DeFi Developments to Watch in 2024 – DL News

With each passing year, the world of decentralized finance – which began in earnest in 2020 – becomes more and more complex.

What started as a handful of simple Ethereum apps that let users exchange or borrow against tokens is now a sprawling metropolis of interconnected protocols, each vying for as much of the $52 billion DeFi market as possible to catch.

It’s hard to make sense of it all—even more so now that the DeFi ecosystem is spread across more than 200 different blockchains.

To help make sense of the latest trends in DeFi, DL News has identified key developments sure to make headlines in 2024.

Uniswap’s ‘Hooks’ let developers make custom features—like KYC

When Uniswap first announced its new Hooks feature as part of Uniswap v4, onlookers immediately warned that it could be used to create liquidity pools with compliance requirements such as know-your-customer checks.

Some DeFi puritans said Hooks went against the fundamentals of DeFi – namely its permissionless nature.

But others argue that authorized Uniswap pools could benefit DeFi by removing the very real fear among institutions of accidentally interacting with entities approved by the US Office of Foreign Assets Control through DeFi protocols.

Since Uniswap is the furthest along in providing optional KYC functionality via Hooks, such a development should strengthen the protocol’s moat and competitiveness, VanEck said.

If permissioned DeFi does start to gain traction with traditional financial players, Uniswap Hooks will likely be where it starts.

EigenLayer will make Ethereum more modular

In recent years, Ethereum has grown beyond the boundaries of the main Ethereum network and now also includes more than a dozen so-called layer 2 blockchains.

While these layer 2 chains offer significantly reduced fees and faster transactions, they also present a significant problem: a breach of Ethereum’s trust network because transaction validation takes place outside of the Ethereum mainnet.

Validation involves checking whether transactions comply with the blockchain rule.

While layer 2s ultimately send all transactions that occur on them back to the Ethereum mainnet for finality, they require an external validation network to do so. Finality is when validated transactions are made irreversible on the blockchain.

Currently, the companies building layer 2s handle this validation themselves in a centralized manner. But most, if not all, have expressed a desire to decentralize their validation as much as possible.

This is where protocols like EigenLayer come in.

EigenLayer will allow the blockchains built on top of Ethereum, as well as other protocols such as decentralized oracle networks, to fall back on mainnet validation for their various validation needs.

The desired result is a more efficient and aligned validation system that covers not only the main Ethereum chain, but also everything else that relies on it for transaction validation.

If EigenLayer becomes successful, Ethereum should start to resemble modular blockchains like Cosmos, Celestia or Polkadot, but with a much more decentralized validation network. Modular blockchains work by separating network functions into special layers instead of their monolithic counterparts like Bitcoin and Ethereum that try to handle all functions on one layer.

EigenLayer also took things beyond validation. It is also working on EigenDA, a way to help layer 2s scale by providing extra data availability.

It’s fair to say that EigenLayer’s full launch could be the spark that revives interest in Ethereum and its many layer2 networks in 2024.

For investors, EigenLayer offers an enticing prospect by allowing them to recycle their Ether, thus offering even more returns. But recycling has also caused some anxiety among the Ethereum community.

Vitalik Buterin, co-founder of Ethereum, warned that recapture, if poorly constructed, could threaten the network’s stability.

JPMorgan analysts, echoing Buterin, are also wary that the repossession could lead to a “cascade of liquidations if an asset under offer declines sharply in value.”

EigenLayer founder Sreeram Kannan told DL News in May that he understands the fear and the project is moving cautiously.

Big names are set to launch on Celestia

EigenLayer is not the only project that offers the magical combination of modularity and data availability.

Celestia does the same, but instead of working through a set of smart contracts on Ethereum, it uses a purpose-built blockchain.

Rather than having to create a validation network themselves, blockchains can build on or migrate to Celestia to take advantage of the validation and data availability provided by the project’s main blockchain.

So far, only a handful of blockchains – or settlement layers – have been deployed on Celestia. But some big names are set to deploy in 2024.

Berachain, which raised $42 million in its April Series A, is probably the best known among DeFi natives. But lesser-known projects, such as Neutrino and Layer N, should not be overlooked.

A number of existing infrastructure projects such as cross-chain bridge Axelar, Optimism’s OP Stack, and the Cosmos SDK framework have also chosen to integrate with Celestia.

With so much potential, Celestia’s growing ecosystem is likely to be one of the biggest stories of the coming year.

Tim Craig is DL News’ Edinburgh-based DeFi correspondent. Reach out with tips at [email protected].