The DeFi Summer of 2020 has passed four years, and the world has changed. Today, we revisit DeFi to explore its next steps.

As an important growth engine in the crypto market, DeFi has seemed to be in a lull over the past two years.

Although new exchanges emerging on Ethereum Layer 2 are actively attracting liquidity, established DeFi protocols like MakerDAO and Unichain are making some adjustments. However, these "innovations" tend to focus more on business transformation/adjustment rather than technical and model innovation.

As a super entry point for Web3 that channels traffic, the OKX Web3 wallet emphasizes improving user experience and helping users engage with the on-chain world with low barriers. Therefore, this article aims to explore the form of DeFi and its next development from the perspective of OKX Web3 product managers.

Overall Situation of the DeFi Market and User Profile

The heat of the DeFi sector in 2024 has decreased, especially after the LSD and Pendle hype in the first half of the year, leading the market to gradually calm down and lack new narrative drives. However, from the beginning of the year to now, the LSD and LRT sectors have maintained strong growth, particularly the re-staking projects represented by EigenLayer, which have brought nearly $20 billion in incremental value to DeFi. Meanwhile, the yield market led by Pendle has also performed well, with its market capitalization increasing nearly fourfold since the beginning of the year, with Pendle contributing most of the increase.

Additionally, the total locked value (TVL) in the RWA sector has doubled since the beginning of the year, driven mainly by private lending, tokenization of government bonds, and the entry of traditional financial institutions. BTCFi has been driven by the narrative of inscriptions, with developers working to activate BTC's funds and users by implementing smart contract-like functions on the BTC mainnet, further building the DeFi ecosystem and bringing a new wave of growth.

Currently, the total locked value in the DeFi market has risen from $50 billion at the beginning of the year to a peak of $120 billion, and has now fallen back to about $80 billion. The LSD sector still holds the largest market share, followed by lending and DEX fields.

At the beginning of this year, the total locked value (TVL) in the DeFi market was $50 billion, which then peaked at $120 billion and is currently back to about $80 billion. The LSD sector occupies the largest market share, followed by lending and DEX fields.

From the user perspective, current DeFi users can be categorized into the following groups:

1. Crypto native ordinary users: Their main demand is for more on-chain yield channels, such as earning returns through stablecoins; while advanced users pursue more complex DeFi strategies, constructing nested plays to achieve higher returns.

2. On-chain DAOs and other institutions: These users focus on treasury management and stable returns, preferring low-risk foundational DeFi protocols, especially RWA that bring off-chain assets (like U.S. government bonds) into on-chain yield channels.

3. Traditional financial institutions: They are gradually recognizing the efficiency and composability advantages of DeFi, starting to tokenize traditional assets on-chain and seeking more distribution channels.

4. Users unfamiliar with DeFi: Although these users are interested in higher on-chain yield opportunities, the entry barrier to DeFi is high and requires guidance.

Users suitable for participating in DeFi typically possess a certain level of risk tolerance and strong learning ability, especially those who have some understanding of the on-chain ecosystem and crypto assets and are eager to explore further tend to be active in DeFi.

Risks and Common Sources of Returns in DeFi

The main risks currently faced in the DeFi space include the following:

1. Security of underlying smart contracts: This is the biggest risk in DeFi, as vulnerabilities in smart contracts can lead to protocol attacks and subsequent theft of funds.

2. Credibility risk of project parties: Project parties may engage in rug pulls or similar situations, affecting the safety of user funds.

3. Regulatory risk: As the scale of DeFi expands, the attention from governments and regulatory bodies increases, and there may be stricter regulatory requirements in the future, involving compliance issues such as KYC and AML.

4. Liquidity risk: DeFi protocols rely on liquidity providers, and any sudden withdrawal of liquidity (such as whale behavior) can lead to market imbalance, increasing transaction costs or triggering liquidations.

5. Market risk: Many DeFi platforms' functionalities depend on other mainstream cryptocurrencies, such as Ethereum. The prices of these assets can be highly volatile, leading to potential losses for users, and in severe cases, significantly impacting the DeFi ecosystem. Additionally, the popularity of DeFi often changes rapidly, requiring users to keep up with trends and adjust positions in real-time, or they may miss high-yield opportunities.

