Bear Market, Consolidation, and Renaissance: What 2024 Was Like for DeFi

The last few years have not been easy for most protocols in the decentralized finance (DeFi) segment. Many well-known players in the market significantly reduced their staff, and some had to close down altogether.

The beginning of 2024 was unremarkable for DeFi - despite market recovery impulses and spot ETFs already visible on the horizon, the segment was in no hurry to grow rapidly. In January, its TVL was in the neighborhood of $50 billion, which was in line with March 2021 values.

Few were optimistic about the prospects for a speedy recovery of decentralized finance, given the lackluster performance of the sector and the cryptocurrency market as a whole. However, in early March, Bernstein experts expressed hope for an accelerated recovery of DeFi on the back of bitcoin growth and strong capital inflows into exchange-traded funds.

• The past bear market tested DeFi's mettle, driving consolidation and strengthening the underlying technologies.
• Tier 2 solutions and the growth of Solana have been key drivers of ecosystem recovery and scaling.
• The total TVL of the decentralized finance segment doubled in 2024, and projects based on Ethereum, Solana and new L2s set the vector for further growth.

Bear Market and Consolidation in Crypto

The bear market continued from mid-fall 2021 until around February-March 2024. Recession was replaced by debilitating stagnation, the prices of most cryptoassets were falling, and skepticism reigned among investors amid regulatory uncertainty. However, it was this phase that tested the decentralized finance segment's strength and strengthened its foundation.

Ethereum ecosystem, which is the backbone of DeFi, has faced a number of challenges. Despite the highest degree of decentralization, the scaling problem was still extremely acute.

The rapid development of Layer 2 (L2) solutions significantly reduced the load on the network of the second most capitalized cryptocurrency. However, this also led to negative consequences: fragmentation of liquidity and the emergence of barriers to compatibility between different protocols.

Against the backdrop of these Ethereum problems, Solana, famous for its fast, inexpensive transactions and, unfortunately, occasional failures, has gained considerable popularity. The graph below illustrates the pronounced growth of the TVL ecosystem in 2024 after the collapse following the FTX crash.

As of December 29, Solana ranks second in the rankings from DeFi Llama, behind only Ethereum, although the gap between the ecosystems remains significant. Its TVL has grown more than 6 times since the beginning of the year.

New Landscape and DeFi Renaissance

Despite the drop in key metrics amidst the past bear market, development continued. DeFi veterans like Maker, Aave and Uniswap held strong, creating investment opportunities and fresh technology solutions. New projects and even entire ecosystems were also emerging, spurring competition in the segment.

Against the backdrop of this progress and gradual market recovery, the number of DeFi users has shown accelerating growth since the beginning of 2024.

About six months after the fourth halving of bitcoin, the cryptocurrency market has noticeably revived, which had a positive impact on the dynamics of the total TVL segment of decentralized finance.

In the first half of November, the indicator crossed the $100 billion threshold, doubling the values of the beginning of the year.

As of December 29, the segment's total TVL stands at ~$122 billion. However, this is still quite a long way from the peak above the $170 billion mark reached in November 2021.

Ethereum Blockchain Layer 1

Among ether-based DEXs, Uniswap remains the unchanged leader. The platform's turnover is almost half of the total figure of other major non-custodial exchanges.

The competition in the segment is intensifying, so Uniswap's market share is slowly decreasing.

However, the developers are not sitting idle - they have been working on the fourth version of the largest DEX for a long time. Uniswap v4 will introduce an innovative system of “hooks” - these are plugins that add new features to liquidity pools, such as dynamic adjustment of commissions or creation of different types of orders.

Another important new feature will be the flash accounting system, which will reduce costs for liquidity providers. This mechanism is activated via EIP-1153 and optimizes the storage of onchain data, reducing commission costs.

In late November, Uniswap Labs announced it was willing to pay up to $15.5 million for discovering critical vulnerabilities in smart contracts in the fourth version of the protocol. The reward is the largest in the history of bounty programs.

In October, the developers opened the possibility for users to directly exchange native tokens and stablecoins in nine networks through an interface and exchange wallet. The solution is based on the permissionless Across Protocol, which uses a decentralized network of liquidity pools and relays.

Another key project of the DeFi-ecosystem - Aave - also confidently holds positions in its segment. The leading lending platform's TVL exceeded $20 billion; it is second only to Lido in the overall DeFi Llama ranking.

he cryptocurrency lending service operates in 13 different networks. In July 2023, the developers presented a decentralized stablecoin GHO, and a year later it was released on the Arbitrum network.

