The three major trends of Decentralized Finance

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

Consumer DeFi

As interest rates decline, DeFi yields are becoming 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 widespread shift to mobile, there are clear opportunities to create consumer-grade 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) – Provide 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 terminal, portfolio tracker, and discovery layer (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 (e.g. Vector, Moonshot, Hype, etc.) – So far, cryptocurrency has primarily favored desktop, but a mobile-first experience will dominate the future of trading applications.

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

As more consumer-level 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 back end. These applications will focus on discovery experiences, the products offered (such as yield types), appeal to advanced users (for example, convenient features like providing 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 massive influx of on-chain real-world assets (RWA). However, the shift from off-chain finance to on-chain finance is accelerating, as large asset management companies like BlackRock realize that issuing RWA on-chain brings significant benefits, including: programmable financial assets, a low-cost structure for issuing and maintaining assets, and greater asset accessibility. These benefits, such as stablecoins, have improved the current financial landscape by tenfold.

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

As more and more traditional assets are transferred onto the blockchain, 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 can be 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 had considerable reflexivity: it rises, falls, and then returns to the starting point. But 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 into a strong asset class, exogenous capital (capital existing outside the on-chain economy) is essential for the next wave of DeFi growth.

RWA represents a significant amount of potential external 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 external uses (rather than on-chain financial speculation), other DeFi activities (such as trading, lending, etc.) also need to realize growth.

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

Platformization of DEFI

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

The crypto protocols are about to迎来它们的平台化时刻.

DeFi applications are all evolving towards the same business model, transitioning from independent application protocols to 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 for its core assets (such as liquidity) like a standard user, 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 provided a payment API that allowed individual businesses (like online stores) to accept payments on their websites, but it was only suitable for single businesses. After launching Stripe Connect, businesses were able to process payments on behalf of multiple sellers or service providers, making Stripe the platform it is today. Later, it offered developers better ways to build more integrations, thereby expanding its network effects. Similarly, DeFi platforms like Uniswap are now transitioning from standalone applications that facilitate exchanges (like 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.

Single-instance liquidity primitives—Uniswap, Morpho, Fluid—aggregate liquidity for DeFi protocols, allowing two modular parts of the value chain (e.g., liquidity providers and applications/users) to access it. The experience for liquidity providers becomes more streamlined, allocating funds to a single protocol instead of differentiated liquidity pools or isolated vault protocols. For applications, they can now rent liquidity from DeFi platforms instead of simply aggregating core services (e.g., 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 the Uniswap 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 for 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 available for its lending and DEX protocols to utilize.

Although there are differences between these platforms, the commonality is that emerging DeFi platforms share similar models, building a singleton liquidity contract layer at the top and constructing more modular protocols on top of it for 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 such as Uniswap, Morpho, and Fluid (formerly known as Instadapp) are unleashing new levels of flexibility and innovation. This shift 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 feature, expanding the market for existing DeFi protocols and enabling a new wave of applications to build on these DeFi platforms.