Three Major Trends of Decentralized Finance

Author: Mason Nystrom, Partner at Pantera; Translated by 0xjs@Golden Finance

Consumer DeFi

As interest rates decline, DeFi yields are starting to become more attractive. Increased volatility has brought more users, yields, and leverage. Coupled with the more sustainable yields brought by RWA, building consumer-grade crypto financial applications has suddenly become much easier.

When we combine these macro trends with innovations in chain abstraction, smart accounts/wallets, and the general shift towards mobile, there are clear opportunities to create consumer-level DeFi experiences.

Some of the most successful crypto financial applications in recent years have emerged from the combination of improving user experience and speculation.

● Trading Bots (e.g., Telegram) – Providing users with the ability to trade within messaging and social experiences.

● Better crypto wallets (e.g., Phantom) - Improve the existing wallet experience and provide a better experience across multiple chains.

● New terminals, portfolio trackers, and discovery layers (e.g., Photon, Azura, Dexscreener, etc.) – providing advanced features for advanced users and allowing users to access DeFi through a CeFi-like interface.

● The Robinhood of memecoins (such as Vector, Moonshot, Hype, etc.) – So far, cryptocurrency has mainly favored desktop, but a mobile-first experience will dominate future trading applications.

● Token launchpad – (e.g., Pump, Virtuals, etc.) – Provides permissionless token creation access for anyone, regardless of their technical ability.

As more consumer-grade DeFi applications are launched, they will resemble fintech applications with a standard user experience that users prefer, but they will aggregate and provide a personalized experience of DeFi protocols on the backend. These applications will focus on discovery experiences, the products offered (such as types of yields), appeal to advanced users (e.g., providing convenient features like multi-collateral leverage), and will often abstract the complexity of on-chain interactions.

RWA Flywheel: Endogenous Growth and Exogenous Growth

Since 2022, high interest rates have supported a large influx of on-chain real-world assets (RWA). However, the transition from off-chain finance to on-chain finance is now accelerating, as large asset management firms like BlackRock realize that issuing RWAs on-chain brings meaningful benefits, including: programmable financial assets, low-cost structures for issuing and maintaining assets, and greater asset accessibility. These benefits, such as stablecoins, have improved the current financial landscape by 10 times.

According to data from RWA.xzy and DefiLlama, RWA accounts for 21-22% of Ethereum assets. These RWAs primarily appear in the form of A-rated, U.S. government-backed treasury bonds. This growth is mainly driven by high interest rates, which make it easier for investors to go long on the Federal Reserve rather than DeFi. Although the macro winds are changing, reducing the attractiveness of treasury bonds, the Trojan horse of on-chain asset tokenization has already entered Wall Street, opening the floodgates for more risk assets to enter on-chain.

As more and more traditional assets move on-chain, this will trigger a compound flywheel effect, gradually merging and replacing traditional financial tracks with DeFi protocols.

Why is this important? The growth of cryptocurrency is attributed to exogenous capital and endogenous capital.

Most of DeFi is endogenous (essentially cyclical within the DeFi ecosystem) and capable of self-growth. However, historically, it has exhibited considerable reflexivity: it rises, falls, and then returns to the starting point. Over time, new primitives have steadily expanded DeFi's share.

On-chain lending through Maker, Compound, and Aave has expanded the use of crypto-native collateral as leverage.

Decentralized exchanges, especially AMMs, have expanded the range of tradable tokens and initiated on-chain liquidity. However, DeFi can only develop its market to a certain extent. Although endogenous capital (such as speculation on on-chain assets) has pushed the crypto market towards becoming a strong asset class, exogenous capital (capital that exists outside of the on-chain economy) is essential for the next wave of DeFi growth.

RWA represents a significant amount of potential exogenous capital. RWA (commodities, stocks, private credit, foreign exchange, etc.) provides the greatest opportunity for the expansion of DeFi, moving beyond merely cycling capital from retail pockets to traders' wallets. Just as the stablecoin market needs to achieve growth through more exogenous uses (rather than on-chain financial speculation), other DeFi activities (such as trading, lending, etc.) also need to achieve growth.

The future of DeFi is that all financial activities will move onto the blockchain. DeFi will continue to see two parallel expansions: an endogenous expansion achieved through more on-chain native activities, and an exogenous expansion achieved through the transfer of real-world assets onto the chain.

Platformization of DEFI

"The power of a platform lies in its ability to facilitate the relationship between third-party vendors and end users." — Ben Thompson

The encryption protocols are about to welcome their platformization moment.

DeFi applications are all evolving towards the same business model, developing from independent application protocols into mature platform protocols.

But how did these DeFi applications become platforms? Nowadays, most DeFi protocols are relatively rigid, providing a one-size-fits-all service for applications that want to interact with these protocols.

In many cases, applications simply pay the protocol fees for their core assets (such as liquidity) like standard users, rather than being able to build differentiated experiences or programming logic directly within the protocol.

Most platforms start this way, solving core problems for a single use case. Stripe initially offered a payment API that allowed individual businesses (like online stores) to accept payments on their websites, but it was only applicable to single businesses. After launching Stripe Connect, businesses were able to handle payments on behalf of multiple sellers or service providers, making Stripe the platform it is today. Later, it provided developers with better ways to build more integrations, thus expanding its network effects. Similarly, DeFi platforms like Uniswap are now shifting from facilitating exchanges as standalone applications (such as DEX) to building DeFi platforms that allow any developer or application to create their own DEX on top of Uniswap's liquidity.

The key driving factors for the transformation of DeFi platforms are the changes in business models and the evolution of singleton liquidity primitives.

Singleton liquidity primitives—Uniswap, Morpho, Fluid—aggregate liquidity for DeFi protocols, allowing two modular parts of the value chain (such as liquidity providers and applications/users) to access it. The experience for liquidity providers becomes more streamlined, allocating funds to a single protocol rather than differentiated liquidity pools or isolated vaults. For applications, they can now rent liquidity from DeFi platforms instead of simply aggregating core services (like DEX, lending, etc.).

Here are some examples of emerging DeFi platform protocols:

Uniswap V4 is driving a singleton liquidity model, through which applications (such as hooks) can rent liquidity from Uniswap's V4 protocol, rather than simply routing liquidity through the protocol as in Uniswap V2 and V3.

Morpho has shifted to a platform model similar to others, where MorphoBlue serves as the core liquidity primitive layer, allowing permissionless access through vaults created by MetaMorpho (a protocol built on top of the liquidity primitive MorphoBlue).

Similarly, Instadapp's Fluid protocol has created a shared liquidity layer for its lending and DEX protocols to utilize.

Although there are differences between these platforms, a common feature is that the emerging DeFi platforms share similar models, building a singleton liquidity contract layer at the top and constructing more modular protocols on top of it to achieve greater application flexibility and customization.

DeFi protocols have evolved from standalone applications to mature platforms, marking the maturation of the on-chain economy. By adopting singleton liquidity primitives and modular architectures, protocols like Uniswap, Morpho, and Fluid (formerly known as Instadapp) are unlocking new levels of flexibility and innovation. This transformation reflects how traditional platforms like Stripe empower third-party developers to build on top of core services, driving greater network effects and value creation. As DeFi enters the platform era, the ability to facilitate customizable and composable financial applications will become a defining characteristic, expanding the market for existing DeFi protocols and enabling a new wave of applications to be built on these DeFi platforms.