Other significant events in the segment include:

• rebranding of MakerDAO - the service changed its name to Sky;
• launch of a completely redesigned third version of Synthetix's synthetic asset platform;
• strengthening of Lido's position as the largest liquid steaking protocol - its TVL is approaching $40 bln, despite the emergence of competitors like Rocket Pool and mETH Protocol;
• emergence of the restacking segment, where the EigenLayer project is a clear leader with TVL over $16 bln;
• emergence of a derivative sector - liquid restocking, where the key players are Ether.fi, Renzo, EigenPie and others, and TVL at its peak reached $18 bln;
• the emergence of the synthetic dollar USDe from the Ethena project, whose market capitalization is already approaching $6 billion;
• the development of decentralized lending protocols like Morpho, which offer high capital efficiency, flexibility and relatively low transaction costs;
• the rise of TVL platform Pendle, which allows trading of future revenues from cryptoassets.

L2 on Ethereum Blockchain

In March there was a major Dencun update that dramatically reduced commissions for Layer 2 solutions, especially those based on Rollups technology.

The Coinbase-backed Base ecosystem has surpassed Arbitrum in TVL, with the figure exceeding $3.6 billion as of December 29.

The growth of the metric came amidst soaring onchain activity and high turnover on DEX.

Aerodrome remains the leader among Base exchanges, with its TVL and daily turnover exceeding $1 bln.

Other well-known L2s like OP Mainnet, Linea, ZKSync, Starknet and Scroll continue to grow aggressively in an effort to strengthen their positions in a competitive environment and retain user loyalty.

Solana Blockchain

As it mentioned above, the Solana ecosystem has shown considerable growth. As of December 29, its TVL is ~$8.6 billion.

Some of the largest protocols include:

• Jito - liquid staking;
• Jupiter - non-custodial trading (spot and perpetual futures);
• AMM exchange Raydium.

”On Solana, DEXes and DEX aggregators such as Orca, Raydium, Jupiter and Drift emerged from the depths of the bear market. They started handling more and more volume – fuelled by the memecoin mania they even surpassed DEXes on Ethereum” - noted the developer and founder of the Finematics portal under the nickname Jakub.

Pump.fun has established itself as a simple and convenient platform for creating new meme tokens. Despite problematic content and controversial approaches to its moderation, the service continues to make a significant contribution to Solana's onchain activity.

Some of Pump.fun's key metrics as of Dec. 27 are illustrated below:

• Number of addresses issuing tokens daily - 4,530;
• number of tokens issued per day - 5222;
• daily number of active and new addresses - >200,000;
• number of tokens issued on the platform per day - >40,000.

According to a dashboard on Dune by Hashed, more than 5 million meme tokens have been issued on Pump.fun so far.

Kamino stands out among Solana's lending projects. Its TVL recently passed the $2 billion milestone.

Future prospects for DeFi Sector

Major updates to Ethereum are expected and there are already a significant number of L2 networks, the competition between which is only likely to increase.

Vitalik Buterin is convinced that with the development of Layer 2 solutions, the total network throughput could reach an impressive 100,000 transactions per second (TPS).

In his opinion, “no other network has even come close to reaching Ethereum's current level of decentralization.”

Among other prioritized changes Buterin cited:

• Increased decentralization, resistance to censorship, quantum resilience;
• improved scaling;
• achieving throughput of more than 100,000 TPS with L2 solutions;
• developing different applications like social networking and payments;
• lowering the entry threshold for staking from the current 32 ETH to make it even easier and more affordable to start a node.

Perhaps the community will adopt Beam Chain developer Justin Drake's proposal to update Ethereum's consensus layer from scratch.

The initiative incorporates the latest ideas from the research roadmap.

According to Drake, Beam Chain aims for faster second block times, smaller validator fractions, chain snarkifaction and, as a result, post-quantum network security.

The expert explained the potential transition as part of the evolution of Ethereum - from PoW to PoS and to a potential Ethereum ZK consensus.

Describing an approximate timeline for a possible implementation, Drake said the process of developing the specification could begin next year, with implementation starting in 2026.

The upgrade could significantly increase the TPS of the Ethereum core network, “completely eliminating the need for rollups.”

Drake is confident that innovation at the L1 level will evolve incrementally, gradually being introduced and made available every year for years to come.

Projects are emerging that offer innovative technological solutions, from unique runtime environments and new programming languages to advanced virtual machines.

For example, Hyperliquid, a decentralized platform for trading open-ended futures, features impressive speed and a high degree of decentralization. The L1 blockchain with a native DEX module uses a modified version of the Proof-of-Stake consensus algorithm called HyperBFT. According to the team, the system's throughput reaches 200,000 TPS, making the platform one of the highest performing on the market.

In late November, the project conducted one of the largest airdrops in the history of the crypto industry. Soon after, the decentralized trading platform with three protocols in its ecosystem entered the top 10 of the DeFi Llama ranking in terms of blocked funds. Within five days of TGE, the HYPE token tripled in value.

In December, the Avalanche team released a major update to Avalanche9000, which reduces the cost of deploying subnets (Subnets) by 99.9% and makes C-Chain transactions - the network for Ethereum-compatible smart contracts - 25 times cheaper.

