DeFi’s Time to Shine: Why 2022 Could be the Year of Breakthrough for Decentralized Finance

Decentralized finance (DeFi) has had its fair share of challenges, particularly during the recent implosion of FTX U.S., which led to a near bank run on centralized exchanges (CEXs). However, there is still hope for DeFi to shine, and many indicators suggest that this could be the year for a real breakthrough.

One of the main reasons for DeFi’s lackluster performance is its total value locked (TVL), which has mostly remained stagnant. According to data from, DeFi TVL started the year at around $20 billion and reached a peak of nearly $100 billion in April. This is significantly lower than the all-time high of $160 billion in November. Currently, DeFi TVL is hovering around the $60 billion mark, indicating that DeFi has not fully capitalized on its potential.

One of the major factors contributing to DeFi’s underperformance is its poor user interface and user experience (UI/UX). Most DeFi platforms have complex interfaces that are only navigable by experienced traders. This creates high barriers to entry for new users. A survey conducted by Uniswap in May revealed that many CeFi-only users were hesitant to explore DeFi due to their lack of knowledge. However, the same survey also highlighted that the primary difficulty for users of both DeFi and CeFi is uncompetitive pricing and execution. This suggests that DeFi’s poor capital and liquidity efficiency is a significant issue.

DeFi platforms often opt for automated market makers (AMMs), which offer better transparency but struggle to compete with the more efficient trading environment of CEXs. AMMs face challenges in addressing high slippage when liquidity is low, which is a major concern for investors. Centralized order book models, on the other hand, are more efficient but lack transparency, making it easier for the platform to bet against its users or misappropriate user funds.

Despite these challenges, progress is being made to improve DeFi’s efficiency and transparency. The recent resurgence of interest in the crypto market, driven by Greyscale’s win over the U.S. Securities and Exchange Commission (SEC) for spot bitcoin exchange-traded funds (ETFs), is expected to level the playing field for DeFi. This implies that professional market participants are more than welcome in the crypto space and may even be sought out to stabilize and legitimize both crypto and DeFi.

Traditional finance players are also accelerating their involvement in crypto finance, beyond just ETFs. For example, Standard Chartered recently launched a tokenization platform called Libeara, with one of the first assets set for tokenization being a regulated Singapore-dollar government bond fund. This move by centralized traditional finance players adds credibility to the broader crypto finance industry, which is beneficial for DeFi.

On the technical side, zero-knowledge rollups and scaling solutions are gaining traction in the Web-native space. These solutions aim to improve the scalability and efficiency of DeFi platforms, addressing some of the current challenges.

Overall, despite its initial fumble, there is still plenty of hope for DeFi to shine. With improvements in UI/UX, capital and liquidity efficiency, and the increasing involvement of traditional finance players, DeFi could see a real breakthrough this year. The recent developments in the crypto market and the growing interest from institutional investors further support this optimism.