Key Insights:

• DeFi TVL reaches $82.67 billion in 2024, driven by a surge in onchain derivatives trading.
• Platforms like Hyperliquid and SynFutures gain ground with better user experience and innovative products.
• Institutional interest rises in DeFi derivatives, but issues like liquidity, slippage, and high gas fees remain obstacles.

The decentralized finance (DeFi) sector has witnessed a significant resurgence in the first half of 2024, driven by a marked increase in onchain derivatives trading. After a relatively slow 2023, the DeFi market is back on track, with the total value locked (TVL) in the ecosystem climbing to $82.67 billion as of August 16, 2024. This represents an impressive 51.9% growth from the $54.4 billion TVL recorded at the beginning of the year.

The surge in TVL and market activity is largely attributed to the growing adoption of onchain derivatives, with daily trading volumes rising from an average of $1.8 billion in 2023 to $5 billion in 2024. Industry experts point to several factors contributing to this rapid growth, including a favorable market environment, improvements in user interfaces and experiences, and enhanced trading tools.

Innovations and Competition Drive Derivatives Market Growth

The resurgence of DeFi has been accompanied by increased competition within the onchain derivatives market. Established platforms like dYdX have faced rising challenges from newer entrants such as SynFutures, Hyperliquid, and RabbitX. These emerging protocols have gained traction by focusing on product development and user acquisition, rather than managing complex token structures, giving them a competitive edge.

Hyperliquid, a layer-1 order book-based perpetual futures decentralized exchange (DEX), has particularly stood out, with its daily trading volumes frequently surpassing $1 billion. The platform’s ability to offer performance comparable to centralized exchanges (CEXs) while maintaining fully onchain operations has been a key factor in its success. 

SynFutures, another notable player, recorded a cumulative trading volume of over $98 billion in Q2 2024, thanks in part to its innovative Oyster AMM. This model combines elements of traditional automatic market makers (AMMs) with an onchain order book, improving capital and liquidity efficiency.

Additionally, the emergence of perpetual futures products for unlisted tokens has introduced a new dimension to the market. These products have shown potential as indicators of initial market reactions and investor sentiment, although the space is still in its early stages.

Institutional Interest in Onchain Derivatives Grows

Institutional investors have increasingly become a driving force behind the growth of onchain derivatives. Rachel Lin, CEO and co-founder of SynFutures, noted a shift in institutional attitudes toward DeFi, particularly among crypto-native institutions. Lin attributed this change to growing acceptance of cryptocurrencies within traditional finance and government sectors, as well as increased trust in stablecoins.

A Moody’s report from the first quarter of 2024 indicated that government-backed tokenized fund issuance on public blockchains grew to over $800 million in 2023, a significant increase from the start of the year. Stablecoins, often used as the quote asset in onchain derivatives, have seen growing adoption by institutions, which Lin believes is crucial for the continued expansion of the DeFi derivatives market. She also emphasized the role of active outreach efforts by the DeFi derivatives industry in attracting institutional participation.

Challenges Persist for Decentralized Exchanges

Despite the rapid growth and innovation in the DeFi derivatives space, several challenges continue to hinder the sector’s full potential. Yongjin Kim, CEO of the cryptocurrency derivatives platform Flipster, pointed out that decentralized exchanges (DEXs) still lag behind centralized exchanges in terms of user experience, execution speed, and slippage. Liquidity also remains concentrated on centralized platforms, making it difficult for traders to execute large orders on DEXs.

Rachel Lin echoed these concerns, noting that capital and liquidity inefficiency remain significant issues for DeFi. While AMMs have brought innovation to the space, they still struggle with challenges such as slippage, impermanent loss, and capital inefficiency. These issues have limited the appeal of decentralized derivatives products compared to their centralized counterparts.

Furthermore, high gas fees and scalability limitations have constrained the accessibility and usability of DeFi platforms, particularly during periods of network congestion. These factors have deterred both retail and institutional users, potentially slowing down the adoption of DeFi derivatives.

However, there is optimism that emerging solutions, such as AMMs capable of integrating order book models, could address some of these challenges. Order books are known for providing deep liquidity and precise pricing, which are essential for sophisticated trading strategies, while AMMs excel in offering decentralized, permissionless trading. Combining these strengths could enhance the user experience and make DeFi derivatives more competitive, improving price discovery and reducing slippage.