered trading agents. Looking Ahead, unless CEXs fundamentally reinvent their models, they risk becoming irrelevant, especially as simply replicating some DeFi features or offering self-custody options may no longer meet customer needs. Trust in the cryptocurrency community has shifted toward systems "built in code" rather than those based on corporate promises. Notably, when liquidity and trading volume recently returned to the market, decentralized entities captured a disproportionate share of funding.
DeFi’s dominance has arrived, heralding a more resilient and empowering financial ecosystem in the future.
Weatherly
Catherine
Kikyo
Anais