Nascent DeFi Trends Solving Critical Liquidity Problems of Bear Market

DeFi, or decentralized finance, describes financial services that aim to provide an open, decentralized alternative to traditional financial services like lending, borrowing, and trading. DeFi services are designed to provide a more accessible financial system as central authorities do not control it.

Speaking of the most promising aspects of DeFi, its ability to solve the liquidity problem truly makes this new realm of the crypto-financial industry a game-changer.

Compared to DeFi, there is a trade-off between liquidity and security in traditional finance. For example, you can have your money in a savings account, which is very secure, but it is not very liquid because you can't access it immediately. Or you can have your money in a checking account, which is more liquid but less secure because it is subject to bank runs. As such, by allowing users to collateralize their assets and borrow against them, DeFi is providing much-needed liquidity to the market.

Ultimately, in DeFi, some protocols allow you to pool your money with other users and earn interest on it. These protocols are called "liquidity pools," which are more secure than traditional banking because they are decentralized and not subject to bank runs. And they are more liquid because you can withdraw your money anytime.

So far, DeFi protocols have been used mainly by early adopters and developers. But as the ecosystem grows and matures, we expect to see more mainstream adoption of DeFi protocols.

The Current State of DeFi

There has been a growing interest in DeFi services in recent years, as they offer a more efficient and transparent way of conducting financial transactions. That said, DeFi is still in its early stages, but the trends are promising. So, with more projects being launched and more users getting involved, the DeFi ecosystem will likely continue to prosper.

For now, though, the DeFi sector has been hit hard by the bear market, which is evident through its shrinking TVL and liquidity. The stats don't lie! Currently, almost $52 billion of assets are locked in the DeFi sector, down 82% from November 2021 high, according to DeFi Llama.

The value of crypto assets has tumbled by 70 to 90% since their all-time highs, which has had a knock-on effect on the DeFi sector. For instance, many DeFi projects are built on Ethereum, and the 50% drop in its price since January has affected the liquidity of many projects.

As expected, this drying up of liquidity and plummeting values has been a huge blow to the sector, which was already struggling to attract users and grow. The reason is apparent, a lack of liquiditywill make it even harder for DeFi projects to survive, let alone thrive.

Currently, this is the main hurdle for the ongoing DeFi development and has already caused many projects to shut down or put on hold and has left investors scrambling to find a safe haven for their money. DeFi certainly has a bright future ahead of it, given its vast benefits, but it is clear that it will be significantly affected by the current market conditions.

The Latest Trend: Real yield

Amidst the challenges faced by the DeFi sector, a new narrative is taking shape: real yield.

What it means is a share in a protocol's revenue. Real yield is denominated in a mainstream crypto asset like ETH or USDC, which holders of a protocol's governance tokens can access by staking or locking them. There's an underlying logic behind it.

With governance tokens down 80% to 90% and even more in some cases, DeFi now wants to incentivize their stakeholders in stablecoins rather than be saddled with dilutionary token emissions. These new real yield protocols are paying token holders with revenue generated from fees.

So, there's no denying that the times of high-risk, high-reward yields are coming to an end in DeFi during the ongoing turbulent times which lack liquidity. This is changing the dynamics within the DeFi space, as new projects are now replacing it with smaller but more sustainable yields.

With projects like Redacted Cartel, Umami Finance, Gains Network, GMX, and Synthetix revamping their tokenomics designs toward more sustainable models, they are being praised for passing revenue on to their users, which can also help these projects flourish as DeFi grows in the future.

GMX Protocol: a Trend of Decentralized Perpetual Exchanges

A prominent example of this new trend to attract liquidity is the GMX Protocol. This decentralized perpetual exchange protocol enables the trustless exchange of digital assets, eliminating the need for a central authority.

Based on Proof-of-Stake (PoS) consensus mechanism, it allows users to earn rewards for participating in the network. The protocol is designed to be highly scalable and efficient and can handle large amounts of traffic.

Recently, the project gained attention as its native governance token GMX came close to hitting its ATH despite the bear market. Moreover, the token got a listing on the largest exchange Binance, which shows the project's importance and popularity in the DeFi sector.

Ever since launching in late 2021, GMX has been accruing deep liquidity and seeing its trading volume rise.

If you are wondering, GMX's success can be attributed to its unique revenue-sharing model. 70% of the exchange's trading fees are paid to liquidity providers in the form of ETH on Arbitrum and AVAX on Avalanche. The remaining 30% fee goes to GMX stakers, which currently earn 14% APR for staking GMX and much higher for holding its LP (GLP) token.

This real yield has proven attractive for liquidity providers, and as a result, GMX has accrued the most liquidity on Arbitrum. Then comes profit sharing, as the governance token holders benefit considerably from it. And with over 86% staking rates, GMX is at the top of the totem pole of stackable tokens.

In a nutshell, GMX is attracting a ton of liquidity and attention from market players during this downturn. With its clear market fit, strong fundamentals, adopting sustainable models, and giving its users a share in the project profits, the perpetual trading platform can flourish and emerge as one of the major DeFi protocols in the next bull cycle.

The CeDeFi Trend

CeDeFi or centralized DeFi is another facet that can help drive DeFi's adoption. It is a type of DeFi that offers the benefits of both centralized and decentralized financial systems.

CeDeFi platforms provide the same security and transparency as DEXs, but with the added advantages of accessibility, faster transaction speeds, and lower fees available on CEXs. On top of that, it also offers the same liquidity as centralized exchanges, making it an attractive option for both traders and investors.

So, the future of CeDeFi looks bright, with many platforms already in development and more expected to launch in the coming months. CeDeFi has the potential to revolutionize the way we think about financial systems and could one day become the standard for DeFi applications.

Speaking of how it functions, it is pretty similar to the traditional banking industry as it lets consumers borrow or lend crypto through a controlled exchange. Moreover, in some projects (e.g. Midas) users can invest in DeFi via centralized service and special investment products, thus mitigating the high threshold of DeFi services. This way, it can also become the future gateway for institutional liquidity in DeFi.

Overall, CeDeFi can help solve the sector's pressing issues and drive mass adoption of crypto and DeFi. It has the potential to change the crypto industry and is expected to grow rapidly in the coming years.

Conclusion

Several issues plague the modern DeFi sector, chief among them being scalability, interoperability, and sustainability. The lack of liquidity is another major problem that DeFi has been trying to solve by leveraging yield farming.

But after the drop in the whole market and liquidity, DeFi projects have difficulty managing capital. Protocols are facing troubles with fundraising, and their tokenomics are weakened. However, as discussed above, hard work is being done to address these issues, and with that, the future of DeFi looks very promising.