Four ‘breakout’ DeFi trends that will define crypto’s upcoming bull market – DL News

DeFi was crypto’s primary growth driver last year as it had twice as many users completing more than 100 transactions than any other crypto market sector.

This growth was fueled by an increase in transaction activity on Ethereum layer 2 blockchains such as Arbitrum and Optimism, and the return of Solana post-FTX crash.

This trend is expected to continue this year amid a possible bull run with trading on decentralized exchanges and yield farming expected to be the most dominant chain activity in 2024.

This is according to a new on-chain crypto user report by the blockchain data platform Flipside Crypto.

“Important regulatory, institutional and financial announcements emerged each month,” from 2023, the report said. “These developments set the stage for a 2024 breakout.”

Driving the growth lately: EigenLayer, an Ethereum liquid recovery protocol.

Playing in DeFi means locking a token into a blockchain network or DeFi protocol, usually in exchange for return.

Locked tokens are typically unusable, but some protocols such as Lido offer liquid staking where a liquid strike token or LST is given in exchange for the locked crypto, as well as the opportunity to earn returns.

“Novel DeFi like EigenLayer will rise in prominence and adoption among web3 native audiences,” Flipside said.

Liquid staking has the advantage of giving users access to their locked coins in the form of the LSTs which they can deploy on other DeFi protocols to earn compound profits. Flipside highlighted four other trends to watch:

Restore crypto set

Liquid restaking is an extension of the DeFi liquid staking primitive. It allows users to revise their LSTs to earn more return and another token called a Liquid Relocation Token or LRT.

There are even protocols like Pendle that will accept an already yielding LRT deposit from a user and provide them with another yielding token, taking the compounded yield potential further.

Flipside’s prediction of a liquid recycling boom this coming year may already be showing signs of becoming a possibility. The new DeFi sector is already a $600 million market — a market growth driven not only by the compound return frenzy, but also the possibility of skyrockets.

New DeFi niches like liquid recycling come with the expectation of airdrops for early entrants. Such expectations have been bolstered by majors like EigenLayer offering a points system for depositors, as points have become a bellwether for potential airdrops.

Despite its growth potential, Flipside does not foresee a bubble popping due to liquid strike this year.

“We’re still a long way from the 2021 madness, where anyone can simply shell out a project and mint 10,000% APY inflation tokens to attract users,” Flipside data scientist Carlos Mercado told DL News.

Instead, Mercado identified the lack of customer diversity among Ethereum fans and validators as a possible cause for concern. More than 80% of Ethereum validators run Geth, an execution client responsible for processing transactions and implementing smart contracts.

This dependence on Geth makes it a supermajority client in Ethereum and any problems with Geth can cause system-wide failures in Ethereum.

Given the potential scale of the problem, Mercado said he expects stakeholders to diversify into other clients.

“The good thing is that these strike methods compete directly with other opportunities in the chain, so there is a natural backlash against becoming ‘too big to fail’ – as the returns decrease with more participants,” Mercado said.

Multi-chain involvement

Flipside’s report covers only eight blockchains – Bitcoin, Ethereum, Arbitrum, Optimism, Polygon, Base, Solana, Avalanche – all but Bitcoin and Solana are EVM networks.

EVM networks run on the Ethereum Virtual Machine and use the same smart contract logic for their applications. This compatibility also makes liquidity migration easier via protocols called bridges that allow users to send crypto across different blockchains.

However, last year only a small percentage of users interacted with at least two EVM chains. But Flipside expects a change this year with greater multi-chain engagement among DeFi users, especially those looking to capitalize on yield and skyfall opportunities across different blockchains.

Greater multi-chain involvement will mean flexible liquidity migration and an increase in the volume of crypto flowing across bridges. Bridge protocols have historically been targets for hackers leading to some of crypto’s biggest thefts, including the $125 million that disappeared from cross-chain bridge Multichain last year.

Mercado noted that bridge security is a major issue, while adding that market participants are moving toward more secure solutions for cross-chain crypto transactions.

“The lock-and-coin mechanism prevalent by 2021-2022, which left a honeypot of tokens that hackers looked up to, faced significant competition from order book or routing bridges that are more efficient in volume transferred per value locked, and canonical bridges such as USDC’s Cross Chain Transfer Protocol,” said Mercado.

Competing layer 2 blockchains

Three of the blockchains covered in the Flipside Report – Arbitrum Optimism, and Base – are Ethereum Layer 2. These are networks created to scale Ethereum by processing transactions away from the mainnet, but still on Ethereum’s security rely on finality.

Polygon is also an Ethereum scale blockchain, but is technically not a layer 2, but rather a sidechain.

Ethereum layer 2s have experienced a Cambrian explosion over the past 18 months, blowing up the EVM blockchain market. With limited investor liquidity, the report predicts greater competition among incumbents, particularly to lower transaction costs and provide a smoother user experience.

Ethereum itself will benefit from the competition between its layer 2 networks, as increased network activity means more money for validators.

This battle for market share dominance among Ethereum layer 2 networks could also affect the value of their respective native tokens, the report said.

Booming infrastructure and chain specialization

Aside from Ethereum layer 2 networks, crypto’s overall infrastructure stack expanded last year and Flipside predicts an even bigger boom in 2024.

The report pointed to significant gains in such as zero-knowledge technology and data availability solutions such as Celestia as reasons for such expectation.

Newer entrants such as blockchain scale Monad and Berachain are also expected to contribute to this growth, the report said.

Ultimately, the report expects developers to optimize for their respective technological strengths leading to specialized blockchains rather than the general purpose blockchain networks currently available.

Osato Avan-Nomayo is our Nigeria-based DeFi correspondent. He covers DeFi and technology. To share tips or story information, please contact him at [email protected].