When bull markets recover, they tend to gain steam over the course of four years. This time around, a rebound in 2024 is feasible as a result of the development of current monetary policy and the reduction of economic headwinds

Total value locked (TVL) in decentralised finance (DeFi) is projected to climb by more than 1,200% in 2021, exceeding $240 billion in invested assets. While DeFi's TVL has fallen to the low $60s in recent years due to broader macroeconomic factors like increasing inflation, the groundwork has been laid for DeFi to reshape the basis of our financial infrastructure in the next market cycle.

When bull markets recover, they tend to gain steam over the course of four years. This time around, a rebound in 2024 is feasible as a result of the development of current monetary policy and the reduction of economic headwinds, which might lead to decreased interest rates and bring financing back into the market. In this article, we will examine the precise variables and early indications that will be important in the next months.

There are currently over 300 million crypto holders worldwide, mostly via exchanges, so the next change in Bitcoin's price could be one of several catalysts for a bull market. Other factors include the taming of global inflation and renewed confidence in the sustainability of DeFi business models.

The transition to a more sustainable economy

Creators of new businesses can no longer rely on "magic internet money." As a result, investors shouldn't expect annual returns of more than 100% or even 1,000% on their capital anytime soon. Previously, such high levels of confidence in the market allowed the creators of the DeFi protocol to give away large amounts of protocol-generated tokens as incentives to early adopters.

DeFi protocol tokens will still be useful, but their minting will be subject to more examination in the future. Market players may wonder whether the protocol can collect sufficient fees to support its treasury and, in the long run, keep (or invest) more value than it gives away to users in the form of inflation or incentives.

Coincidentally, the next 'rocket stage' in Bitcoin's price may not happen until 2024.

It's important to note that this doesn't imply that DeFi protocols will immediately generate a profit. Taking a cue from Web2 and Silicon Valley, Web3 entrepreneurs should think about "unit economics." Once massive initial expenditures are no longer needed, a tech-enabled company model may begin generating free cash flow in excess of operations and customer acquisition expenses.

For DeFi's liquidity providers and market makers, the idea of unit economics translates into an absolute need to maximise capital efficiency. Put differently, if discretionary protocol token inflation is no longer an option, a DeFi protocol will need to be able to produce sufficient transaction fees to compensate liquidity providers.
Implications for decentralised markets

DEXs, also known as automated market makers, have been at the vanguard of the DeFi movement from the beginning. To encourage liquidity providers to switch from Uniswap, SushiSwap was an early adopter of protocol-sponsored early adopter prizes and "vampire assaults."

When it comes to powering every dollar of daily trade volume in a decentralised way, DEXs have traditionally not been capital efficient. Protocol-generated tokens are used by liquidity pools to compensate liquidity providers for their services since the fees collected per dollar of frozen liquidity are so minimal.

More capital-efficient DEXs are appearing, a trend that will very certainly spread to all of the other DeFi sub-sectors.

For instance, Uniswap v3 lets liquidity providers pool their resources to facilitate trade only in a narrow price band. As long as prices remain within that range, a single dollar of liquidity may facilitate far larger daily trade volumes, allowing the network to collect higher transaction fees without resorting to protocol-generated token inflation.

The key is effective use of resources

Those entrepreneurs who can build decentralised business models that provide sustainable unit economics for liquidity providers and market makers will usher in the next generation of DeFi innovation.

Possibly none of the businesses that will develop these business models even exist yet. In response, there has been a rise in the number of Web3 startup accelerators targeting the "next big thing" (for example, Cronos, Outlier Ventures or BitDAO).

DeFi's rise among the next generation of Web3 users will be accelerated if its founders and initiatives keep creating new possibilities with varying degrees of risk and potential profit. Developers have a growing variety of high-throughput, low-transaction-fee blockchains to choose from, giving them a solid foundation upon which to build DeFi and other types of profitable, distributed apps. Competition will help drive innovation, leading to the finest solutions for end-users, as Web3 evolves into a multichain future.

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