This last year may have been a quieter year for decentralized finance (DeFi) than most, but all that could change very soon. Next year looks set to be a landmark period for DeFi as crypto winter thaws and several trends reach their natural maturation points.
Cointelegraph spoke with a range of experts from across the industry to discover what 2024 holds for decentralized finance.
The sector as a whole is currently in good spirits. Optimism abounds as the green shoots of renewed growth begin to show. Julian Deschler, co-founder of Web3 privacy protocol Elusiv, is among the leaders who are bullish on DeFi’s prospects in the near term.
“We look forward to a resurgence of constructive growth in the DeFi ecosystem. The projects that were able to navigate the last couple of years and continue to deliver are a sign of real value and scalability. We see 2024 as the year where these projects catalyze legitimate traction for DeFi and establish the beginning of long-term mainstream adoption,” Deschler told Cointelegraph.
Kain Warwick, founder of derivatives markets ecosystem Synthetix, echoed those sentiments. Warwick told Cointelegraph that 2024 “will also mark the end of the bear market. We’ve already seen impressive price momentum in this last quarter and should expect to see this continue as macro liquidity thaws throughout the year.”
In their anticipation of a great year ahead, Deschler and Warwick are joined by Sam MacPherson, co-founder of Phoenix Labs and contributor to MakerDAO’s subDAO Spark. According to his analysis, there is strong evidence of an emerging bull trend.
Excited to see all these RWA tokenizations coming online. The space is maturing rapidly.
— Sam MacPherson (@hexonaut) December 18, 2023
MacPherson told Cointelegraph, “Watching the balance sheet of Maker for five years, I haven’t seen leverage like this coming online since 2021. I think the bull market is starting soon — certainly in 2024.”
Regulation and transparency
One area that is likely to witness profound change is regulation. In 2023, the crypto industry regularly found itself at odds with United States lawmakers keen to impose themselves on the crypto industry. DeFi is unlikely to avoid scrutiny in the year ahead.
Nathan Catania, partner at XReg Consulting — a public policy and regulatory affairs consultancy specializing in crypto — told Cointelegraph that true DeFi has far less to fear than centralized alternatives.
“The majority of DeFi projects have certain elements of centralized control and are, in fact, hybrid finance (HyFi), meaning they exist somewhere on the spectrum between CeFi [centralized finance] and DeFi,” explained Catania. “In 2024, true DeFi will continue to remain outside of the regulatory perimeter, as it cannot be regulated under existing regulatory paradigms. However, it will be the year that regulators in many jurisdictions, including the U.S., will crack down on HyFi.”
Antoni Zolciak, co-founder of Aleph Zero — a privacy-enhancing layer 1 — also believes 2024 will be an important year for regulation.
“As institutional capital signals its entry into crypto markets through ETF [exchange-traded fund] discussions, tokenization of assets and major Web3 launches, DeFi’s readiness is in the spotlight. In 2024, major market trends in DeFi will center on addressing institutional concerns and fostering compatibility with regulatory frameworks. The industry recognizes the challenges posed by features like permissionless markets and pseudonymity, prompting a pivotal shift toward a nuanced balance between privacy and transparency through proactive compliance measures.”
Speaking to Cointelegraph, Zolciack went on to add, “The focus on transparency and compliance is reshaping DeFi’s trajectory [...] Critical solutions are already emerging to tackle institutional concerns. On-chain intellectual property protection, real-time AML [Anti-Money Laundering] analytics and decentralized order book exchanges signify a move toward safeguarding proprietary trading strategies.”
The tokenization of everything
Some industry observers say that one of the big trends for 2024 will be tokenization. From new types of yield-bearing stablecoins to the tokenization of real-world assets (RWAs), the sector has the potential for massive growth.
Anything that can be on-chain will be on-chain in 2024, and on-chain fiat will provide just one example of this larger trend, according to Sveinn Valfells, co-founder and CEO of Monerium.
“There’s growing recognition of the indispensable role fiat currencies play in the trading and integration of traditional assets onto blockchains,” Valfells told Cointelegraph.
“That’s why a fully authorized and regulated subset of stablecoins, on-chain fiat, is expected to gain momentum in 2024 and beyond. This is driven to a large extent by the excitement revolving [RWAs] and their potential to revolutionize the sector and also by on-chain P2P payments. To capitalize on this trend, there will be more appetite for solutions allowing seamless integration with traditional payment systems, which makes it directly transferable between off-chain bank accounts and Web3.”
Valfells predicts a future in which “bonds, stocks and treasuries seamlessly integrate onto blockchains,” with 2024 proving to be an important stepping stone on that journey.
