Meta Description: Stay ahead of the game with our comprehensive guide on the top DeFi trends in 2024. Discover how decentralized finance is reshaping the future.
What Is Decentralized Finance?
Decentralized Finance, called DeFi, is a general term for financial services on public blockchains, especially Ethereum. It uses cryptocurrency and blockchain technology to manage financial transactions.
DeFi allows people to make transactions directly via blockchain networks without the need for centralized institutions like banks.
As a result, there is no intermediary, which makes the transactions cheaper, faster, and more efficient.
With Decentralized Finance, you can access your assets through secure digital wallets and enter smart contracts.
Like regular banks, you can access various financial services, from peer-to-peer lending, contractual relationships, asset trading, and everyday banking.
But this time around, you won't need paperwork or a third party. As long as you have an internet connection, DeFi is open to you.
Like crypto, DeFi is global, peer-to-peer (meaning it works directly between two people, not routed through any centralized system), pseudonymous, and open to all.
How Does Decentralized Finance Work?
DeFi uses security protocols, connectivity, software, and hardware advancements. Because of this system, there are no intermediaries such as financial service companies or banks.
Instead of charging businesses and customers like these centralized systems, DeFi uses blockchain technology for these transactions.
Most DeFi products allow you to remain in control of your assets, giving you room to access them via a secure digital wallet.
You can carry out transactions via smart contracts, meaning that you and the other party will agree to specific conditions. After setting up your smart contract, you cannot alter it.
This method ensures that no one can re-route your funds and send them to a different account.
A smart contract runs on a blockchain. It uses the blockchain's distributed ledger and cryptographic encryption abilities to specify terms and conditions for a specific operation.
Many DeFi applications (Decentralized apps or Dapps) are built on the Ethereum blockchain. However, other platforms like Solana, Binance, or Cardano are developing similar applications.
DeFi is new compared to centralized finance systems, so new applications are still being released.
A blockchain is an immutable ledger that cryptographically secures entries that are used for transactions. Blockchains are the basis of cryptocurrencies, tokens that have value and are created in a blockchain.
What is the Difference Between DeFi and Crypto?
Decentralized Finance and Cryptocurrency are often used in the crypto space. As such, the difference between them needs to be explained.
Cryptocurrency is a digital currency that received its name because it uses encryption to verify transactions. Transaction data is stored on public blockchains.
DeFi is a broader concept encompassing many financial applications built on blockchain technology. These applications include lending, borrowing, insurance, and more.
DeFi applications can be built on several blockchain platforms and use many digital assets, including cryptocurrencies.
Cryptocurrency is one of the types of assets available in DeFi. DeFi offers a wide range of financial services based on blockchain technology that permits you to buy, sell, lend, or borrow money.
Also, cryptocurrencies are tokens or coins. You can buy them through centralized or decentralized exchanges. DeFi, however, represents all finance-related protocols under a blockchain network.
In conclusion, cryptocurrency is a digital asset under DeFi, but DeFi does not involve just crypto. Despite these differences, these two concepts coexist and complement each other.
Top DeFi Trends to Anticipate in 2024
Decentralized Finance (DeFi) is the standard shift from traditional finance. It promotes peer-to-peer financial services without the need for a third party, paving the way for a more inclusive and effective financial market.
For example, in businesses, DeFi presents an opportunity for easy and quick access to capital via decentralized fundraising and lending platforms.
This opportunity facilitates borderless transactions and plays a vital role in propagating financial inclusivity, mainly via smart contracts that ensure fair and transparent transactions for all its users.
The DeFi market should reach a staggering $26,170.0 million by 2024, with an annual growth rate (CAGR 2024-2028) of 9.07%. By 2028, the market should grow to $37,040 million, presenting a wealth of opportunities for investors and entrepreneurs.
As 2024 continues to become a crypto-awareness year, DeFi trends are gaining serious momentum. This article will explore the top DeFi trends to anticipate, especially in the second half of 2024.
