Just a few short years ago, the allure of double-digit and even higher yields was irresistible.
But since late 2022, these returns have taken on a new light — they’re too often viewed by skeptics as a potential red flag and a harbinger of risk and instability, rather than the enticing red carpet they once were.
To those skeptics and critics, I say: I still firmly believe DeFi yield will continue to be a vital category. It’s more than just presenting an appealing number — it’s an essential cog in the machinery of most protocols.
That yield strengthens governance, fuels liquidity provision and increases protocol security; proving that it’s not just yield for yield’s sake, but a direct result of technological advancements that improve capital efficiency.
This stands true even in the face of recent adversities. This would include the Euler hack of $200 million (eventually returned), or the Iron Bank incident that saw Alpha Homora’s users’ funds held hostage in an attempt to offset bad debt.
While DeFi’s recovery may not necessarily take the form of the eye-watering APY users have grown accustomed to, it offers a more sustainable solution and a chance for broader participation. Some users may be fine with taking the risk. However, the focus is gradually shifting from chasing astronomical returns to more calculated strategies, creating opportunities for a larger demographic and financial inclusion.
DeFi is poised to have a renaissance in 2023.
Demonstrated resilience in the face of challenges
Acknowledging the undeniable resilience of DeFi is crucial, as it isn’t just another catchphrase in the crypto world; It’s a vital component to crypto’s survival.
Evidence of this dependency can be seen in the events of 2022, wherein centralized entities imploded while DeFi held strong. Numerous projects such as Rocket Pool and Sonne pushed forward, using the so-called “crypto winter” that followed as a learning experience to refine their proposition and open up new opportunities to users.
It is during times of turbulence that we, as a community, are given the chance to refine our strategies, reassess our priorities and consolidate our strengths. These challenges serve as the proving grounds for the next generation and enable us to step up and showcase an alternative future that’s decentralized.
Emergence of liquid staking derivatives
A significant factor in helping weather the storm of 2022 has been the rise of liquid staking derivatives. LSDs saw substantial growth during this period thanks to the promise of the Shapella upgrade — 4.3 million ETH deposited — despite the market sentiment.
Major contributors such as Lido were able to alleviate concerns through user-friendly and low-barrier-to-entry approaches, promoting more sustainable yield that remained liquid.
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This very process not only gained trust quickly, but also opened the doors wide, enabling anyone with a small amount of capital and slightly less-than-total-degen technical sophistication to participate.
In this new world, geography is irrelevant. Your location or background doesn’t dictate your ability to earn returns.
Coinbase’s cbETH, with its 2.2 billion TVL, is evidence of this shift. It signals a growing acknowledgment of an inclusive financial future where anyone can participate and reap rewards.
The promise of layer-2 solutions in finding yield
Layer-2 solutions have been nothing short of transformative in their impact on the DeFi landscape. For years, Ethereum’s transaction fees have been a barrier, hindering accessibility and usability for many DeFi participants. However, the emergence of layer-2 solutions has revealed a world of untapped possibilities. These solutions offer significantly lower fees and faster transaction speeds, outperforming the limitations of mainnet, and provide a perfect environment for LSDs to become more inclusive.
These improvements, however, are not just about outperforming mainnet’s limitations; they are about forging a new path to universal access. Layer-2 solutions provide the perfect launchpad for anyone, irrespective of their location, to engage with DeFi.
Even those who were previously shut out by high costs can now participate and try their hand at various strategies. Should they decide to bow out, they still gain the invaluable experience of navigating a world that was previously inaccessible to them.
Jordan Kruger is the Head of DeFi at Bloq and co-founder of Vesper Finance and Metronome.
