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Now LIVE: Our 2022 Annual Crypto Report 📊 – Get a full overview & analysis of last year’s trends, across Bitcoin, Ethereum, DeFi, NFT, Exchanges & more!
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Top 2023 DeFi Trends to Watch for Crypto Investors

4.3 | by CJ -

DeFi Trends 2023


Key Takeaways:

  • DeFi will continue to play a bigger part in crypto after the widespread mismanagement of user funds by centralized exchanges, with spillover effects that will lead to new DeFi trends.

  • In 2023, new DeFi trends include increase adoption of real-world assets onto the blockchain, increased interest in non-custodial dApps, new developments in derivatives and options, DeFi scaling solutions such as L2 rollups and Cosmos app-chains, and more.

  • A bear market is often one of the best times to observe what worked and what failed and filter the good projects from the weak, allowing investors to invest in promising trends that they have conviction in at better valuations for the next bull market.


The cryptocurrency industry is expanding quickly due to the introduction of blockchain-based projects like NFTs, GameFi, Metaverses, and of course Decentralized Finance (DeFi)

Let's take a moment to define DeFi and explore some of the upcoming DeFi trends for 2023.

What is DeFi?

Decentralized finance (DeFi) is a fintech solution that uses a distributed ledger to let financial transactions happen without requiring centralized financial institutions like banks and finance corporations. All transactions are recorded on a public and immutable ledger, removing the need to pay such institutions a service fee for each transaction.

You simply need a phone and an internet connection, and you can borrow, save, lend, or swap cryptocurrencies without KYC, resulting in greater convenience, better integration, and higher transparency, which are some of the well-known advantages of DeFi.

The growth of DeFi protocols has also made it easier for a number of new crypto companies to start up. Demand has increased significantly, and it is predicted that the industry will grow from $11.78 billion in 2021 to $231.19 billion by 2030, an increase of nearly 20 times.

With so many exciting things that have happened in 2022 and prior, we believe 2023 will be just as exciting, if not more. Here are some of the up-and-coming trends to watch. 

The Revival of DEXs

Decentralized apps (dApps) are apps that are built on top of blockchains that are usually transparent, autonomous, permissionless, and non-custodial, meaning it does not hold control of users’ funds. Decentralized exchanges (DEXs) are dApps which are a key part of DeFi and are where most of the trading happens.

This is in contrast to centralized exchange (CEX) applications which are usually permissioned and custodial, meaning that the CEX holds the funds and manages it on behalf of the users. 

Unfortunately, in 2022, a number of centralized exchanges (CEXs), including Sam Bankman Fried's FTX, shut down. Many users became worried about the lack of transparency and control on these centralized platforms, and are afraid of losing their funds on CEXes. 

This has resulted in a revival of DEXs, and they have huge growth potential because they are the natural alternative for users leaving centralized exchanges. Despite the fact that DEXs can be more complicated and demand more care from the typical user as they have to secure their own private keys, they provide users with total control over their funds rather than handing them over to a business. 

In 2022, we’ve seen interesting liquidity mechanics like GMX’s GLP token and GNS’s DAI vaults acting as the counterparty liquidity, as well as Perp v2 and Rage Trade leveraging on top of Uniswap v3's concentrated liquidity mechanics to improve the liquidity and trading experience. 

Uniswap is still the leading DEX by TVL, and its market cap has held up better than ETH in 2022. After their license for Uniswap v3 runs out in April of 2023, Uniswap v4 could come out with even more cool features, which could be a turning point for the DEX space. 

uniswap price chart

Uniswap price chart taken from CoinGecko  

Decentralized Derivatives and Options

With the revival of DEXs comes increased interest in blockchain derivatives. Derivatives are known to be one of the largest markets in the world in terms of notional value and volume, and CEXs' derivative volume is currently sitting at over $1 trillion according to CoinGecko. 

derivative volume

Data taken from CoinGecko

What makes derivatives so popular is that they often come with leverage. Some examples of derivatives are perpetual contracts and options contracts, which give users a lot of leverage, up to 50x on some of the most popular perpetual DEXs. 

As users are more wary of CEXs, some of this volume may migrate to on-chain derivative DEXs. This trend of rising volume and increased user adoption has a chance to keep going as there constantly new features being launched to make trading on-chain derivatives better. Perpetual trading has already become popular, but options trading is still catching on, with protocols like Panoptic Options and Dopex introducing novel ways to allow users to trade options. 