The “second floor” is also innovating. An example is the L2 solution MegaETH, focused on high-speed transaction execution. The project was supported by Vitalik Buterin, Joseph Lubin, Dragonfly Capital and other well-known market participants.

The developers position MegaETH as the first Ethereum-compatible “real-time blockchain.” The protocol aims to achieve a throughput of 100,000 TPS.

In October, Uniswap Labs unveiled its own L2 solution for Ethereum called Unichain, targeting DeFi. The network is developed on Optimism's OP Stack as part of the Superchain ecosystem.

Unichain will provide crosschain interoperability and a decentralized validator network. At launch, the block processing time will be one second and will later drop to 250 milliseconds. The developers predict a 95% reduction in transaction costs compared to Ethereum, and even more in the future.

The network uses a trusted execution environment (TEE) based block constructor created with Flashbots. This speeds up operations, streamlines transactions, and reduces the likelihood of failures.

Unichain is designed as a modular blockchain, allowing functionality to be extended with new tools, improving decentralization and user experience.

Eclipse is an Ethereum-based L2 that utilizes:

• SVM as an execution environment;
• Celestia network for data availability;
• RISC Zero technology to generate zero-disclosure proofs.

In March, the project team closed a $50 million Series A funding round.

Stylus is an update to Arbitrum's leading L2 platform that allows developers to write smart contracts in Rust, C or C++ without sacrificing EVM compatibility.

Another important factor in DeFi's adoption is improving the user experience. One of the key ways to achieve this goal is the widespread adoption of account abstraction (AAU). This technology has the potential to empower cryptocurrency wallets and improve their security.

Other benefits:

• Account recovery options in case of key loss;
• transaction aggregation (e.g., approving and executing an exchange transaction in one click);
• gas payment with stablecoins;
• scheduled and batch transactions;
• alternative signature schemes;
• automation of operations: portfolio rebalancing, implementation of dollar cost averaging strategy.

For the Solana ecosystem, the key event will be the upcoming launch of Firedancer - a new client-validator from Jump Crypto. The new development is designed to dramatically increase the throughput and reliability of the system, which could have a positive impact on the SOL price.

An early version of the client called Frankendancer was launched in September.

Innovative projects like NeonEVM are being developed. This is the first “parallel” EVM on the Solana blockchain, combining the strengths of both technologies - high interoperability and significant throughput.

According to the project's website, the commission for sending tokens or swapping them is only $0.003. The blockchain is capable of processing more than 2000 transactions per second.

The developers of Solana's “parallelized” L1 competitors are not wasting time either - Aptos, Sui and Sei are actively working. New players are also emerging:

• Monad - a tier-1 smart contract platform that features innovative approaches to scaling;
• Berachain, a modular, tier-1 blockchain project with EVM support that uses a Proof-of-Liquidity consensus mechanism.

Interesting processes are taking place in the bitcoin ecosystem - the Taproot update breathed new life into it. Along with the Lightning Network, other L2 scaling solutions are developing, as well as markets for “inscriptions” and BRC-20.

The steaking protocol of the first cryptocurrency Babylon is no stranger to popularity. Its TVL has exceeded $5 billion.

Project co-founder Fisher Yu said that DeFi on bitcoin simply didn't exist until recently - all methods of steaking or wrapping coins via dapps required trust in one way or another. In his view, “true DeFi” only implies confidence in the blockchain or smart contract.

Tokenization is another promising area for DeFi. Despite development obstacles due to regulatory uncertainty, the RWA segment continues to grow rapidly; its capitalization exceeds $20 billion.

It’s hard to predict exactly when, but I’d expect to see the vast majority of assets in the world eventually being tokenized and tradable in DeFi. This would include stocks, bonds, commodities, real estate, and other financial assets, Jakub suggested.

According to him, the pace of innovation in DeFi is unlikely to slow down. The sector will continue to develop: infrastructure reliability will improve, transaction speeds will increase, user experience will improve, and interconnectivity will become more efficient. In addition, decentralized finance will become more deeply integrated with artificial intelligence, gaming platforms and other promising areas.

Conclusion

The past bear market turned out to be not just a downturn, but an important stage in the evolution of decentralized finance, laying the foundation for its future.

The DeFi sector has shown resilience, innovation and growth. Despite the crisis, hacker attacks and regulatory uncertainty, the segment has not only recovered, but also opened up new opportunities for financial technology.

Protocols like Uniswap, Aave and Sky have not just survived, but have implemented advanced features, confirming the strength and significant potential of the ecosystem.

Tier 2 projects like Arbitrum, Base and OP Mainnet are effectively combating the scaling challenge and attracting new users.

Solana is consolidating its position, and new Tier 1 blockchains are actively vying for the market's attention.

DeFi is changing the familiar financial landscape, making it more accessible, flexible and interconnected. Unstoppable progress promises many more opportunities and innovations.