Rachel Lin is CEO of SynFutures, a decentralized derivatives trading platform. She previously worked in the global markets division at Deutsche Bank, where she specialized in derivatives, and is also a founding partner of Matrixport, one of Asia’s largest crypto neo-banks.
2023 should have been decentralized finance’s (DeFi) time to shine. In late 2022, FTX’s implosion led to a near bank run on centralized exchanges (CEXs), and a flight to the transparency of DeFi alternatives.
But DeFi wasn’t ready. It fumbled the baton pass. Immature infrastructure and overly complex UI/UX meant DeFi wasn’t well-positioned to make the most of centralized finance’s (CeFi) "black swan" event.
Yet, there’s no reason to assume this was DeFi’s one and only shot. There is still plenty of hope for DeFi. In fact, major factors indicate that 2024 could be the year we see a real breakthrough.
DeFi’s total value locked (TVL) mostly staggered sideways in 2023. Based on data at DefiLlama.com, DeFi TVL started the year at around $38 billion, and reached a peak of nearly $53 billion in April. That’s compared to all time highs of $175 billion in November 2021. As of the time of writing, DeFi TVL is hovering around the $46 billion mark.
No wonder it’s easy to argue that DeFi squandered its opportunity. FTX left the door open for new entrants, but DeFi was caught off guard, and was completely unprepared to take on the potential influx in trading volumes that was suddenly up for grabs.
An outsize share of that blame is apportioned to DeFi’s poor UI/UX. True, the complex interfaces of most DeFi platforms are only navigable by experienced traders. Highly manual processes create high barriers to entry. A useful survey by Uniswap, released in May 2023, showed that 42% of CeFi-only users surveyed were hesitant to explore DeFi due to their knowledge gap.
Yet the same survey also showed that the primary difficulty for users of both DeFi and CeFi is actually uncompetitive pricing and execution; 45% of respondents in this group identified this as a problem.
Essentially, this boils down to the issue of DeFi’s poor capital and liquidity efficiency. Without getting too deep into the technical aspects, centralized order book models are infinitely more efficient than DeFi’s approach, but lack transparency. With such models, it’s very easy for the house to be betting against its users, and even misappropriating user funds.
Instead, DeFi platforms tend to opt for automated market makers (AMMs), yet these have so far struggled to compete with the more efficient trading environment CEXs can offer. While AMMs’ on-chain approach offers better transparency, these models struggle to address high slippage when liquidity is low, which is anathema to investors.
Yet, progress is being made on all these fronts, giving me, and many others, optimism for 2024.
Traditional finance (TradFi) players are accelerating their involvement in crypto finance, and not only in the form of ETFs. Standard Chartered recently launched a tokenization platform, Libeara, and one of the first assets set for tokenization is a regulated, Singapore-dollar government bond fund.
Expect such high-level crypto finance ventures to ramp up in 2024. Although this is a centralized, TradFi move, the broader credibility such news extends to crypto finance in general is no bad thing for DeFi.
Back on the Web3-native side, zero-knowledge rollups and scaling solutions are increasingly gaining traction. More and more protocols are deploying on these L2 scaling solutions, expanding usage of a major fix for high gas fees and ongoing infra-level efficiency issues.
We can expect these solutions to mature and expand their footprint in 2024, in a major boon for DeFi. With lower fees and greater network capacity, DeFi will be able to compete on a more even footing with CeFi.
In addition, there are already major advances underway in combining the strengths of order book models and AMMs, an advancement I’m personally very bullish on. Integrations and innovations in this area are offering credible solutions to DeFi’s capital and liquidity efficiency issues, especially with the introduction of on-chain order books.
Such models combine the trustlessness of an on-chain approach, with the capital efficiency of order books. We can expect more decentralized exchanges to explore and introduce these models in 2024, thereby tackling one of the major roadblocks to mainstream adoption.
Another point to note is that DeFi teams’ cash burn rate is significantly lower than their CeFi peers. As on-chain processes do the majority of the daily legwork, DeFi teams tend to stay smaller and therefore still have significant dry powder to deploy amid the current bear market.
It's possible the fundraising environment could remain tough well into 2024, at the same time as overall trading volumes remaining low and affecting fees-based revenue. Together, these factors present more of a challenge to centralized finance firms compared to smaller, decentralized projects.
Simply put, DeFi is better suited to weather deep, prolonged winters, giving it an edge as the market takes time to recover.
In short, DeFi isn’t out of the running yet. While 2023 might have been underwhelming, it wasn’t the end of the road. DeFi still lags CeFi for now but there are reasons to believe the former could catch up, and quickly, in 2024. Everyone’s been building in the background, getting their internal infrastructure up to par and establishing and deepening meaningful industry partnerships. I firmly believe 2024 will be DeFi’s year, and can’t wait to see what the near future holds.
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– Rachel Lin
