DeFi
Four “revolutionary” DeFi trends that will define the next crypto bull market – DL News
What you will learn
- New DeFi, like liquid restocking, will attract more attention in 2024.
- The repurchase of liquidity already represents a market of 600 million dollars.
- The search for yield and airdrop farming will drive greater multi-chain engagement this year.
DeFi was the biggest growth driver for crypto last year, as it had twice as many users with over 100 transactions as any other sector of the crypto market.
This growth was fueled by an increase in transaction activity on layer 2 Ethereum blockchains like Arbitrum and Optimism, and the return of Solana after the collapse of FTX.
This trend is expected to continue this year amid a possible rise, with trading on decentralized exchanges and yield farming expected to be the most dominant on-chain activity in 2024.
This is according to a new report on on-chain cryptocurrency users by blockchain data platform Flipside Crypto.
“Significant regulatory, institutional and financial announcements were published every month” in 2023, the report said. “These developments set the stage for a breakthrough in 2024.”
Driving this growth in recent times: EigenLayer, a Ethereum Liquid Resumption Protocol.
Staking in DeFi means locking a token into a blockchain network or DeFi protocol, usually in exchange for a yield.
Locked tokens are generally unusable, but some protocols like Lido offer liquid staking in which a liquid staking token or LST is given in exchange for the locked crypto, along with the opportunity to earn yield.
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“New DeFi like EigenLayer will gain prominence and be adopted by the native Web3 audience,” Flipside said.
Liquid staking has the benefit of giving users access to their locked coins in the form of LST which they can deploy on other DeFi protocols to earn compound gains. Flipside highlighted four other trends to watch:
Restore staked crypto
Liquid restocking is an extension of the DeFi liquid staking primitive. It allows users to refresh their LSTs to get more yield and another token called Liquid Resume Token, or LRT.
There are even protocols like Pendle that will accept an already yield-bearing LRT deposit from a user and provide them with another yield-bearing token, thus pushing the compounding yield potential further.
Flipside’s prediction of a liquidity buyback boom in the coming year may already be showing signs of becoming a possibility. The new DeFi sector is already a A $600 million market — market growth driven not only by the frenzy of compound returns but also the possibility of parachute drops.
New DeFi niches such as liquid restocking come with expectations of airdrops for early participants. These expectations have been reinforced by majors like EigenLayer which offer a points system to depositors, the points having become an indicator of possible airdrops.
Despite its growth potential, Flipside does not envision a bubble emerging due to liquid staking this year.
“We are still far from the frenzy of 2021, where anyone could simply launch a project and use 10,000% APY inflation tokens to attract users,” said Carlos Mercado, data scientist at Flipside. DL News.
Instead, Mercado identified the lack of customer diversity among Ethereum stakeholders and validators as a possible source of concern. More than 80% of Ethereum validators use Geth, an execution client responsible for processing transactions and deploying smart contracts.
This reliance on Geth makes it a majority client in Ethereum and any issues with Geth could cause system-wide outages in Ethereum.
Given the possible scale of the problem, Mercado said he expects stakeholders to diversify and look to other customers.
“The good news is that these staking methods are in direct competition with other on-chain opportunities, so there is a natural reluctance for them to become “too big to fail” – as yields fall with the number of participants,” Mercado said.
Multi-chain engagement
Flipside’s report only covers eight blockchains – Bitcoin, Ethereum, Arbitrum, Optimism, Polygon, Base, Solana, Avalanche – all but Bitcoin and Solana are EVM networks.
EVM networks run on the Ethereum Virtual Machine and use the same smart contract logic for their applications. This compatibility also facilitates liquidity migration through protocols called bridges that allow users to send cryptos across different blockchains.
Last year, however, only a small percentage of users interacted with at least two EVM chains. But Flipside expects a shift this year with greater multi-chain engagement among DeFi users, particularly those looking to capitalize on yield and airdrop opportunities across different blockchains.
Greater multi-chain engagement will mean flexible liquidity migration and an increase in the volume of crypto flowing across bridges. Bridge protocols have historically been targets for hackers, leading to some of crypto’s biggest thefts, including $125 million missing of the Multichain multi-chain bridge last year.
Mercado noted that bridge security is a big issue while adding that market participants are moving towards more secure solutions for cross-chain crypto transactions.
“The lock and mint mechanism that prevailed throughout 2021-2022, which left a pot of tokens that hackers observed, faced significant competition from order books or trading bridges. routing that are more efficient in terms of volume transferred per locked value, and canonical bridges like USDC Cross Chain. Transfer protocol,” Mercado said.
Layer 2 concurrent blockchains
Three of the blockchains covered in the Flipside report – Arbitrum Optimism and Base – are layer 2 of Ethereum. These are networks created to scale Ethereum by processing transactions outside of the main network, but still rely on the security of Ethereum for their purpose.
Polygon is also a scalable blockchain for Ethereum, but is technically not a layer 2, but rather a side chain.
Ethereum Layer 2s have seen a Cambrian explosion over the past 18 months, swelling the EVM blockchain market. With limited liquidity for investors, the report predicts greater competition among incumbents, including reducing transaction costs and providing a smoother user experience.
Ethereum itself stands to gain from rivalry between its Layer 2 networks, as increased network activity means more money for validators.
This struggle for market share dominance between Ethereum layer 2 networks may also affect the value of their respective native tokens, the report states.
Booming infrastructure and channel specialization
In addition to Ethereum layer 2 networks, the overall crypto infrastructure stack has grown in the last year and Flipside predicts an even bigger boom in 2024.
The report highlights significant gains made in zero-knowledge technologies and data availability solutions like Celestia as reasons for this expectation.
New entrants such as blockchain scaling Monad and Berachain are also expected to contribute to this growth, the report said.
Ultimately, the report expects developers to optimize their respective technological strengths, leading to specialized blockchains rather than the general-purpose blockchain networks currently available.
Osato Avan-Nomayo is our DeFi correspondent based in Nigeria. He covers DeFi and technology. To share tips or story information, please contact him at osato@dlnews.com.