To date, DeFi has arguably the strongest product-market fit in crypto. As of October 2024, the TVL across DeFi protocols exceeds $86 billion, indicating a gradual recovery from the lows of $36 billion seen in early 2023. DeFi protocols like Uniswap, Raydium, and Maker consistently generate the most revenue. This sustained revenue flow reflects DeFi’s potential for long-term growth.
The growth of DeFi is further highlighted by its robust transaction volumes and increasing stablecoin adoption. In 2024, total transaction volumes across DeFi protocols surpassed $1 trillion, demonstrating strong demand from both retail and institutional users. This sustained activity underscores DeFi’s ability to facilitate seamless, permissionless financial transactions on a global scale. Simultaneously, the stablecoin market cap has expanded to over $170 billion, up from $125 billion in early 2023. This growth in stablecoin usage serves as a crucial liquidity layer for DeFi, enabling seamless access to trading, lending, and yield-generating opportunities.
Looking forward, we envision DeFi as a parallel financial system distinct from traditional finance, focusing on building separate infrastructure rather than rapid integration.
Institutional adoption is a key focus, as it represents net new capital inflows into this new financial system. We are in the early innings as players like PayPal (launching their USD backed stablecoin), Blackrock (their BUIDL tokenized fund surpassing $500 million) and Stripe ($1.1 billion acquisition of stablecoin startup Bridge) begin to enter the foray.
While DeFi’s growth thus far is impressive, there are still areas ripe for innovation. In the sections below, we highlight our investment thesis and some DeFi sub sectors that we are keeping an eye on.
Payments and stablecoins are poised to become the primary entry point for users new to crypto, given their familiarity and ease of use. As stablecoin adoption accelerates exponentially, the distinction between fiat-backed stablecoins like USDC/USDT and traditional fiat money may seem minimal to casual users. However, yield-bearing stablecoins represent a disruptive leap, offering the ability to generate returns—a feature that traditional fiat systems struggle to replicate.
We have a huge interest in protocols who are preparing for a stablecoin-dominated economy which involves addressing key challenges like streamlining stablecoin issuance, improving on/off-ramp accessibility, and managing fragmented liquidity across a growing number of stablecoins.
With payments and stablecoins closely intertwined, major institutions like PayPal are already working to own the entire user stack, maximizing value capture and positioning themselves to lead in this evolving financial landscape.
Crypto payments can be broadly categorized into two sub-categories - local payments and cross-border payments. Local payments involve transactions within a single country or region, where crypto rails offer advantages like near-instant settlement, reduced fees, and 24/7 availability compared to traditional payment systems. This sub-category often finds application in point-of-sale transactions, e-commerce, and peer-to-peer transfers. On the other hand, cross-border payments deal with international transactions. Crypto rails add value by reducing costs, improving speed, and enhancing transparency compared to traditional methods like SWIFT or remittance services, making them particularly useful for global commerce and remittances.
The current state of local payment systems is highly efficient within national borders, thanks to the rise of real-time payment systems (RTPs). These systems enable immediate settlements, operating 24/7 with low transaction costs, making frequent and reliable money transfers accessible to both individuals and businesses. Countries like Brazil, Europe, and the U.S. have developed advanced RTP networks. For example, PIX in Brazil supports instantaneous transfers across all sectors, Instant SEPA in Europe allows near-instant euro transactions, and the RTP Network in the U.S. facilitates fast payments with enhanced messaging for better reconciliation. These domestic systems are not only fast but also interoperable, integrating seamlessly with banks, digital wallets, fintech apps, and point-of-sale systems, which drives high adoption rates.
With that in mind, we are interested in local payment protocols that possess a deep understanding of traditional payment systems and can effectively incentivize both merchants and consumers to adopt stablecoin transactions through means such as cashbacks and loyalty programs.
