Experts expect the number of DeFi users to grow significantly within the next decade with some estimates forecasting at least 22.1 million individuals engaging with various protocols by 2028. One of the biggest on-chain analytics websites Dune states that there are at least 86.9 million unique wallet addresses in the DeFi sector in 2024, an 86% increase compared to last year. The number of monthly DeFi users is also growing steadily.
Estimating the true size of the sector is challenging since we do not have information about individual users and have to rely on the number of wallets which can be misleading. A much better metric is TVL or total value locked. In September 2024, the combined TVL across all protocols was $80.6 billion, a 112% growth year-on-year. However, it is still magnitudes lower than the ATH of $170 billion reached by the sector in November 2021 during the pandemic.
No matter how you look at it, the sector is massive. With over 4 thousand tracked protocols across over 30 chains, investors have an incredibly diverse selection of capital allocation options. Some of these platforms have massive TVL numbers counting in billions of US dollars. So, what are these DeFi protocols? Let’s talk about them and learn about the best ones.
Decentralized finance has one key difference from centralized systems — self-custody. Users are responsible for the safety and management of their finances. Decentralization removes the need for intermediaries by allowing users to interact with each other directly in a trustless and permissionless environment thanks to DeFi protocols using smart contracts, tiny programs that execute its instructions when certain conditions are met.
In simpler words, users trust an automatic system that moves digital assets according to hard-coded instructions that all participants of the network can see and easily verify. Instead of a banker that may hide some crucial information from you, DeFi protocols operate transparently and simply cannot obscure information.
Automated transactions between users also nullify the counterparty risk that usually prevents us from actively participating in unregulated traditional financial markets. Brokers, banks, exchanges, and other institutions exist largely to deal with the counterparty risk which is not an issue in DeFi.
The mechanics behind a typical protocol are derivative of blockchain technology. All protocols use an underlying chain to operate as immutable digital ledgers are inherent components of their designs. Automating transactions is an incredibly challenging endeavor if you do not have strict rules and frameworks within which financial operations can occur. Blockchains provide these critical, foundational frameworks.
There are two essential mechanisms used by DeFi developers to build protocols:
Centralized financial systems have existed for millennia and have developed a variety of useful instruments. While many crypto enthusiasts strongly oppose the idea of CeFi, even they have to admit that traditional services are more convenient, faster, and offer flexibility to the participants of the global economy. However, these benefits do not nullify the biggest reason to have decentralized alternatives — potential corruption.
Since all participants of financial systems are incentivized to act with their best interest in mind while completely disregarding the financial interests of others, the tension between power-wielding institutions and individuals inevitably leads to wealth centralization, corruption, and eventual collapse of monetary, financial, and social infrastructures.
Having an alternative ecosystem to fall back on if things go south in the traditional centralized economy is quite useful. Considering the fallout of the 2008 financial crisis and the ongoing CoL crisis across the globe, we need a better system that does not easily succumb to inflation, allows for democratization in finance, and offers novel instruments to investors.
Decentralized finance provides ample opportunities for financing investment strategies without the need to deal with middlemen. The mobility of digital assets is further improved due to the use of smart contracts that automate all interactions between lenders and borrowers to ensure that those looking for financing can access funds quickly and without any issues.
A good example of this particular sector of the DeFi landscape is Aave, a multichain lending protocol with a combined TVL of over $11.1 billion and over 140 different pools with utilization ranging between 20% and 80% meaning that borrowers are actively taking out loans. The average APY is 2.19% but some pools are way more productive than others.
A smart contract usually operates as an automatic vendor that simply accepts your collateral, calculates the amount you can borrow, and gives it to you while keeping a record of the interest rate that you have to pay back on top of the borrowed funds to get back the collateral.
These protocols are the main facilitators of economic activity in the DeFi ecosystem. Unlike centralized platforms, these also use smart contracts to conduct transactions between users automatically and completely remove the need for intermediaries. This approach allows all market participants to work in a trustless environment without worrying about counterparty risk.
DEXes often serve only one chain they are deployed on. However, some exchanges work across multiple networks by either separating pools or utilizing bridges which are another type of protocol used to increase interoperability and allow people from one chain to send their assets to another effortlessly.
DEXes need liquidity that they gain by setting up special pools where investors can allocate assets to receive rewards. In some cases, they are rewarded with native or governance tokens. In others, DEXes simply pay an interest rate from revenues they collect by providing financial services to users.
When you invest a certain type of token to receive rewards in incentives offered by protocols, we call it yield farming. The term has different meanings. Another one is just a blanket term for all activities in the DeFi sector related to accruing interest passively. We will focus on the former.
Yield farming protocols come in all shapes and forms. They can offer derivatives, yield trading, insurance services, and more. However, the vast majority of such protocols are decentralized exchanges that offer generous rewards to users in an effort to attract more liquidity.
Types of rewards include native tokens issued by protocols, utility and governance tokens, layer 2 cryptocurrencies, and other digital assets. In some cases, protocols reward users with points that can be later exchanged for native tokens when they are emitted by the platform.
Many platforms in the DeFi sector are offering unique services that have never been seen in the world of centralized finance. However, the uniqueness of the sector is not the main reason why so many crypto enthusiasts are attracted to it. Decentralization has many perks and contemporary protocols demonstrate them quite well.
Here are some benefits of these platforms:
To illustrate the point, we will give you a comparison between three distinctly different platforms that all outperform their CeFi counterparts in terms of profitability, investment costs, and transparency as well as user trust.
| METRIC | LIDO (liquid staking) | Aave (lending) | Uniswap (DEX) |
| TVL | $22.4 b | $11.1 b | $4.26 b |
| Token mCap | $885 m | $2.02 b | $4.86 b |
| Number of pools | 2 | 140 | 3666 |
| Average APY | 3.75% | 2.18% | 21.6% |
| Highest TVL pool | stETH ($22.5 b) | wstETH ($2.6 b) | WBTC-WETH ($191 m) |
| Highest TVL pool APY | 3.11% | 0.01% | 3.09% |
| Unique stat | $425 m in annual fees | $7.42 b borrowed | $159 m in annual fees |
| