DeFi – Financial Alchemy in a Trillion Dollar Market

The global financial system, overseen by traditional banks, asset managers, and gatekeeper financial institutions, operates only during normal business hours and imposes many restrictions on customers. Money transfers, especially international ones, can take several days and often require SWIFT codes, routing numbers, and other complex identifiers. Settlements for transactions can take 1 to 3 days, with funds held by financial institutions. These limitations are akin to trying to run a modern Formula 1 race on a horse-drawn carriage track: legacy systems and infrastructure, built for a bygone era, are struggling to keep up with today’s financial needs. What’s holding things back? Every country has its own rules, and getting all these financial institutions to work together smoothly is a challenge.

In contrast, crypto platforms operate 24/7 and enable autonomous custody of funds. Crypto finance and DeFi facilitate instant and borderless peer-to-peer (P2P) transactions, creating a financial world that bypasses traditional centralized institutions. The growing adoption of blockchain and digitized financial services is driving the DeFi market, which is expected to reach $450 billion by 2030, at a CAGR of 46%. Despite its multi-trillion dollar market size, the DeFi sector is only just beginning to explore its potential compared to the $100 trillion+ global bond markets alone, suggesting there is still a long way to go.

Innovations that are driving the DeFi ecosystem

Stablecoins – Digital dollars, pegged to fiat currency (usually the dollar), offer the stability of fiat currency with the flexibility of crypto; the main players are Tether (USDT), USD Coin (USDC), and Dai (DAI).

Lending and Borrowing Protocols – Facilitating peer-to-peer lending and borrowing of digital assets to help crypto holders earn returns on their holdings; notable players include Aave, Compound, and MakerDAO.

Yield generation mechanisms – enable crypto asset holders to maximize returns through strategies such as staking, liquid staking, and yield farming; players include Lido, Rocket Pool, and Curve Finance.

Cross-Chain Bridge Platforms – Facilitate asset transfers between different blockchain ecosystems and help investors explore various networks to optimize returns; prime examples include Multichain (formerly Anyswap), Wormhole, and Hop Protocol.

Decentralized Exchanges (DEX) – Enable peer-to-peer transactions while handling billions of daily transaction volumes: Uniswap, SushiSwap, and PancakeSwap.

Maximizing return on assets

Staking Staking is the practice of locking up cryptocurrency holders’ assets to participate as a node or validator on a blockchain. It’s essentially putting your skin on the line — making a deposit to ethically validate blockchain transactions according to the network’s rules and help secure the network. As compensation, stakers earn additional coins, usually the same cryptocurrency they staked. The main drawback of staking, however, is illiquidity. Staked funds are locked up and cannot be traded or used for other investments during the staking period. Proof-of-Stake networks like Ethereum 2.0, Cardano, and Solana use these staked assets to secure the network and validate transactions.

Liquid Staking resolves the illiquidity of the assets involved by generating Liquid Staking Tokens (LST) which represent the cryptocurrency held in the Liquid Staking ProtocolThese minted LSTs can be deployed to other protocols within the DeFi ecosystem to earn additional yields while the original staked cryptocurrency continues to accrue staking rewards. This allows crypto owners to maintain their ability to easily access funds and explore other investment options while still enjoying the benefits of staking. It’s like having your cake and eating it too: your cryptocurrency is staked, but you have a token available for use. Imagine if you could use a proxy for your funds locked in a CD to engage in other financial activities while the real money sits in the fixed deposit earning interest. Crypto makes this hypothetical scenario real, thanks to liquid staking.

Hit LSTs can be put back into play/deposited on Liquid re-staking protocolswhich in turn create Liquid Re-Staking Tokens (LRT)allowing the asset holder to earn additional yields. Some advanced protocols work directly with the underlying blockchain and create new tokens native to their systems, i.e. native liquid restaking tokens (nLRT) and recursive, compound or leveraged liquid staking tokens. These tokens allow asset holders to earn both traditional proof-of-stake rewards and additional staking rewards.

