- \n
- Despite a broader market rebound, the TVL<\/span> of decentralised finance remains roughly 70% below the all-time high near $200bn reached in December 2021.<\/li>\n
- Ethereum still tops the ecosystem rankings by TVL, while Uniswap leads in trading volumes. <\/li>\n
- New technological avenues (L3, rollups, account abstraction) and segments (RWA, Web3 social) are gathering steam. <\/li>\n
- Institutions remain wary of DeFi, chiefly because of frequent hacks and scams, strict KYC\/AML<\/span> requirements and regulatory uncertainty.<\/li>\n<\/ul>\n<\/div>\n
Stagnation<\/h2>\n
The dramatic events of 2022 dealt a heavy blow to crypto, triggering a plunge in TVL and a prolonged DeFi slump. <\/p>\n
As of 1 January 2023, the sector\u2019s TVL stood at $43.7bn\u2014around 80% below its ATH<\/span>. <\/p>\n
In April the figure climbed above $60bn, but the rally was brief\u2014by October TVL had slipped below its level at the start of the year. <\/p>\n
In November, as the broader market recovered, sector liquidity began to grow again. Yet as of 24 December the aggregate DeFi TVL remained a modest $60bn.<\/p>\n
![\"1-TVL\"](\"https:\/\/forklog.com\/wp-content\/uploads\/1-TVL-1024x359.png\")
The crash and subsequent stagnation of DeFi. Data: DeFi Llama<\/a>.<\/figcaption><\/figure>\n As before, DeFi built on Ethereum dominates the segment, accounting for just over half of total TVL.<\/p>\n
![\"2-Total-Value-Locked-All-Chains\"](\"https:\/\/forklog.com\/wp-content\/uploads\/2-Total-Value-Locked-All-Chains.webp\")
Shares of various ecosystems within DeFi. Data: DeFi Llama<\/a> (as of 24.12.2023).<\/figcaption><\/figure>\n The second-largest ecosystem is Tron with roughly 1.4m active addresses, compared with around 490,000 for Ethereum.<\/p>\n
The largest aggregate TVL sits in liquid-staking protocols (LSD) at about $31.9bn. Lending is next ($22.22bn), followed by cross-chain bridges ($14.4bn) and DEX<\/span> ($14.22bn).<\/p>\n
![\"3-segments\"](\"https:\/\/forklog.com\/wp-content\/uploads\/3-segments.webp\")
TVL by category. Data: DeFi Llama<\/a> (as of 24.12.2023).<\/figcaption><\/figure>\n Lido remains the undisputed leader among liquid-staking protocols, with TVL above $21bn<\/a> (as of 24 December). Its nearest rival, Rocket Pool, stands at $2.71bn. <\/p>\n
Lido leads not only within its category but across all DeFi projects by TVL.<\/p>\n
![\"3_2-Projects\"](\"https:\/\/forklog.com\/wp-content\/uploads\/3_2-Projects-1024x470.png\")
Top dapps by TVL. Data: DeFi Llama<\/a> (as of 24.12.2023).<\/figcaption><\/figure>\n In October the Lido Finance community decided to end support for Solana. It is also considering dropping liquid staking for Polygon\u2019s token. <\/p>\n
LSD protocols are so popular they materially influence Ethereum\u2019s supply structure and issuance dynamics. On lending platforms, derivatives such as stETH were more attractive than ETH in 2023. <\/p>\n
Competition is fiercer among lenders\u2014Tron\u2019s JustLend trails Aave by a small margin despite the latter supporting ten different networks.<\/p>\n
![\"4-Lending-TVL-Rankings\"](\"https:\/\/forklog.com\/wp-content\/uploads\/4-Lending-TVL-Rankings.webp\")
Aave\u2019s TVL is $6.82bn, JustLend\u2019s $6.68bn. Data: DeFi Llama<\/a> (as of 24.12.2023).<\/figcaption><\/figure>\n Third place among lending projects goes to a DeFi veteran, Compound, whose TVL lags the leaders by more than $4bn. <\/p>\n
In September Compound Labs launched a lending service for institutional investors. <\/p>\n
