Will there be a DeFi cycle in this crypto bull market?

Author: Sean Lee

Compiled by: Vernacular Blockchain

As the crypto market enters a new bull run, the top question is whether decentralized finance (DeFi) will once again take center stage. 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 transcended its experimental origins to become a cornerstone of blockchain innovation. By leveraging smart contracts and decentralized infrastructure, it provides democratized access to financial services to millions of users around the world.

DeFi is no longer a fringe experiment but a proven disruptive technology. In 2021, approximately 1.4 billion people around the world do not have bank accounts, and another 1 billion people are underbanked. DeFi offers a path to financial inclusion, allowing 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. The current bull market

To assess the likelihood of a DeFi cycle, we need to analyze current market dynamics. In the ongoing bull market, Bitcoin and large asset prices are rising again, with the total market value exceeding $3 trillion. However, DeFi’s growth does not rely solely on market optimism. Key indicators to pay attention to:

1. Market Liquidity The increase in total locked value (TVL) on DeFi platforms indicates increased user confidence. The latest data shows that TVL has climbed steadily and now exceeds $75 billion.

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 increased by 30% month-on-month, reflecting the continuous improvement of user participation.

3. The rise of DeFi innovators

The growth of DeFi total value locked (TVL) has given rise to a number of new innovative solutions on the market. Among the emerging players shaping the next phase of development, Nudge stands out. This company has introduced a new basic mechanism in the DeFi ecosystem: programmable incentive payments, called “nudges”.

Nudge’s approach is called “reallocation primitives” and represents a shift in the way resources are utilized on DeFi platforms. Users are rewarded 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 effective mechanism for the growth of the ecosystem.

Maier added: “The nudge mechanism is inspired by the many protocols competing for the same users and capital. By letting users profit by reallocating resources, we create new incentives that align their actions with the broader ecosystem success remains consistent.”

Other emerging players include Convex Finance and Tokemak. Convex Finance is built on Curve Finance, increasing revenue opportunities for liquidity providers and Curve stakers by simplifying rewards and increasing incentives. Tokemak, on the other hand, acts as a decentralized liquidity provider, optimizing capital deployment across the ecosystem through its unique liquidity reactor.

While retail-focused DeFi solutions like Nudge aim to make financial instruments more accessible to individual users, there is another class of DeFi applications focused on institutional utilities, bridging the gap between traditional finance and decentralized systems. gap. 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. Backed by the Monetary Authority of Singapore (MAS), it aims to combine tokenized assets with permissioned liquidity pools to provide a secure and scalable blueprint for institutional adoption.

4. The role of supervision

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 push DeFi into the mainstream, or it could stifle its growth.

Recent developments suggest a mixed picture for the industry. The EU’s Markets in Crypto-Assets (MiCA) regulations aim to create a comprehensive framework for crypto-assets, including DeFi protocols. While this offers a path to legalization, critics argue that overly stringent requirements could hinder innovation.

In the United States, the Securities and Exchange Commission (SEC) has increased 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 deal with regulatory hurdles. “While regulation is necessary, there must be a balance 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 Cryptocurrency Innovation Council, of which I am a co-author. Here, we outline principles for developing policies that encourage innovation while ensuring consumer protection and financial stability.

5. What can drive this DeFi cycle?

There are several factors that could reignite the DeFi cycle during this bull market:

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 improve utility.

Maier added: “The next DeFi cycle will prioritize utility over hype.”

6. Conclusion

While regulatory and market sentiment uncertainty remains, DeFi fundamentals remain strong. With innovative platforms such as Nudge taking the lead and blockchain technology continuing to advance, DeFi is expected to recover during this bull market. The next few months will be critical in determining whether DeFi can overcome the challenges and regain its position as a driving force in the crypto ecosystem.