DeFi on Ethereum: State of play and outlook in 2024

Global situation

At present, around $58 billion of cryptos are stuck in DeFi protocols on Ethereum. This is 2.7 times more than in October 2023, when TVL was at its lowest, but around half its all-time high ($106 billion in November 2021).

While this recovery is intrinsically linked to the price of the various tokens that make up DeFi (mainly ETH), this surge also reflects a renewed interest in the protocols among users.

This can be seen in particular via the on-chain volume: whereas it was just $670 million per day in October 2023, the volume has now grown significantly and is close to $2.6 billion per day.

But not all DeFi sectors on Ethereum are in the same boat: some narratives came out on top in 2024, to the detriment of other projects that are now suffering from a certain lack of interest.

DEXs are still thriving, but competition is tough

Decentralised exchange platforms on Ethereum are now widely used, reflecting the interest of DeFi users.

However, competition is tough between the various players. Currently, Uniswap remains the undisputed leader with a weekly volume of $9 billion on the mainnet. This is a huge achievement, given that the centralised giant Coinbase records around $15 billion.

In comparison, Curve, which occupies second place, continues to lose market share and achieves "only" $1.4 billion in volume per week. That's around 6.5 times less than its main competitor, while Uniswap's TVL is only 2.5 times Curve's.

How do you explain such a difference in volume? It lies mainly in the platform model.

Liquidity on Uniswap (V3 - which captures 90% of the volume on Uniswap Ethereum) is concentrated, unlike Curve, which allows much better use of liquidity providers' capital.

As a direct consequence for users: trading is often better on Uniswap. This is why the majority of volume transits via this platform (via aggregators, which account for around 50% of DeFi volume).

This concentrated liquidity model (introduced on Uniswap V3) has been democratised in DeFi. It is now considered better than the old model, which required liquidity to be deployed over a price range from 0 to + ∞ (still used on Curve).

But all is not so rosy for Uniswap, as the platform is currently losing ground to Aerodrome and Velodrome, representatives of the ve(3,3) model.

Indeed, drawn from the famous DEX Solidly that appeared on the Fantom blockchain, Aerodrome and Velodrome use some of its components with a few added specifics.

Like Uniswap, they use concentrated pools of liquidity but with additional incentives based on a system of bribes (snippets).

Without going into too much technical detail, the liquidity providers on Aerodrome/Velodrome receive not only the fees generated by the exchanges but also additional tokens (linked to the operation of the ve(3,3)).

This dual incentive provides better compensation for impermanent losses for the liquidity providers and is genuinely beneficial for the system.

On Layer 2 Base (read our analysis), Aerodrome has already overtaken Uniswap in terms of volume: $1.9 billion over 7 days compared with $875 million for Uniswap, although Uniswap v3 has 1.85 times more TVLs than Aerodrome's concentrated pools.

As a result, it is important to note that the dominance of this market is fragile and relies mainly on technological innovations related to this field (a more efficient platform will naturally take more market share).

Aave dominates the lending platform market

In the lending platform sector, everything is working perfectly: the model is deemed viable and is attracting ever more users.

Aave, the No. 1 lending and borrowing platform on Ethereum, is still widely used. At the time of writing, the protocol has around $12.8 billion in TVL (up from $19 billion at its peak).

The platform has overcome the difficulties it has encountered and demonstrated the robustness of its system.

This is thanks in particular to its agile governance mechanism: the protocol is managed by AAVE holders, who can influence the platform by voting on the various proposals (also submitted by the protocol's stakeholders).

Each week, several proposals (generally changes to risk parameters) are voted on to adjust the protocol in line with market conditions. This allows the platform to adapt quickly. Recently, its community raised the possibility of redistributing part of the revenue generated by the protocol via a buyback of AAVE tokens on the market, which could support its share price.

This is one of the things that was lacking in Liquity, a decentralised borrowing service that lost a lot of interest following a change in the market (the protocol is completely immutable and has no governance).

Behind Aave are Spark Protocol ($3.1bn TVL), Compound Finance ($2.3bn) and Morpho Blue ($950m).

Spark Protocol is a fork of Aave V3 backed by Maker DAO. Despite being second in TVL, it doesn't really add value to the market.

To be honest, the factors that explain why the protocol is so high in TVL today are an airdrop program (in SPARK, the platform token) and formerly the availability of sDAI (a yield-generating asset) on Spark (now available on Aave).

So we can legitimately ask: what will be the point of using Spark once the protocol has released its token?

Spark offers certain risk parameters that are more permissive on Spark (particularly on stablecoins).

With regard to Compound Finance, the market is struggling to recover from its various hacks suffered in December 2020 and September 2021 ($159 million was lost).

Despite the market's recovery, users are still not confident about placing funds in this protocol. TVL has fallen steadily since its peak at $12 billion.

Finally, Morpho Blue seems to be Aave's most serious competitor. Its approach is interesting because it is based on delegating risk to its users.

In contrast to Aave, which is managed by a governance and uses a global pool for its assets, Morpho has isolated markets (e.g. wstETH/USDC) that are immutable with risk parameters specific to each of them.

That is to say, users who wish to gain exposure to specific assets/risk parameters will be able to do so via the various markets available. He will be assured that these parameters will remain as they are and will not depend on the other assets in the protocol.