Liquid Staking Protocols
Liquid staking protocols are an advanced move in traditional staking mechanisms. These protocols allow stakers to retain liquidity even when their assets are locked in staking.
The stakers achieve this with the help of Liquid Staking Tokens (LSTs). LSTs act as derivatives of the staked assets. Holders of these tokens use them for various DeFi activities, thereby promoting capital efficiency.
Let us examine one of such protocols.
Lido Finance
Lido Finance is the largest liquid staking platform, supporting various networks such as Polygon, Ethereum, and Solana.
Users of these networks can stake their tokens and receive liquid staking tokens (stMATIC, stETH, stSOL) for use as equivalents across various DeFi platforms.
Lido has over $14 billion in Total Value Locked (TVL) and charges a 10% fee on staking rewards. The protocol also offers an APY ranging from 4.4% to 6.7%, depending on the network.
Users stake their assets in a liquid staking protocol and receive LSTs equal to the value of their staked asset. For instance, when a user stakes Solana, they receive stSOL in return.
These tokens can be used in many DeFi applications, like borrowing, lending, yield farmings, etc.
The technology behind liquid staking involves the use of smart contracts. Smart contracts automate the staking process, distribute rewards, ensure security, and mint LSTs.
These contracts undergo regular auditing to ensure they are free from vulnerabilities and to maintain the integrity of the staking process.
Certain protocols, such as Frax Finance, use Algorithmic Market Operations (AMO) to maintain the stability of LST prices. AMO helps the LSTs closely track the value of the underlying assets.
Also, many liquid staking protocols make use of Decentralized Autonomous Organizations (DAOs) for governance. Token holders have the right to vote on protocol changes, fee structures, and many other important decisions.
This participation helps to ensure that the platform evolves in line with the needs of the community.
While liquid staking protocols have new risks, like smart contract vulnerabilities and counterparty risk, many protocols have very robust security measures that help to mitigate these risks.
Blockchain Gaming
The blockchain gaming industry is currently booming, and the DeFi market has begun to monetise it.
Blockchain-based games allow players to own in-game assets, which tokens represent. Players use these tokens for various purposes in the game’s ecosystem.
These players can also trade these tokens on DeFi platforms. DeFi protocols play a very important role in promoting in-game asset transferability.
The protocols also enable users to earn interest on their gaming assets. Several surveys have proven that interest is growing in this space.
This proof of interest is because both gamers and developers are currently expressing enthusiasm for exploring the various possibilities of blockchain-powered and monetized gaming experiences.
Traditional Finance Integration
DeFi is forming an integration with traditional finance (TradFi) using hybrid financial products that combine the benefits of both systems (DeFi and TradFi).
These products include tokenized securities and decentralized trading platforms that provide traditional financial instruments.
This integration will provide easy access to these two financial systems, speed DeFi's growth, attract many institutional investors and foster mainstream adoption.
The synergy between TradFi and DeFi will give broader access to capital, thereby allowing businesses to tap into already established financial markets.
This synergy will also increase investor confidence. The combination of traditional finance’s reliability and decentralized finance’s innovation will enhance investor confidence.
Crypto Bridges
Crypto bridges have become a very important component in the blockchain space. These bridges permit investors to move assets to faster layer 2 networks like Polygon or Arbitrum.
This transition brings about cost-effective ERC-20 token trading while maintaining exposure to Ethereum.
Crypto bridges also give access to exclusive markets on various blockchains. The integration of bridges into DeFi protocols has made token swaps across protocols very easy.
This integration makes it unnecessary for users to navigate many platforms.
Therefore, the growing traction of crypto bridges is due to enhanced user experience, combined efficiency, and accessibility to multiple markets.
Intent-based System
Due to DeFi's current complexity and time-intensive nature, users often need to handle transactions across multiple platforms and infrastructures.
