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 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 to mobile, there are clear opportunities to create consumer-grade DeFi experiences.

Some of the most successful crypto financial applications in the past few 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 encryption wallets (e.g. Phantom) - Improve the existing wallet experience and provide a better experience across multiple chains.

● New terminals, portfolio trackers, and discovery layers (such as 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 mainly favored desktop, but mobile-first experiences will dominate the trading applications of the future.

● Token launchpad – (e.g., Pump, Virtuals, etc.) – Provides anyone with permissionless token creation capabilities, regardless of their technical skills.

As more and more consumer-grade DeFi applications are launched, they will resemble fintech applications with the standard user experiences that users prefer, but they will aggregate and provide personalized experiences of DeFi protocols on the back end. These applications will focus on discovery experiences, the products offered (such as types of yields), appeal to advanced users (such as 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 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 meaningful 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 by a factor of 10 compared to the current financial landscape.

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 U.S. 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 trend is changing, diminishing 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 on-chain.

As more and more traditional assets move on-chain, this will trigger a compounding flywheel effect, gradually merging and replacing traditional financial rails 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 considerable reflexivity: it rises, falls, and then returns to the origin. But over time, new primitives have steadily expanded the share of DeFi.

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 propelled the crypto market into a strong asset class, exogenous capital (capital that exists outside 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 the mere circulation of capital from retail pockets to traders' wallets. Just as the stablecoin market needs to grow 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 shift 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.

The Platformization of DEFI

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

The encryption protocol is about to迎来 its platformization moment.

DeFi applications are 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 fees to the protocol 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 payment APIs that allowed individual businesses (like online stores) to accept payments on their websites, but it was limited to single businesses. After launching Stripe Connect, businesses could process 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, thereby expanding its network effects. Similarly, DeFi platforms like Uniswap are now shifting 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 single-instance liquidity primitives.

Single 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 (such as DEX, lending, etc.).

Here are some examples of emerging DeFi platform protocols:

Uniswap V4 is driving a singleton liquidity model, whereby 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, where MorphoBlue serves as the core liquidity primitive layer, allowing permissionless access to 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, they share a commonality in that emerging DeFi platforms utilize similar models, building a singleton liquidity contract layer at the top, and then constructing more modular protocols on top of it to achieve greater application flexibility and customization.

DeFi protocols have evolved from standalone applications into 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 shift reflects how traditional platforms, such as 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.