As alluded to in our previous article on Solana Payments, we believe that there is a bigger opportunity in cross-border payments. Local payment systems face limitations in global connectivity, lacking a unified framework to handle cross-border transactions. Diverse technical standards, compliance protocols, and settlement methods make international integration difficult. Furthermore, they do not have built-in mechanisms for foreign currency conversions or international compliance. By removing intermediaries, crypto cross-border payments become faster and cheaper, operating 24/7. It also enhances compliance through built-in, automated verification processes like KYC and AML, ensuring regulatory clarity. With standardized, tamper-proof data, blockchains allow easier auditing and adherence to international regulations, making it especially beneficial for fintechs operating globally or in regions with limited banking infrastructure.
Additionally, we are closely observing cross-border protocols with expertise in emerging markets, where access to efficient global payment solutions remains limited. These regions present an urgent need for more reliable, compliant, and cost-effective cross-border transactions, making them a critical area for impactful innovation.
Our view is that the current trading patterns will persist for the foreseeable future, with large-cap "fat head" token trading volumes to be captured by order books or off-chain sources, such as solvers on intent-based exchanges, while AMMs will remain the primary venue for trading the long tail of small-cap tokens.
We are particularly interested in next-generation AMMs that focus on supporting long-tail assets like memecoins in a more capital-efficient and less value-extractive manner.
For AMMs, the main problem to solve is still loss versus rebalancing (LVR), which refers to the inevitable difference between holding assets in an AMM and holding them in a traditional, balanced portfolio. A key driver of LVR in AMMs is the role of arbitrageurs, who exploit stale prices within the pools to extract value. AMMs rely on automated formulas to determine asset prices, but these prices can lag behind off-chain sources like CEXes. When this happens, arbitrageurs can buy assets at lower prices or sell them at higher prices within the AMM, profiting from the difference.
There have been several interesting attempts to solve LVR. For instance, am-AMM or "Auction-Managed Automated Market Maker" introduces a censorship-resistant auction mechanism, allowing a pool manager to dynamically set trading fees and capture arbitrage, resulting in higher liquidity compared to fixed-fee AMM. Uniswap v4 introduces "hooks," a feature that allows developers to insert custom logic at specific points in a pool's lifecycle, such as before or after swaps, liquidity additions, or removals. Developers can design hooks to execute rebalancing strategies that align the pool's asset ratios more closely with current market conditions. Another solution is deployed by ALM (active liquidity management) protocols like Arrakis and Kamino Finance. Active liquidity management on AMMs involves LPs dynamically adjusting their positions within specific price ranges to enhance capital efficiency, maximize returns, and reduce risks like impermanent loss. This approach often uses external signals, rebalancing strategies, and trading bots to optimize liquidity provision in real-time, making it more suitable for advanced users.
Despite their potential, ALM protocols manage only around $400 million in aggregate liquidity as of October 2024, indicating that these mechanisms are primarily used by advanced users and specialized protocols. Broader acceptance may be slow due to their complexity and associated risks. Approaches like am-AMM and Uniswap v4’s hooks introduce significant complexity, making it harder for average users to participate. Features like dynamic fee settings, custom hooks, and rebalancing mechanisms often require technical knowledge, limiting adoption to sophisticated participants.
RWAs on crypto rails offer a compelling solution to reduce costs and enhance transparency in financial transactions. By leveraging crypto’s 24/7/365 operational capacity, RWAs enable instant capital deployment and continuous liquidity, unlike traditional finance, which operates within rigid hours, often resulting in missed opportunities. The blockchain's decentralized infrastructure removes intermediaries, significantly cutting transaction and settlement costs while providing a transparent, tamper-proof ledger for all parties involved. This aligns with the success of stablecoins, the first RWA to achieve product-market fit, whose transaction volumes more than doubled Visa’s $3.9 trillion over the second quarter of 2024. Stablecoin usage now rivals giants like Visa, PayPal, ACH, and Fedwire, representing an inflection point that signals broader adoption of other RWAs. As transparency, efficiency, and cost reductions continue to drive adoption, RWAs on blockchain rails could redefine how financial markets operate and scale.