Valfells is not the only voice predicting big things for tokenization. Keyrock co-founder and CEO Kevin de Patoul also has his eyes on the sector.
As the boss of the digital market makers told Cointelegraph, “In 2024, tokenized treasuries will continue to play a crucial role, serving as a bridge between TradFi and DeFi [...] However, the major market trend for DeFi in 2024 will be the tokenization of all assets. While tokenized treasuries are a starting point, other real-world assets such as stocks, bonds, real estate and carbon credits will undergo tokenization. This shift is expected to enhance liquidity, reduce transaction costs, and provide new opportunities for DeFi protocol designs.”
“Another significant trend is the potential development of yield-bearing stablecoins backed by tokenized Treasury bills. As stablecoins already play a crucial role in the DeFi ecosystem, incorporating yield-bearing features backed by real-world assets could attract more conservative investors, which will, in turn, contribute to increased liquidity, accessibility and innovation within the decentralized finance space.”
Tokenization will power DeFi
Tokenization will power much of the DeFi sector in 2024, with some areas seeing 10x growth, according to Danny Chong of Tranchess, the yield-enhancing asset tracker. Chong is among the industry figures predicting its importance in shaping the year ahead.
“The 2023 tokenization wave has not only asserted the versatility of blockchain but has also positioned it as a strong force in bridging the gap between traditional and decentralized finance, bringing greater accessibility and liquidity,” Chong told Cointelegraph.
“The tokenization of real-world assets and the development of advanced structured products are two key trends which have the potential to drive market maturation in 2024 [...] The landscape is now witnessing a greater transition towards liquid staking tokens (LSTs). This shift extends beyond cryptocurrencies and to the tokenization of real world assets, broadening the scope of what can be used as collateral.”
Warwick also predicts further growth in the decentralized stablecoin market: “The rise of decentralized, crypto-native stablecoins will be a notable trend in 2024. The introduction of projects like Ethena, which leverages the basis trade to scale, will be a huge shift over 2024. I expect this to continue through the year, and we’ll see more decentralized stablecoin projects come to market.”
Conor Ryder, head of research and data at internet bond firm Ethena Labs, went further. Ryder believes that yield-bearing stablecoins will be the must-watch trend of the year. Speaking to Cointelegraph, he said, “The focus is expected to shift significantly towards yield-bearing stablecoins. We estimate that yield-bearing stablecoins are the fastest-growing DeFi sector, expanding from about $1 billion to more than $10 billion, and these stablecoins are set to proliferate further. Their yields are anticipated to stem from both staked Ether-based and RWA-based stablecoins, enhancing their market presence.”
David Siska of the Vega Protocol DEX said tokenization only now has a chance to shine thanks to advancements made in the crypto ecosystem during the crypto winter.
“Tokenizing real-world assets is complex from a legal and regulatory perspective, but we now have the block capacity and technology (like L2s and rollups on Ethereum) to make this a reality. We weren’t ready for RWAs during the previous market cycle. But today, the macro environment is different; the technology is significantly better; and there is so much more capital on-chain,” said Siska to Cointelegraph.
“My prediction is that RWAs will first make an impact in derivatives trading, as perpetuals and futures markets can reference RWAs from various oracle providers. For instance, oracles like Pyth, Redstone and Chainlink all offer a variety of RWA price feeds,” said Siska, adding, “To truly mature beyond price speculation, DeFi must interact with the real economy. A financial system that’s not connected to the real economy is effectively pointless.”
Other major forces
The development of layer 2s is another important phenomenon from 2023 that will reach maturity in 2024. Mathieu Baudet, CEO of microchain pioneer Linera, predicts novel solutions will emerge to meet the challenges of working on layer 2s.
“While 2023 was the year of betting on layer 2s, 2024 will be the year of consolidation — especially for those protocols based heavily in DeFi,” Baudet told Cointelegraph. “As an industry, we’re starting to realize that cross-L2 communication is hard and leads to fragmented liquidity. L2s will need to work together to allow for faster communication — possibly by sharing a decentralized sequencer instead of using slow layer-1 transactions.”
Elsewhere, Sung Min Cho, CEO and co-founder of Web3 messaging firm Beoble, expects that Web3 social platforms will also shine in 2024. Cho told Cointelegraph, “As we venture into 2024, I expect Web3 social platforms to continue growing and evolving in the ecosystem [...] From an industry perspective, greater regulatory clarity, growing consumer demands and innovative tech development will make Web3 social platforms the industry to watch.”
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