Arthur@Arthur_0x

The European Renaissance, which began in the 14th century, ignited a revival in art, culture, and intellectual thought that transformed modern civilization.Today, we are witnessing a similar awakening in the crypto space — the Decentralized Finance (DeFi) Renaissance. Like its historical counterpart, this movement is breaking down barriers and reshaping how we think about money and finance. Powered by blockchain and smart contracts, DeFi democratizes financial services, giving people worldwide access to a trustless economy without traditional finance intermediaries. It has the potential to reinvent finance entirely.Just as the European Renaissance thrived on technological advancements and societal shifts, the DeFi Renaissance is being driven by key factors that are pulling it out of early challenges and into a period of renewed growth and innovation.

1. DeFi Is Moving Out from Trough of Disillusionment

DeFi saw a surge in 2020 and 2021, fueled by high expectations as many believed it would revolutionize traditional finance(TradFi). However, like most new technologies, the early hype led to disappointment when the underlying infrastructure proved underdeveloped, leading to a slump in 2022.Yet, as with any revolutionary movement, DeFi has emerged stronger, navigating the “trough of disillusionment” and beginning its climb up the slope of enlightenment. The Gartner Hype Cycle is an effective framework to illustrate this journey, where DeFi is now showing signs of revitalization.After two years of correction, key metrics like total value locked (TVL) are rebounding, evidently from the chart below. While some metrics improved due to higher crypto assets prices, volumes on DeFi platforms have also increased significantly and nearly recovered to 2022 levels, proving that the resurgence is real..In fact, some foundational DeFi projects, like Aave, have even surpassed their 2022 peak in several metrics. For instance, Aave’s quarterly revenue has surpassed that of 4Q21 — considered the height of the last bull market.Our full Aave analysis is hereThis signals that DeFi is maturing and entering a new phase of productivity, poised for long-term scalability.

2. New Interest Rate Cycle Will Make DeFi Returns More Attractive

DeFi’s resurgence is not just driven by internal factors; external economic shifts also play a critical role. As global interest rates shift, risk assets like crypto, including DeFi, become more attractive to investors seeking higher returns.With the Federal Reserve implementing a 50 basis points rate cut in September, the stage is set for what may be a period of lower interest rates, similar to the environment that fueled the crypto bull markets of 2017 and 2020, as shown in the chart below. Bitcoin (and crypto) bull markets are highlighted in green, historically in a low-interest-rate regime, whereas bear markets are highlighted in red typically during a time of spiking interest rates.DeFi benefits from lower interest rates in two key ways:

1. Lower opportunity costs of capital — With treasury bills and traditional saving accounts offering lower returns due to reduced interest rates, investors may turn to DeFi protocols that offer higher yields for instance via yield farming, staking, and liquidity provision.
2. Cheaper loan — Financing costs become lower, encouraging DeFi users to take out loans and put them to productive use, thereby driving overall activity across the ecosystem.

While interest rates may not drop to the near-zero levels seen in past cycles, the reduced opportunity cost of engaging DeFi will be lowered significantly. Even a moderate decrease in rates is enough to make a big difference given the difference in rates and yield can be amplified with leverage.In addition, we foresee the new interest rate cycle to be a large driver for stablecoin growth given it significantly lowers the cost of capital for yield-seeking TradFi funds moving over to DeFi.During the last cycle, FFR (federal funds rate) has an inverse relationship with stablecoin supply growth, as shown below. As rates decrease again, stablecoins supply is expected to grow, providing more dry powder for the acceleration of DeFi.

3. Finance: (Still)The Biggest Product-Market Fit for Crypto

The crypto space has experimented with various use cases for crypto such as NFT, metaverse, gaming, social, etc. However, by most objective metrics, they haven’t really found product-market fit (PMF).Consider the case below of dwindling NFT daily trading volume even with a brief Bitcoin Ordinals-led resurgence in 2024.As for metaverse and gaming, there are still no breakthrough Web3 games that are popularly consumed by fans all over the world. The two OG Web3 metaverses, Decentraland and Sandbox, are struggling to even get a few thousand daily active users, compared to 80 million DAUs for Roblox. TON games have impressive DAUs, but it is unsure how many will continue gaming on TON when there are no more financial incentives.DeFi, on the other hand, has proven its product-market fit. The growth of core DeFi categories like liquid staking and lending, which have expanded over 100% year-on-year, is a testament to its traction. Meanwhile, newer billion-dollar categories, such as restaking (Eigenlayer) and basis trading (Ethena), which had zero TVL just a year ago, are emerging. This explosive growth showcases the composability and permissionless nature of DeFi, where new financial “legos” are built on top of each other to unlock new use cases.Regulatory barriers have long hampered DeFi’s potential to disrupt TradFi, but its inherent advantages are clear. For example:

• Cross-border transactions and remittance fees average 6%, with transfers taking 3–5 business days.
• Stock exchanges operate with bloated back-office systems and limited hours, making them inefficient.
• Real-world assets, such as real estate, could benefit from tokenization, unlocking liquidity and enabling composability in DeFi e.g. used as collateral.