Unlike transactions, which show “how’ you can execute an action, intent-based systems show “what’ the desired outcome of an action should be.
With intent-based systems, users can easily specify their desired outcomes without detailing every transaction parameter.
This method is the exact opposite of the traditional transaction model, which requires users to define every aspect of their transactions.
The intent-based architecture will help users to get the best deal in the market. This architecture does not need them to specify the time frame for the execution or the platform for the swap.
Users do not need to detail every transaction parameter or navigate all the technical complexities involved. This advantage makes the entire process more efficient and user-friendly.
In the crypto space today, UI/UX challenges make it very difficult to make good Return on Investments (ROI). The challenges include the stress of creating a wallet, doing swaps on-chain, etc.
These factors chase and discourage investors. The idea of Intent-based systems is to eliminate all these difficulties, thereby giving users the best possible outcome in what they need in crypto.
Let us see an example of an intent-based system.
UniswapX
UniswapX is an intent-based system that helps to overcome the challenge of inefficient routing across fragmented liquidity pools. UniswapX is an auction-based protocol.
Users find the best price for their trades across Automated Market Makers (AMMs) and many on/off-chain liquidity sources.
The front end of UniSwapX looks very similar to Uniswap. However, the key differences are in the back end. Users will not need to approve their transactions traditionally.
Instead, they get their signatures through Uniswapx’s Filler network, which helps them find the best price across centralized exchanges, DEX aggregators, and Uniswap pools.
Central Bank Digital Currencies (CBDCs)
In 2024, central banks worldwide will actively participate in research, development, and pilot programs for central bank digital currencies (CBDCs).
These banks aim to introduce their digital national currencies. This DeFi trend is sure to grow substantially by the end of 2024. Many more countries will soon begin pilot programs or introduce their CBDCs.
The distinctive aspect that defines this trend is the upcoming integration of CBDCs into TradFi infrastructures. This integration is a very major shift as CBDCs transcends their role.
The potential CBDC integration goes beyond just facilitating cross-border transactions and regular everyday payments.
The integrations will set the stage for innovative applications and huge transformative advancements across many sectors.
The Rise of AI-Powered DeFi Solutions
This DeFi trend is very major as Artificial Intelligence (AI) can improve DeFi’s capacities.
AI-powered tools can automate several tasks, such as risk assessment, portfolio management, and algorithmic trading, in the DeFi space. These tools and their abilities can result in more efficient investment strategies.
Users can also have personalized financial experiences. However, there are several potential biases and ethical considerations in AI algorithms that need to be properly addressed before they are adopted.
NFT Integration
The infusion of Non-fungible Tokens (NFTs) into Decentralized Finance platforms is a very major DeFi trend to anticipate in 2024. This integration creates vast opportunities for digital ownership and asset tokenization.
NFTs represent distinct assets like art, real estate, and collectibles which allows companies to use them as collateral in DeFi borrowing and lending.
This trend expands the scope of assets within the DeFi ecosystem and fosters DeFi growth by enhancing liquidity and boosting market participation.
One benefit of adopting NFT integration is that NFTs provide new revenue channels for companies to produce and sell unique digital assets.
Another benefit is that NFT-centered experiences and rewards enhance brand interaction and loyalty spurring up customer engagement.
Conclusion
DeFi is at a very crucial moment, gaining traction in both major and niche markets because of new narratives and developments.
The DeFi sector is evolving regularly, using areas like DEXes to offer formerly inaccessible financial primitives on-chain.
DeFi is constantly pushing boundaries and reshaping the future of the financial landscape.
As these DeFi trends keep evolving, we can expect new solutions to emerge, making DeFi one of the most powerful forces in the financial market.
Despite the positive outlook for DeFi, certain challenges, such as composability, user experience, and liquidity fragmentations, may affect the widespread adoption of these trends.
This article is for educational purposes only. Hence, do not take it as financial advice.
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