A month earlier, developers integrated Base, Coinbase\u2019s layer-2 network.<\/p>\n
Among DEXs, Uniswap has long been the unchallenged leader. Curve, focused mainly on stablecoins, ranks second by TVL. PancakeSwap is third; in November it launched a gaming marketplace.<\/p>\n
![\"5-Dexes-TVL-Rankings\"](\"https:\/\/forklog.com\/wp-content\/uploads\/5-Dexes-TVL-Rankings-1024x344.png\")
Uniswap leads DEXs, well ahead of Curve by TVL. Data: DeFi Llama<\/a> (as of 24.12.2023).<\/figcaption><\/figure>\n According to Gauntlet, competition is fiercest among decentralised exchanges.<\/p>\n
![\"6-Concentration\"](\"https:\/\/forklog.com\/wp-content\/uploads\/6-Concentration-1000x1024.jpeg\")
DeFi competition index. Data: Bloomberg.<\/figcaption><\/figure>\n For two years DEX volumes steadily declined from the May 2021 peak. The downtrend is shown below:<\/p>\n
![\"7-Monthly-DEX-Volume\"](\"https:\/\/forklog.com\/wp-content\/uploads\/7-Monthly-DEX-Volume.webp\")
Monthly DEX trading volumes across Ethereum-based exchanges. Data: Dune<\/a>.<\/figcaption><\/figure>\n About 80% of non-custodial exchanges use automated market makers.<\/p>\n
![\"7_2-DEX-Mechanism-Volume-Share\"](\"https:\/\/forklog.com\/wp-content\/uploads\/7_2-DEX-Mechanism-Volume-Share-1024x237.png\")
Shares of DEX types over time. Data: CoinGecko, The Block<\/a>.<\/figcaption><\/figure>\n By late December, order-book DEXs accounted for less than 1% of volume, while \u201chybrids\u201d made up about 19.4%. <\/p>\n
The vast majority of dapps<\/span> are written in Solidity:<\/p>\n
![\"8-Solidity\"](\"https:\/\/forklog.com\/wp-content\/uploads\/8-Solidity.webp\")
More than 93% of dapps are built with Solidity. Data: DeFi Llama<\/a>.<\/figcaption><\/figure>\n Stagnation shows not only in TVL: user growth also fell. December 2021 recorded over 6.2m users; two years later there were just 2.49m (-60%).<\/p>\n
![\"9-Monthly-unique-DeFi-users\"](\"https:\/\/forklog.com\/wp-content\/uploads\/9-Monthly-unique-DeFi-users.webp\")
Monthly unique DeFi users. Data: Dune<\/a>.<\/figcaption><\/figure>\n DeFi Dominance<\/span> has barely budged since May 2022\u2014the month Terra collapsed. In December 2023 it was around 4.4%.<\/p>\n
![\"10-DeFi-Dominance\"](\"https:\/\/forklog.com\/wp-content\/uploads\/10-DeFi-Dominance-1024x236.png\")
DeFi Dominance over time. Data: CoinGecko, The Block<\/a>.<\/figcaption><\/figure>\n The supply of \u201cbitcoin on Ethereum\u201d also fell in spring 2022. It stabilised around 164,000 a year later, then began to climb gradually as the broader market recovered.<\/p>\n
![\"11-BTC-on-Ethereum\"](\"https:\/\/forklog.com\/wp-content\/uploads\/11-BTC-on-Ethereum-1024x236.png\")
\u201cBitcoin on Ethereum\u201d over time. Data: The Block<\/a>.<\/figcaption><\/figure>\n Ubiquitous hackers<\/h2>\n
In 2023 reports of platform breaches landed almost daily. According to DeFi Llama, total losses to users of decentralised apps from hacks exceed $5.69bn.<\/p>\n
![\"12-Total-Value-Hacked\"](\"https:\/\/forklog.com\/wp-content\/uploads\/12-Total-Value-Hacked-1024x262.png\")
Cumulative losses suffered by DeFi platforms due to exploits. Data: DeFi Llama<\/a> (as of 24.12.2023).<\/figcaption><\/figure>\n Cross-chain bridges remain a prime target; cumulative losses in this niche exceed $2.7bn. <\/p>\n
A recent high-profile case was the Heco Bridge hack and, as if in addition, the compromise of exchange HTX\u2019s hot wallet. Analysts put the loss at $110m. <\/p>\n
September and November 2023 were especially \u201cproductive\u201d for hackers, with $308m and $331m respectively stolen from DeFi protocols.<\/p>\n