This is a different approach but one that responds quite well to sophisticated players in particular. The platform currently has 950 million TVL on Ethereum.

As Spark and Morpho Blue do not yet have liquid tokens, they can play on their respective airdrop programmes to attract more liquidity.

Restaking is the most explosive sector of 2024

This is the sector that has seen the biggest rise in 2024: since the start of the year, EigenLayer's TVL has risen from ETH 155,000 ($500m) to ETH 5.7M ($18.5bn).

This surge was mainly driven by liquid restaking protocols (LRTs) such as EtherFi (read our analysis) or Renzo (read our analysis), which allow users to take advantage of the various airdrop programmes while still having their ETH.

Since slashing is not yet active on EigenLayer, there is very little risk in depositing funds there. This is partly why we have found that whales have had relatively little reluctance to migrate to this narrative.

As far as the players in this sector are concerned, EigenLayer benefits from the "first mover advantage" and now captures 90% of the market.

However, some serious competitors have recently emerged: Symbiotic ($1.2 billion TVL) and Karak ($1 billion) are the two biggest challengers today (read our analysis of the restaking sector).

Although Karak does not really offer any clear prospects, Symbiotic is innovating with a totally different approach. Unlike securing networks solely with ETH, Symbiotic is permissionless and allows anyone to introduce other tokens.

This approach is already appealing to several players as Ethena and Hyperlane (also secured by EigenLayer) are going to use Symbiotic to secure their networks.

With regard to the various LRTs, the competition is fierce: EtherFi ($6.3 billion TVL) continues to secure its leadership position (53% market share), releasing relevant products at the right time (notably their vault "Super Symbiotic LRT" which introduces EtherFi on Symbiotic).

His main competitor Renzo ($1.8 billion TVL) continues to lose market share. While it was at 32% on 1 May, the project represents "only" 15% of the market today.

This loss of momentum is mainly due to the loss of confidence of some investors, a consequence of the ezETH depeg last April (ezETH lost its 5% anchor to ETH during that event).

The other LRTs have remained fairly stable in terms of market share.

Finally, the restaking boom has benefited liquid staking protocols like Lido overall, but perhaps not as much as some would have liked.

Although only 25% of EigenLayer's TVL is made up of liquid staking tokens (the rest comes from independent validators), this still represents $4.6 billion.

These funds have been spread mainly across Lido's stETH (900.000 ETH), Mantle (150,000 ETH) and Swell (115,000 ETH).

With regard to the liquid staking (LST) market in general, Lido (read our analysis) is still in the lead with a dominance of around 30%. This dominance could well increase in the coming weeks.

In fact, Mellow, the infrastructure behind the majority of Symbiotic LRTs, only runs on wstETH. We can therefore expect demand for this token to increase in the coming months, as Symbiotic repositories reopen.

Symbiotic and Mellow have been funded by the Lido Alliance, a collective aiming to develop the presence of stETH in the DeFi ecosystem. This follows a desire to compete with EigenLayer.

Centralised stablecoins are still used just as much

In the last year, the stablecoin landscape has not changed much.

90% of the market is still dominated by fiat-backed stablecoins (mainly USDT and USDC), while the rest is made up of "decentralised" stablecoins.

Tether has clawed back market share from Circle, rising from 50% to 58%, reinforcing its supremacy within the ecosystem. To date, there are approximately 114 billion USDT in circulation (ATH) compared with 34 billion USDC.

On the decentralised stablecoin side, new trends are emerging, notably via the appearance of yield-generating stablecoins.

Maker led the way a few months ago by introducing RWA collaterals on DAI to diversify and increase its revenues.

This change led to the popularisation of the DSR, a contract allowing users who deposit DAI to receive a share of the protocol's profits (represented by the sDAI token).

Today, anyone who holds sDAI is remunerated at 7% annual return. As this token is composable, it can be used in DeFi, in particular as collateral on money markets.

Ethena Labs is also focused on this niche, via its USDe and sUSDe stablecoins.

As a reminder, the protocol has set up a tokenised basis trade on ETH and BTC enabling holders of sUSDe (staked USDe) to receive a native return. Today, holding sUSDe yields 11% APY.

There are currently 3.2 billion USDe in circulation. It is, moreover, the fastest-growing stablecoin in the history of stablecoins (the one that has reached USDe 3 billion in capitalisation the fastest).

Although Ethena's concept is interesting (read our analysis of Ethena), sUSDe returns vary greatly depending on the market (subject to funding rates) and the risks of managing the basis trade are also significant.

Finally, we can mention Angle Finance and Usual, which are among the challengers in this narrative.

Through USDA (70 million tokens in circulation), Angle enables holders of stUSD (staked USDA) to generate returns natively. As with Maker, Angle incorporates various collateral such as USDA lent on Morpho or tokenisations of Amundi and BlackRock ETFs (mainly European and US Treasuries, as well as corporate debt).

Usual adopts a similar system with its USD0 (130 million tokens).

While these systems are interesting for users, the management of RWA collateral is rather opaque and requires significant trust in the stablecoin issuer.

Conclusion

DeFi on Ethereum is experiencing a real resurgence of interest, from both retail and professional users.

The restaking narrative looks very promising and full of opportunities. As for stablecoins, it is necessary to fully understand the risks associated with certain projects to avoid overexposure.

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