DeFi’s ability to operate 24/7, with low costs, increased liquidity, and no intermediaries, makes it a far more efficient alternative. The technology exists; the challenge lies in whether regulators will allow DeFi to disrupt the $10 trillion global financial industry, which thrives on inefficiencies.To show how DeFi outperforms TradFi in efficiency, let’s compare the costs of running services in both systems. Here’s a breakdown according to an IMF study:

• Labor costs: DeFi’s labor costs are nearly 0%, compared to 2–3% in TradFi. For instance, DeFi loans are processed automatically without human intervention, while TradFi requires manual reviews and paperwork.
• Operational costs: DeFi’s operational costs are just 0.1%, while TradFi’s range from 2–4%. DeFi avoids the need for a large office or intermediaries, as smart contracts handle transactions and blockchain provides verification.

In total, marginal costs in TradFi reach 6–8% in advanced economies and 10–14% in emerging markets, with these costs passed on to end users.DeFi cuts out these inefficiencies. It’s that simple.In addition, the financial technology (Fintech) sector has seen very little innovation over the last 15 years, echoing the research by Blockchain Capital. While we’ve made huge strides in areas like AI and global internet access, Fintech is still stuck with outdated systems, such as all banks using the 50-year-old SWIFT system that typically takes 1–4 working days for transfers.Most Fintech advancements, like digital payments, fractional shares, and APIs, have been focused on improving user experience, not fixing the core inefficiencies of TradFi. For instance, Robinhood and Plaid have built convenient solutions for everyone to purchase stocks, but they still rely on the old financial infrastructure. The real problem is that Fintech connects to outdated systems to make the best use of them rather than creating something entirely new. While these changes are helpful, they don’t solve the deeper issues plaguing the TradFi world.DeFi is different. It’s built to be digital from the ground up. Instead of working around the old financial system, DeFi embeds financial services directly into the internet. In DeFi, things like fractional shares, over-collateralized loans, and global payments aren’t innovations — they’re just basic features. This marks a fundamental shift from small improvements to a complete overhaul of how finance works.By adopting DeFi, we can move beyond minor tweaks and start unlocking massive new economic opportunities, improving financial access, and creating wealth in places that TradFi often overlooks. It’s about reinventing the financial system to work better in a digital world.Looking ahead, the 2024 U.S. election could provide regulatory clarity. A Trump presidency could bring crypto-friendly regulations, while a Harris administration, recently warming to the industry, could maintain a positive stance. Regardless of the political outcome, the momentum behind DeFi is undeniable.DeFi is just getting started, and the future of finance is decentralized and onchain.

4. Enhanced UI/UX, Infrastructure, and Security

DeFi’s early days were marred by clunky interfaces and technical complexities that alienated users. However, the past few years have seen significant improvements in user experience, infrastructure, and security, making DeFi more accessible to mainstream users.One of the most significant improvements has been in wallet infrastructure. Managing seed phrases and private keys used to be a major obstacle, but new smart wallets and embedded wallets have made this process simpler and more secure. Features like social recovery, biometric authentication, and passwordless logins now make it easier for users to manage their funds without the complexities of traditional Web3 wallets.

Security has also improved, with more thorough smart contract audits becoming standard before deployment. Platforms like ImmuneFi encourage ethical hackers to find bugs and security issues through bug bounties, ensuring vulnerabilities are addressed before they can be exploited. These developments in wallet infrastructure and security are making DeFi safer and more efficient for all users. This result is reflected in the number of DeFi hacks which declined dramatically in the past 1 year.With these improvements, DeFi is becoming more accessible to the mainstream including for institutional adoption, fueling its continued growth.

Make DeFi Great Again

Much like the European Renaissance reshaped society, DeFi is set to revolutionize finance. The potential for innovation in DeFi is vast, and we are only beginning to see its impact. As more users and investors embrace DeFi, the future of global finance will increasingly move on-chain, making financial systems more efficient, open, and accessible to everyone.DeFi has the power to eliminate inefficiencies, break down barriers, and create new opportunities for financial inclusion. It’s not just a passing trend — it’s a fundamental shift in how the world interacts with money. From global payments to democratizing access to financial services, DeFi offers a future where anyone can participate in the financial system.Currently, the total market cap of all DeFi protocols is around $33 billion, which is only about 1.4% of the total crypto market cap of $2.3 trillion.

Data as of 13 Oct 2024The growth and success of DeFi have been largely overlooked recently given the challenging market conditions and industry environment, however, that is set to change when DeFi protocols continue to grow at a breakneck pace and return those growing value to token holders such as what Aave have done with their recent token economics change proposal. Market participants will come to further recognize the fundamentals and potential of DeFi and reallocate their capital accordingly.We expect this DeFi assets’ share of the total crypto market cap to grow from 1.4% to 10% within the next 2 years as DeFi continues to grow and the market wakes up to its latest traction and renewed potential.Make DeFi great again.

Acknowledgment

1. The person who popularized the term “DeFi Renaissance”
2. The Great Return of DeFi

Authors: Arthur Cheong & Eugene Yap

IMPORTANT NOTICE: This document is intended for informational purposes only. The views expressed in this document are not, and should not be construed as, investment advice or recommendations. Recipients of this document should do their due diligence, taking into account their specific financial circumstances, investment objectives, and risk tolerance (which are not considered in this document) before investing. This document is not an offer, nor the solicitation of an offer, to buy or sell any of the assets mentioned herein.