![\"13-Total-Value-Hacked-2023\"](\"https:\/\/forklog.com\/wp-content\/uploads\/13-Total-Value-Hacked-2023-1024x311.png\")
Monthly sums stolen in 2023. Data: DeFi Llama<\/a>.<\/figcaption><\/figure>\n At the start of autumn, attackers actively exploited flash-loan vulnerabilities.<\/p>\n
![\"13_2-Stolen-funds-by-using-Flash-Loans\"](\"https:\/\/forklog.com\/wp-content\/uploads\/13_2-Stolen-funds-by-using-Flash-Loans-1024x238.png\")
Stolen funds via flash loans (monthly). Data: The Block<\/a>.<\/figcaption><\/figure>\n However, per rekt, the biggest exploits occurred in 2021\u20132022: Ronin Network ($624m), Poly Network ($611m) and BNB Bridge ($586m).<\/p>\n
![\"14-rekt\"](\"https:\/\/forklog.com\/wp-content\/uploads\/14-rekt.webp\")
Largest crypto hacks. Data: rekt<\/a>.<\/figcaption><\/figure>\n The biggest hacks of 2023 were Mixin Network ($200m) and Euler Finance ($197m). These are hefty sums and, given the still-high frequency of such incidents, risk exposure remains a pressing concern. <\/p>\n
At times attackers are brazen with victims. After breaching KyberSwap in late November, the hacker demanded full control of the project, including all assets and documents. <\/p>\n
November was the most lucrative month of the year for criminals: hacks and fraud cost crypto projects $343m, 15.4 times October\u2019s tally.<\/p>\n
On the other hand, the main vector of attacks in November was CeFi<\/span>, accounting for 53.8% of total losses.<\/p>\n
![\"15-Immunefi_Crypto_Losses_In_November_2023\"](\"https:\/\/forklog.com\/wp-content\/uploads\/15-Immunefi_Crypto_Losses_In_November_2023-1024x531.jpg\")
Data: Immunefi.<\/figcaption><\/figure>\n By chain, BNB Chain led with 22 incidents and 53.7% of total losses. Ethereum recorded 12 incidents and 29.3%.<\/p>\n
Developers and security specialists are not idle, devising new safeguards for user funds. In October the MetaMask team, in partnership with Blockaid, added security alerts to the Web3 wallet\u2019s browser extension to proactively block malicious transactions and protect users from scams, phishing and hacks.<\/p>\n
Obstacles and prospects<\/h2>\n
Institutional scepticism<\/h3>\n
In 2023 talk of institutional adoption returned amid hype over potential approval of spot ETFs based on bitcoin and Ethereum. <\/p>\n
Many analysts predict strong inflows into these instruments, if approved by the SEC<\/span>, alongside significant growth in digital assets. <\/p>\n
With large players refocusing on the industry, a likely side-effect of launching spot ETFs in America would be a revival in DeFi. <\/p>\n
Yet several barriers still stand in the way of institutional DeFi adoption. Chief among them:<\/p>\n
- \n
- security<\/em>. Crypto is rife with cases of multimillion-dollar losses from code errors and smart-contract vulnerabilities. That spooks many financial institutions exploring the sector;<\/li>\n
- data privacy<\/em>. Some traditional players prefer not to disclose trading history, open positions and other information competitors might exploit. Blockchain data are public and traceable, which will not suit all institutions. On the other hand, zero-knowledge-based innovations are advancing, promising private transactions and effective verification and authentication;<\/li>\n
- regulatory uncertainty<\/em> that leaves DeFi looking like the \u201cWild West\u201d. The risk of supervisory scrutiny remains a serious deterrent for many traditional firms; <\/li>\n
- strict AML\/KYC obligations<\/em>, which can run counter to DeFi\u2019s permissionless nature.<\/li>\n<\/ul>\n
