loading

The Revival of Decentralized Finance: Making DeFi Great Again

Written by: Arthur Cheong, Eugene Yap

Translated and Edited by: Block Unicorn

The European Renaissance, which began in the 14th century, ignited a revival of art, culture, and thought, radically transforming modern civilization. Today, we are witnessing a similar awakening in the crypto world — the revival of Decentralized Finance (DeFi).

  • DeFi is Emerging from the Trough of Disillusionment

In 2020 and 2021, DeFi experienced a surge of excitement, with many believing it would completely disrupt traditional finance (TradFi). However, like most emerging technologies, early hype led to disappointment as the infrastructure was not yet fully developed, leading to a downturn in 2022. However, as with any revolutionary movement, DeFi has become more resilient. It has successfully traversed the "Trough of Disillusionment" and is now climbing the "Slope of Enlightenment." The Gartner Hype Cycle is an effective framework that illustrates this journey, and DeFi is now showing signs of recovery.

  • A New Interest Rate Cycle Will Make DeFi Returns More Attractive

DeFi's resurgence is not only driven by internal factors but also by key external economic changes. As global interest rates fluctuate, high-risk assets such as crypto, including DeFi, are becoming more attractive to investors seeking higher returns.

DeFi benefits from a low-interest-rate environment in two key ways:

  • Reduced opportunity cost of capital — with lower returns from bonds and traditional savings accounts due to falling interest rates, investors may turn to DeFi protocols to gain higher yields through yield farming, staking, and liquidity provision.
  • Lower borrowing costs — as financing costs decrease, DeFi users are encouraged to borrow and use capital for productive purposes, thus driving activity across the ecosystem. While interest rates may not fall back to near-zero levels as seen in previous cycles, the opportunity cost of participating in DeFi will significantly decrease. Even moderate rate reductions can have a considerable impact, as the difference between rates and yields can be amplified through leverage. Additionally, we anticipate the new interest rate cycle will become a key driver of stablecoin growth, as it significantly lowers the cost of capital for TradFi funds entering DeFi to seek returns.
  • Finance: Crypto's Strongest Product-Market Fit

The crypto space has experimented with various use cases, such as NFTs, metaverse, gaming, and social. However, by most objective measures, these areas have yet to find a true product-market fit (PMF). For example, despite a brief revival in 2024 due to Bitcoin Ordinals, daily NFT trading volume has continued to decline. As for the metaverse and gaming, no breakthrough Web3 game with global fan acceptance has emerged. Two OG-level Web3 metaverse projects, Decentraland and Sandbox, struggle to surpass a few thousand daily active users, whereas Roblox boasts 80 million daily active users. While TON gaming's daily active users are impressive, it's uncertain how many will remain once economic incentives fade. In contrast, DeFi has already proven its product-market fit. Core DeFi categories like liquid staking and lending have grown over 100% year-on-year, demonstrating its strong appeal.

  • Improved User Interface/Experience, Infrastructure, and Security

Early DeFi interfaces were complex and technically challenging, alienating many users. However, in recent years, there have been significant improvements in user experience, infrastructure, and security, making DeFi more accessible to mainstream users. One of the most critical advancements has been wallet infrastructure. Managing seed phrases and private keys used to be a major hurdle, but new smart wallets and embedded wallets have greatly simplified this process, making it more secure. Features such as social recovery, biometric authentication, and passwordless login now allow users to manage funds easily without facing the complexities of traditional Web3 wallets.

Making DeFi Great Again

Just as the European Renaissance reshaped society, DeFi is poised to revolutionize the financial world. The potential for innovation in DeFi is enormous, and we are only beginning to see its impact. As more users and investors embrace DeFi, the future of global finance will increasingly shift on-chain, making the financial system more efficient, open, and accessible to all. DeFi has the power to eliminate inefficiencies, break down barriers, and create new opportunities for financial inclusion. It is not just a passing trend but a fundamental shift in how the world interacts with money. From global payments

 

This article is sourced from Foresightnews:

https://foresightnews.pro/article/detail/69628

Sincerely,

AIC Team

October 21, 2024