Regarding common sources of returns and associated risks, DeFi has various underlying sources of returns, such as providing liquidity as an LP in DEXs to earn trading fees; lending out assets in lending protocols to earn interest; staking, LSD, and LRT returns come from staking rewards, such as Ethereum PoS rewards, as well as project tokens and points; for perpetual contract LPs (like GLP, JLP), returns come from trading fees or funding rates from counterparties; finally, RWA (real-world assets) returns come from off-chain traditional assets, such as U.S. government bonds or real estate returns. In addition, many DeFi projects also offer additional project token rewards and partner token rewards to liquidity providers.

Overall, the higher the risk, the higher the potential return. More basic lending protocols and staking are relatively safe but offer lower yields; while more complex operations like providing liquidity in DEX V3 require real-time dynamic adjustments to the market-making range, which, although offering higher returns, also correspondingly increases risk. Therefore, when trading, one should pay attention to selecting targets that match their risk tolerance.

Currently, OKX Web3 has taken certain measures in terms of security, as we believe that the security of DeFi projects is key to their widespread adoption. OKX DeFi conducts thorough research before integrating new protocols, with the BD team responsible for evaluating the background of project parties and the technical team conducting in-depth reviews of smart contracts to ensure there are audit reports and other safeguards. As a DeFi aggregator, the OKX DeFi platform only integrates protocols that have been security-verified, and the platform does not hold user funds, serving merely as a bridge for users to participate in DeFi with one click. Additionally, OKX DeFi provides users with an extra layer of returns sourced from project subsidies, which are distributed directly to users rather than through the OKX platform, further reducing capital risk.

Current Status and Development Direction of OKX DeFi Products

Currently, RWA (real-world assets) may become a potential growth point for DeFi. As traditional assets such as real estate, bonds, and stocks are gradually introduced on-chain, higher liquidity and returns can be achieved through DeFi protocols. In 2024, more institutions will focus on the combination of RWA and DeFi, bringing more funds and opportunities to the DeFi ecosystem. At the same time, institutional investors' interest in DeFi is continuously increasing, especially in areas like stablecoin lending and yield products, prompting more traditional financial institutions to explore ways to participate in the DeFi market. The involvement of institutions will drive the DeFi market to become more mature and standardized, bringing in more capital inflows and more stable yield products.

Additionally, CeDeFi brings innovative products by combining CeFi and DeFi, such as Ethena, which integrates yield-bearing stablecoin solutions; while the BTCFi sector has seen the emergence of innovative staking protocols based on BTC and their derived upstream LSD ecosystem, such as Babylon.

OKX's DeFi products mainly focus on creating a one-stop DeFi aggregator, allowing users to participate in various DeFi protocols across the network through the OKX platform, making position management more convenient. OKX not only helps users filter out most of the protocol risks but also does not hold user funds, while providing an additional layer of returns beyond the official DeFi protocol websites to enhance trading returns. Furthermore, OKX is designing exclusive DeFi strategy products aimed at leveraging the team's expertise to help users achieve higher returns.

Future development plans for OKX's DeFi include: creating the best one-stop DeFi yield aggregator across the network, aggregating all mainstream public chain DeFi protocols, and supporting emerging hot projects to provide more early yield opportunities; launching a powerful DeFi dashboard to display overall positions and PnL across the network; and simplifying the trading process by productizing complex DeFi strategies through a professional team, making it easier for more users to participate in the world of DeFi.

Disclaimer

This article is for reference only. It represents the author's views and does not reflect the position of OKX. This article does not intend to provide (i) investment advice or recommendations; (ii) offers or solicitations to buy, sell, or hold digital assets; (iii) financial, accounting, legal, or tax advice. We do not guarantee the accuracy, completeness, or usefulness of such information. Holding digital assets (including stablecoins and NFTs) involves high risks and may fluctuate significantly. You should carefully consider whether trading or holding digital assets is suitable for you based on your financial situation. Please consult your legal/tax/investment professionals regarding your specific circumstances. You are responsible for understanding and complying with applicable local laws and regulations.

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