To address these challenges, Haven1 Foundation head Akash Mahendra proposed<\/a> several strategic steps to reduce \u201cinstitutional uncertainty\u201d around DeFi:<\/p>\n
- \n
- top priority is stronger security<\/em>: regular, in-depth smart-contract audits; bug-bounty programmes to find vulnerabilities; and wider use of multisig wallets;<\/li>\n
- reducing regulatory uncertainty<\/em> through constructive dialogue between \u201cDeFi pioneers\u201d and supervisors to legitimise the sector in the eyes of traditional participants;<\/li>\n
- integrating KYC\/AML solutions<\/em> and striking an \u201coptimal balance between protecting user privacy and meeting stringent regulatory standards\u201d. This, he argues, would enable a \u201cmore secure and accountable ecosystem\u201d;<\/li>\n
- education and evangelisation<\/em>. Misunderstanding breeds mistrust, Mahendra says; large-scale education should help institutions navigate DeFi \u201cwith renewed confidence\u201d, deepen knowledge and debunk myths; <\/li>\n
- interoperability and standardisation<\/em>. DeFi \u201ccan benefit enormously from cross-chain solutions\u201d, enabling \u201csmoother and more predictable interactions between platforms\u201d; <\/li>\n
- transparent governance<\/em>. Open, decentralised governance empowers communities by giving everyone a voice. \u201cCollective oversight inspires trust\u201d because decisions are made transparently.<\/li>\n<\/ul>\n
Is another \u2018DeFi summer\u2019 near?<\/h3>\n
Despite institutional caution, JPMorgan analysts detected \u201cpreliminary\u201d signs of recovery in DeFi and NFTs. In their view, anticipation of a spot bitcoin ETF has improved market sentiment and \u201cthe worst is behind us from a medium-term perspective\u201d.<\/p>\n
According to JPMorgan, the main driver of DeFi\u2019s rebound is a pickup in DEX trading activity. Liquid staking via Lido Finance has also had a significant impact.<\/p>\n
The popularity of Ordinals and similar protocols has buoyed NFTs, they argue. Avalanche, Fantom and Polygon have already implemented their own \u201cinscriptions\u201d.<\/p>\n
JPMorgan stressed that Ethereum will benefit less as liquidity shifts to newer projects such as Aptos, Sui, Pulsechain, Tenet, Sei and Celestia. The problem also relates to Ethereum\u2019s \u201cscalability, lower transaction speeds and higher fees\u201d.<\/p>\n
MN Trading founder Micha\u00ebl van de Poppe expects the return of \u201cDeFi summer\u201d in 2024. He observes that an increasing number of projects in the segment \u201care starting to rally\u201d.<\/p>\n
\n
#Bitcoin<\/a> still consolidating above $35,000. <\/p>\n
Slowly, but surely, more #DeFi<\/a> projects start to rally. <\/p>\n
I wouldn\u2019t be surprised if we get a renewed DeFi summer in 2024. <\/p>\n
The bear market is behind us.<\/p>\n
\u2014 Micha\u00ebl van de Poppe (@CryptoMichNL) November 2, 2023<\/a><\/p><\/blockquote>\n
- reducing regulatory uncertainty<\/em> through constructive dialogue between \u201cDeFi pioneers\u201d and supervisors to legitimise the sector in the eyes of traditional participants;<\/li>\n
- data privacy<\/em>. Some traditional players prefer not to disclose trading history, open positions and other information competitors might exploit. Blockchain data are public and traceable, which will not suit all institutions. On the other hand, zero-knowledge-based innovations are advancing, promising private transactions and effective verification and authentication;<\/li>\n