With the rapid pace of innovation in the DeFi ecosystem, platforms with unique liquid staking implementations continue to emerge. One such platform is YieldNest.

YieldNest is revolutionizing the staking landscape with its innovative liquid retaking products, designed for optimal yields and a simplified user experience. Using Liquid Retaking Tokens (LRT) and Native Liquid Retaking Tokens (nLRT), YieldNest transforms traditionally illiquid staking assets into yield-bearing liquid tokens. This allows users to earn rewards from Actively Validated Services (AVS) while maintaining liquidity. Their application offers advanced risk management, which ensures the safety of funds and maximization of yields. YieldNest offers controlled exposure to certain AVS classes, catering to both novice and experienced users.

While some platforms focus on maximizing yields through liquid staking, others are innovating to increase the utility of liquid staking tokens. Bracket is at the forefront of this innovation with its DeFi Liquid Staked approach.

Bracket is revolutionizing Liquid Staked DeFi, enhancing the utility of Liquid Staking (LST) and Liquid Retaking (LRT) tokens. The platform introduces $brktETH, a composite token backed by a diversified LST treasury, improving collateral efficiency and providing expanded earning opportunities. Users can stake LST and LRT to earn rewards, benefiting from both passive and active trading strategies. With a consistent user interface, Bracket simplifies strategy management, making advanced DeFi more accessible. The platform addresses the maturity and non-fungibility challenges of LST while offering pooled LST, margin lending, and collateral management. Bracket’s innovative approach includes a points system, ETH rewards, and LRT points for early participants. Backed by Binance Labs and leveraging on-chain derivatives expertise, Bracket democratizes access to sophisticated financial strategies.

Liquid staking is a financial alchemy that offers unprecedented flexibility to asset holders. As the sector grows, traditional finance and non-natives are increasingly interested in cryptocurrencies, bringing both challenges and opportunities to DeFi.

Cryptocurrency Exchanges

The launch of Spot Bitcoin exchange-traded funds (ETFs) in January 2024, accompanied by growing institutional interest, is transforming the cryptocurrency market. As of July 2024, these ETFs collectively held approximately 3% of the total Bitcoin supply, concentrating a significant portion of the assets under a few TradFi asset managers. This trend toward centralization contrasts with the decentralized ethos of DeFi and DEXs, sparking debate within the cryptocurrency community, including industry stakeholders—Bitcoin advocates, blockchain developers, and retail investors—about how to balance mainstream adoption with the original vision of decentralized finance. In response, the industry is innovating to balance institutional participation with decentralized principles.

Cryptocurrency exchange StealthEX, for example, actively addresses the issue of centralization by prioritizing user control and privacy. This means that users’ personal data and funds are not stored by the platform, ensuring the experience is as secure and transparent as possible. At the same time, there is no need to register, making entry points accessible even for those without advanced technological knowledge. Users can easily access cross-chain transactions with over 1,500 assets without the need to create an account, connect a wallet, or disclose personal information, and be sure that no third party has their data or money.

Regulatory landscape

Advances in the DeFi ecosystem such as staking, liquid staking, and DEXs provide new opportunities but also introduce risks. Restaking addresses liquidity issues but amplifies systemic risks due to interconnected minted tokens. The space faces regulatory uncertainties, smart contract vulnerabilities, and questions about the sustainability of returns. The complex and evolving regulatory framework, which varies across jurisdictions, adds additional risks to the ecosystem due to a lack of clear guidelines.

The Continued Evolution of Crypto Finance

A hotbed of innovation, DeFi offers a transformative ecosystem for user-centric financial operations. Leveraging blockchain and smart contracts, it is reshaping finance with decentralized exchanges, lending protocols, yield farming, liquid staking, and more. These products highlight DeFi’s potential to solve complex financial challenges while creating revolutionary opportunities for users. Traditional financial institutions are starting to take notice and enter the space, initiating the convergence of old and new finance with potential implications for the global financial system.