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.
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.
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
lackluster
2023
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.
DeFi’s
year
Toward
the
end
of
2023,
general
interest
in
the
crypto
market
—
both
retail
and
institutional
—
is
on
the
upswing
again,
driven
in
large
part
by
Greyscale’s
win
over
the
U.S.
Securities
and
Exchange
Commission
(SEC),
which
paved
the
way
for
spot
bitcoin
exchange-traded
funds
(ETF)
to
launch.
DeFi
will
be
able
to
compete
on
a
more
even
footing
with
CeFi
This
optimism
is
bleeding
into
DeFi
as
well.
The
excitement
around
ETFs
implies
professional
market
participants
are
more
than
welcome
in
crypto,
and
may
actually
be
sought
out
to
stabilize
and
legitimize
crypto
and
DeFi.
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.