Variables predict a renewed rise in crypto values. It includes loosening monetary policy and falling inflation. As well as changing Bitcoin mining requirements and rising support for DeFi.
Since its beginnings, decentralized finance (DeFi) has experienced rapid growth. Total value locked (TVL) will increase by more than 1,200% in 2021. And topping $240 billion in invested assets.
As a result of broader macroeconomic dynamics, such as rising inflation, DeFi has subsequently decreased to about $60 billion TVL.
But the groundwork is already in place for DeFi. So as to reorganize the pillars of our financial infrastructure when the next market cycle arrives.
This time, a recovery in 2024 is feasible as a result of the current monetary policy’s maturation. And the reduction of economic headwinds, which may allow for lower interest rates. And the reintroduction of funding into the sector.
Therefore, let’s examine the specific elements and warning signs that we should be out for in the upcoming weeks.
There are currently more than 300 million crypto holders worldwide. Mostly through exchanges. This bull market is likely to be fueled by four factors: the control of global inflation and renewed faith in the viability of DeFi business models.
The migration of at least 50 million crypto holders from the world of centralized exchanges to the world of decentralized applications.
And, possibly, the next adjustment in Bitcoin (BTC) mining difficulty.
Sustaining economic growth
Startup entrepreneurs can no longer rely on “magic internet money”. This means the market is unlikely to return to levels of confidence. That allowed DeFi protocol founders to reward early users. With massive amounts of protocol-generated tokens, subsidized yearly returns of more than 100%. Or even 1,000% on invested capital.
DeFi protocol tokens will still be useful. But there will be more scrutiny on how these tokens are created.
The protocol’s ability to collect enough fees to fund its treasury and ultimately retain (or invest) more value. What it is dispersing to end users via inflation. Or rewards will be questioned by market participants.
The implications for decentralized exchanges
Automated market makers, also known as decentralized exchanges (DEXs), have always been at the forefront of DeFi. To encourage liquidity providers to leave Uniswap, SushiSwap.
For instance, invented the ideas of protocol-sponsored early adopter awards and “vampire attacks.”
DEXs are inefficient in terms of capital, requiring substantial amounts of liquidity from liquidity providers to power. Every dollar of daily trade activity is in decentralized way.
Because liquidity pools have low fees per dollar of liquidity held, they rely on protocol-generated tokens to compensate liquidity suppliers.