In 2023, it is possible that options will achieve greater adoption with the rise of a new narrative called "OpFi,” which stands for "DeFi infrastructure powered by options." 

Real-World Assets on the Blockchain

By migrating real-world assets (RWA) onto the blockchain, they have helped to unlock significant sums of liquidity and utility that were otherwise impossible or difficult to do in the real world. 

Even though blockchains have the potential to make things more open and liquid, tokenizing physical assets hasn't been very successful. One reason could be that there is a legacy market for the vast majority of real-world assets that, while complicated, is "good enough" and has been around for a long time.

Carbon offsets are a relatively new type of asset, and they might be an exception to this rule. There isn't a legacy system for carbon that is so firmly established that it cannot be changed. The first true success story of the tokenization of real-world assets may very well be the construction of web3 infrastructure to bring carbon offsets on-chain.

Additionally, large players in the DeFi lending market, like MakerDAO, have passed laws to invest in US Treasury and corporate bonds and have teamed up with traditional banks to offer loans with RWAs as security. As of now, MakerDAO has over $500 million in US Treasury bonds, which account for 57% of their revenue. 

Partnerships with banks and real businesses bring together one of the most practical use cases for DeFi. Another example is Goldfinch, a decentralized global credit protocol that helps users to loan out their USDC to real businesses and has continued to grow in revenue throughout the bear market, with about $100 million in loans given out, generating real yield outside of crypto activities, albeit with certain risks as they are undercollateralized and bad debts can happen. 

goldfinch

Goldfinch charts taken from Dune Analytics

Since many in the business already see RWAs as a great chance to combine traditional institutions with DeFi liquidity, these actions are likely to become more prevalent in 2023.

Vitalik Buterin's blog also says that he’s excited about RWAs and that "the formula behind stablecoins can be applied to other real-world assets," such as DAO-governed stablecoins backed by real-world assets.

The Emergence of CBDCs

We can’t talk about real-world assets without talking about real-world fiat currencies entering the digital realm, also known as Central Bank Digital Currencies (CBDCs)

A CBDC is a digital currency issued by a central bank, rather than by a commercial bank. It is also a central bank liability denominated in the sovereign currency.

Over a hundred nations are reportedly actively investigating CBDCs at the research and development stage, according to the Atlantic Council think group

CBDCs

Image taken from Atlantic Council

Several nations, such as Nigeria and the Bahamas, have started their CBDC programs, while many nations, including China, India, and Thailand, are still in the pilot stage.

China has had the most success with its digital yuan, with more than $14 billion in transactions. However, overall volumes have slowed significantly; they grew by a record 154% in 2020, but have only grown by 14% since. 

India is one of the newer entries to the CBDC race with the launch of its e-rupee. Being the largest democracy in the world with a massive crypto audience, India will prove to be a case study of launching a large-scale CBDC initiative. 

Although CBDCs are widely talked about, the adoption of CBDCs has not been great. This is partially because CBDCs and fiat currencies that are digitalized are very similar from the consumer's point of view. They are both fast and free to use, and backed by their governments. 

The benefits of CBDCs are that they allow those without a bank account to still access them as long as they have a phone and internet access, and they also allow for instant international transactions thanks to blockchain technology. 

There are also some concerning methods to encourage adoption by governments, such as Nigeria's plan to charge high ATM cash withdrawal fees.

CBDCs allow governments to have control over the finances of their populations, which may not be well-received by most people unless the benefits far outweigh the repercussions.

In 2023, it's likely that CBDC technology will get better and that we'll know more about how different groups of people use and react to CBDCs. Additionally, because centralized and decentralized stablecoins are already here and widely used in DeFi as the main denomination for prices and are highly liquid, they are well received by users, and are recognized as having one of the best product market fit. Thus, it is unlikely that CBDCs will overtake stablecoins anytime soon. 

Liquid Staked Derivatives (LSDs)

Speaking of liquidity, in 2023, the Shanghai upgrade for Ethereum is one of the next big events slated to happen after the Ethereum Merge, allowing staked ETH to be withdrawn into liquid ETH once again. 

