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Steering through waves of transformative growth and occasional setbacks, the realm of DeFi witnessed a tumultuous yet groundbreaking phase throughout 2023. Amidst market resilience, regulatory shifts, and an influx of innovative protocols, the landscape underwent a renaissance, propelling the sector to new heights.
Market Overview
- Total Value Locked
The TVL within the DeFi sector hovered around $47 billion at the time of writing. While this figure stands ~ 72% lower than its historical peak, the TVL exhibited noteworthy resilience throughout 2023.
- TVL per Chain
Ethereum maintained its leadership position with ~ 56.5% share in TVL, hosting approximately 957 applications on its chain and showcasing its robust ecosystem for dApps. Close on its heels was Tron with ~ 16.1% share in TVL across 26 protocols, followed by BNB chain with ~ 6% share in TVL and ~ 667 applications. Additionally, both Arbitrum and Polygon emerged as prominent contenders, as they accommodated 491 dApps each, and a share of ~ 4.5% and ~ 1.7% in TVL respectively.
- Category Wise TVL
LSDs emerged as the dominant category in Total Value Locked (TVL), commanding a significant share of $27 billion at the time of writing. Following closely were Lending protocols, contributing $18.7 billion, and Decentralized Exchanges (DEXes) with $12.67 billion in TVL. Additionally, 2023 witnessed the ascent of Real World Asset (RWA) protocols, accumulating a share of $5.76 billion, marking their growing representation in the DeFi landscape.
- Number of DeFi Protocols
Dexes dominated the landscape with a vast count of 1,091 protocols, facilitating seamless token trading. Lending protocols amounted to 319, highlighting the significance of borrowing and lending activities. Liquid Staking was represented by 129 protocols, emphasizing the growing importance of staking derivatives. CDP protocols amounted to 111, while Bridge protocols totaled 48, serving as vital connectors between disparate blockchains. RWA protocols stood at 32, marking a rising trend of integrating tangible assets into DeFi.
Expert Opinion
Vadim Krekotin, Founding Partner, Cryptomeria Capital
DeFi continues to redefine traditional finance paradigms. The fusion of blockchain and AI has led to innovative financial products and services, offering investors decentralized lending, automated trading, and yield farming opportunities. DeFi’s momentum is set to persist in 2024, with increased adoption and integration of AI-driven algorithms.
Lending Protocols
Lending protocols continued to act as a prominent player in the DeFi space with a TVL of $18.7 billion. Few notable developments observed during the year are as follows:
- Aave launched GHO stablecoin backed by various digital assets including Ethereum and AAVE’s native token AAVE
- JustLend launched “Staked TRX” and “Energy Rental” to provide users with more flexible and streamlined options while reducing energy rental costs
- MakerDAO team built Spark to empower DAI ecosystem
- Venus protocol launched Venus Prime to elevate user engagement and propel the protocol’s expansion
- Oasis.app rebranded to Summer.fi and extended their offerings to Base, Arbitrum and Optimism and registered a gigantic surge in TVL from $1.4 billion to $3 billion this year.
Total Value Locked
Among the 319 lending protocols, AAVE held close to $5 billion in TVL throughout the year, while JustLend registered an exponential increase to $6 billion, a remarkable surge of ~ 68% from the start of the year.
Decentralized Exchanges
Decentralized Exchanges can be regarded as the backbone of DeFi as it is the go-to platform to swap assets on-chain. The sector witnessed significant developments like Uniswap came up with Uniswap X which emphasized on enhancing swapping efficiency by aggregating liquidity sources for better prices and offering gas-free transactions.
PancakeSwap launched V3 on BNB Chain and Ethereum in April, with an aim to enhance capital efficiency and revamp its fee structureCurve Finance fell victim to a ~ $73 million hack, the attackers’ exploited a zero-day vulnerability in the Vyper compiler, a language fundamental to Curve Finance’s contracts, which resulted in a substantial loss, out of which ~ $54 million was recovered by the team. Algebra Finance introduced the ‘Integral’ update to address the issue of high gas costs, and DEX security. This update also enables seamless plugin integration without liquidity migration, ensuring core immutability for security and functionality.
DEX Market share by Trading Volume
Uniswap continued to dominate the DEX ecosystem commanding a staggering ~77% share in trading volume. PancakeSwap emerged as the closest competitor to Uniswap during the year with ~13% market share.
Perpetuals
The perpetual sector garnered substantial attention in 2023, witnessing increased investor interest. dYdX and GMX continued their dominance in the derivatives market and witnessed some key updates during the year.
For instance, in February, dYdX announced migration of their token to the Cosmos chain from Ethereum to offer enhanced scalability, interoperability, and reduce transaction costs. GMX launched their V2 in August which emphasized on protocol security and also launched isolated pools to manage high-risk assets. They also partnered with Chainlink to get reliable oracle feeds and reduce price attack risks.
With nearly 180 protocols, the TVL of all the protocols in this category stood at ~ $1.44 billion. GMX emerged as the market leader, boasting a TVL of $538 million, surpassing dYdX which had a TVL of $354 million.
Fees earned in 2023
Throughout the year, derivative trading volume notably surged across dYdX, GMX and perpetual protocols. In 2023, dYdX collected ~ $74.9 Mn in fees, while GMX collected a staggering ~ $122 Mn in fees.
DeFi’s Outlook for 2024
While the industry still faces challenges such as regulatory uncertainty and security risks, the potential for DeFi to revolutionize finance is undeniable. The trends observed in 2023, such as LSDs and RWAs, are expected to garner widespread adoption. We can anticipate new projects to contribute to these trends and further solidify their presence in the sector.
Year 2023 has magnetized institutional interest for DeFi from leaders like Blackrock, Fidelity and others. With the industry leaders joining the forces, we anticipate other institutions to follow through and explore DeFi instruments for their capital deployment.
The gaming industry seems poised for DeFi integration. Leveraging DeFi protocols within gaming holds promise for monetizing gaming experiences, fostering decentralized in-game economies, and offering gamers fresh opportunities to earn within these virtual environments.
DEXs and derivative trading platforms are likely to focus on user-friendly interfaces, offering tight spreads through their robust liquidity to attract more institutional and retail capital.
Expert Opinion
Maria Magenes, Marketing Lead, Summer.fi
2023 was not the best year for DeFi in a certain way. We have seen hacks, treasury raids and enforcement actions. But I think there has also been a lot of innovation in the space, more attention toward regulations, and improvements regarding the UI which I expect will bring in more users soon. Time and struggles bring more experience and we keep building with optimism. I like to think about the DeFi path as a love story: starting with a wow, experiencing difficulties and finally getting to the stable phase, where the crush transforms to a solid love.
Crypto Outlook 2024
2023 was a roller-coaster ride for the crypto sphere, marked by dynamic shifts, innovative advancements, and transformative trends that reshaped the industry’s landscape. Our Crypto Outlook Report for 2024 reflects on the highs, lows, and pivotal moments that defined the past year, while also peering into the horizon to forecast the exciting potential and emerging patterns set to influence the year ahead, with insights from industry leaders at Stepn, Enjin, Hacken, SuperScrypt, and more.
Click here to read the full report!