One of the biggest challenges for RWA projects is achieving liquidity. While tokenization aims to transform historically illiquid assets—like private credit, treasuries, securitized gold, watches, wine, and real estate—into more accessible, tradable assets, simply tokenizing them doesn’t guarantee high liquidity. For tokenized RWAs to be truly valuable, there must be substantial demand and trading volume. Without sufficient market interest, tokenized assets may struggle with price discovery, wide bid-ask spreads, and limited exit options for investors. Therefore, building deep liquidity is essential, whether through incentives like yield farming, integration with liquidity providers, or creating secondary markets that attract consistent buyers and sellers.
Projects that successfully cultivate robust demand and active trading environments will unlock the core value proposition of RWAs, bridging the gap between traditional assets and crypto’s continuous, liquid markets.
The DeFi space is poised for a transformation, where the apps that own end-user relationships will emerge as dominant players, akin to how social media platforms and mobile apps currently operate. While there are high-functioning protocols across various DeFi verticals—like money markets, spot and derivatives trading, payments, and memecoin trading—the user experience remains fragmented and suboptimal. Apps like Jupiter are paving the way by integrating multiple product suites, striving to deliver a seamless, all-in-one experience.
The next step will be the rise of a DeFi superapp capable of unifying all these services, offering users a comprehensive platform where they can access a wide array of DeFi products without switching between protocols.
By consolidating user relationships and offering an intuitive, mobile-first interface, this superapp can drive mass adoption and set the standard for the future of decentralized finance.
The recent emergence of GOAT incited more excitement and interest into the intersection between AI and DeFi. GOAT started as an AI-driven meme coin that quickly gained popularity through social media interactions, mainly propelled by LLM-trained Truth Terminal engaging with users and promoting memes. Despite the initial speculation, it's important to clarify that GOAT is not fully AI-enabled. The token was launched independently on Pump.fun, not by Truth Terminal. As a result, Truth Terminal has no direct control over any wallets that would facilitate token trading. Utimately, we feel that Truth Terminal is merely a glimpse into the transformative potential of the intersection between AI and DeFi.
From a broader perspective, the future vision for AI and DeFi involves creating a fully automated, intelligent financial ecosystem that is personalized, efficient, and seamless.
AI could potentially handle every aspect of DeFi interactions, from asset creation, liquidity management and portfolio rebalancing to yield optimization and risk mitigation, without requiring constant user input.
One particularly interesting area of focus could be on autonomous trading agents where they could execute trades based on real-time data analysis. DeFi, traditionally driven by deterministic smart contracts, could be significantly transformed with AI-powered agents that bring adaptability and intelligence. Imagine agents trained on proprietary financial data not publicly available, offering nuanced insights into market behaviour, yield optimization, or risk management. These models could unlock new functionalities, like dynamically managing liquidity based on real-time sentiment, predicting memecoin trends before they surge, or automating cross-chain arbitrage across fragmented markets. This would allow users to deploy AI agents as "personal bankers or portfolio managers" that manage diverse investment strategies based on individual preferences, ultimately creating a bespoke financial environment. Taking a step further, another interesting area of research could be agents that can autonomously create new tokens, leading to the development of entirely new digital assets designed for speculation, staking, or other DeFi functions.
By leveraging verifiable decision-making processes and self-custodial mechanisms, AI can improve transparency and security in DeFi interactions. This fusion can also democratize financial access, making DeFi more user-friendly and inclusive by abstracting complex operations into intuitive, automated solutions. As AI continues to evolve, it can help expand DeFi’s asset scope, improve market dynamics, and create highly personalized financial ecosystems, marking a significant step toward a fully automated, intelligent financial infrastructure. There are so many more exciting concepts to explore in the convergence of AI and crypto which certainly warrants a separate article.
In conclusion, the DeFi landscape is undoubtedly evolving rapidly, driven by continuous innovation across various sectors, from stablecoins and payments to RWAs, next-gen AMMs, and the emerging fusion of AI with DeFi. As DeFi matures, it is positioning itself as a parallel financial system that offers more efficient, transparent, and accessible financial services. We plan to invest in protocols that prioritize strong fundamentals, sustainable revenue models, and clear value propositions, aligning with the expanding DeFi market size.
Pivot Global