Before the Shanghai upgrade is completed, there is no way for staked ETH to be liquid. So, Lido made liquid staking derivatives (LSDs) popular, starting with ETH. Users could deposit ETH with Lido to earn ETH staking rewards and receive stETH as a liquid token that represented their staked ETH tokens. stETH can then be used in DeFi for trading, lending and borrowing, and liquidity provision, instead of the ETH sitting idle while being staked. 

This liquid staking derivative trend also caught on to Cosmos with several liquid staking providers appearing, creating liquid-staked versions of ATOM, OSMO, and others popular Cosmos proof-of-stake (PoS) assets.

Even though staked ETH cannot be withdrawn, it has not stopped the steady increase in the amount of staked ETH, especially with Lido as can be seen by the chart below. 

staked eth lido

Amount of ETH staked with Lido chart taken from Dune Analytics

Continued Growth of Cosmos

Talking about LSDs, the rise in popularity of LSDs is very obvious in the Cosmos ecosystem, which is made up entirely of proof-of-stake networks with governance assets that are idly staked in order to provide security to the network.

In 2022, we saw the arrival of multiple liquid staking providers, which helped unlock the capital of these staked assets, giving rise to more DeFi activities. But more than that, as DeFi continues to find ways to scale, Cosmos app-chain solutions have proved to be a successful scaling solution, attracting dApps over. 

Cosmos has kept a healthy number of active users on its existing dApps despite the current bear market. For example, DEXs like Osmosis have more than a hundred thousand active users every month. 

Cosmos map of zones

Taken from Map of Zones

The prime prospects for this are Central Limit Order Book (CLOB) exchanges. This trend was initiated by dYdX, and we anticipate to see spot and derivative exchanges constructed as app-chains to benefit from reduced fees and latency. What makes app chains so attractive is the Cosmos SDK that allows the creation of customisable technological stack that can be tailored to the DeFi protocol's requirements. 

There are big changes coming to Cosmos Hub, and one of them is Interchain Security (ICS), which is a form of shared security where new chains will tap on existing ATOM validators to secure the chain instead of setting up their own validator set. In exchange, ATOM validators receive staking rewards of the new chain as well, increasing the value accrual to ATOM stakers, while allowing new applications to focus on delivering a dedicated execution environment and better user experiences. 

Coming in 2023 are also Interchain Accounts (IA), which make it easier for Cosmos dApps to communicate with each other and create a more balanced ecosystem of dApps, are expected to help more app chains launch and work together better, which may allow Cosmos to grow even bigger. Overall, it looks like it will be an interesting year for Cosmos.

Layer 2s Continues to Gain Traction

We can’t talk about app chains without talking about Layer 2 (L2) rollups

L2 rollups came about because of the high gas fee and slow transactions happening on Ethereum during periods of high network activity, resulting in gas fees of over $200 each and taking minutes to confirm. 

Rollups are layers that execute transaction execution and ordering while the consensus and data availability are provided by Ethereum, the L1. 

The launch of Optimism's OP token sparked an increase in TVL and DeFi activities across L2 ecosystems, with Arbitrum currently leading the way in TVL. 

Although Ethereum gas fees have tapered down nowadays, they typically still cost a couple of dollars for most DeFi activities, which is huge compared to the cents that L2s currently cost. 

There is also the possibility that L2s will continue to grow as trading activity and TVL from Ethereum L1, as well as other capital that reside in EVM chains due to high ETH gas prices will continue to migrate to L2s, overall creating a sustainable growth in L2 ecosystems in 2023.  

L2 Cryptofees

Image taken from CryptoFees

Conclusion

DeFi is one of today's most exciting advancements in financial technology, providing the potential to an alternative financial hub of great security, transparency, data integrity, and accessibility. 

The past few years can be viewed as the first cycle for DeFi, and just like how the internet took sometime to bloom and was even considered a fad before it achieved mass adoption, DeFi is expected to take multiple cycles of innovation and failure before it has the chance to become the transformative technology it is envisioned to be. 

This bear market is thus a great opportunity to for the market to remove as much of the fluff and hype that came due to the starting boom of DeFi, and observe which trends stay. Patiently researching during a bear market can offer clearer insights to trends for long-term DeFi investors who are serious about the space and believe that it will continue to develop for many years to come, and CoinGecko remains as a great data aggregator platform to study various tokens and trends. 

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CJ

CJ

CJ sold his property to go all-in on crypto in March 2020 and now spends his time sharing about decentralized finance products through educational videos and articles. Follow the author on Twitter @fishmarketacad

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