Unveiling the New Phase of DeFi on APED.ai

• Crypto Market Anticipates an Exciting Phase with DeFi v2 in 2024
• Emerging Developments in Decentralized Finance (DeFi)
• Progressing Towards Widespread Adoption
• DeFi v1: A Retrospective Look
• Transitioning to DeFi v2
• DeFi v2 for Developers: Introduction of More Granular and New Primitives
• DeFi v2 for Institutions: Risk Management and Structured Products
• DeFi v2 for Retail: UX and Simpler Services

Crypto Market Anticipates an Exciting Phase with DeFi v2 in 2024

In 2024, the cryptographic market is prepared for an innovative era filled with optimism. The market has successfully navigated through turbulent times in the past 18 months and recent regulatory approvals have bolstered confidence. Monetary policy adjustments and Web3 technological advancements are setting the stage for an upsurge in crypto innovation.

Emerging Developments in Decentralized Finance (DeFi)

DeFi is showing particularly encouraging progress. As central banks show signs of cutting rates, DeFi yields are seen as increasingly attractive alternatives for investments. Furthermore, new ecosystems and a generation of fresh protocols are injecting novel financial primitives into the sector.

Progressing Towards Widespread Adoption

However, in order for DeFi to achieve mainstream acceptance, it needs to evolve from its previous phase. What are the essential pillars required for DeFi's evolution, and how are they taking shape in this market?

DeFi v1: A Retrospective Look

The first phase of DeFi was marked by the introduction of highly incentivized ecosystems, which created artificial and unsustainable yields. This phase also laid foundational groundwork for protocol innovations. Despite facing skepticism, these incentive programs effectively addressed the initial problems of many ecosystems. Unfortunately, changing market conditions led to a decrease in DeFi activity and yields plummeted to levels that no longer offered attractive risk-return ratios.

DeFi v1 was also characterized by the dominance of intricate protocols with a wide array of functionalities. With evolving market conditions, protocols like Aave, Compound, and Uniswap led to an outbreak of protocol forks across diverse EVM ecosystems. Security breaches posed a significant barrier to DeFi adoption, with most DeFi hacks resulting in a large percentage of the protocols' Total Value Locked (TVL) being lost. Despite these challenges, DeFi v1 was a remarkable success, holding strong through harsh market conditions and garnering a sense of community.

Transitioning to DeFi v2

For a technology trend's second iteration to achieve wider adoption than its predecessor, either the market conditions need adjustment or the technology must evolve to engage a new customer base. In terms of DeFi v2, its adoption milestones have been categorized into three groups:

• Developers creating new DeFi protocols and apps
• Retail investors accessing DeFi via wallets and exchanges
• Institutional investors utilizing DeFi for sophisticated and scaled use cases.

DeFi v2 for Developers: Introduction of More Granular and New Primitives

For developers, this new DeFi phase is being shaped by significant trends. Protocols are evolving from monolithic structures to smaller, more granular primitives. This shift towards "DeFi micro-primitives" is being made possible by protocols like Morpho Blue that provide atomic primitives for lending.

DeFi v2 developers will also benefit from the emergence of new and unique ecosystems such as EigenLayer or Celestia/Manta, offering new opportunities for development of innovative financial primitives in DeFi. Early innovators in these ecosystems include protocols like Renzo or EtherFi.

DeFi v2 for Institutions: Risk Management and Structured Products

Institutional adoption in DeFi v1 was primarily led by crypto businesses. For this to progress, DeFi v2 must enhance its core primitives with robust financial services that lower entry barriers for institutions. Risk management should become a key primitive in DeFi v2, enabling institutions to accurately model risk-returns in DeFi, leading to more advanced risk management services.

Micro-primitives need to be amalgamated into higher-order structured protocols to overcome adoption challenges for institutions in DeFi v2. Margin lending, insurance, or credit services are essential to unlock the next phase of DeFi for institutions. A DeFi vault offering yields across different protocols combined with risk management and lending or insurance mechanisms can serve as a structured product suitable for institutional frameworks.

The biggest unknown for institutional DeFi adoption is regulation. However, constructing a thoughtful regulatory framework is nearly impossible without institutional primitives like risk management and insurance. Therefore, building institutional-grade capabilities in DeFi v2 is critical to both increase adoption and mitigate existential risks to the sector.

DeFi v2 for Retail: UX and Simpler Services

Retail investors were hugely impacted by the turbulence in DeFi markets. However, the emergence of new ecosystems has been steadily bringing back retail investors. Despite this trend, DeFi remains a crypto-to-c

Edited by Jonathan Stoker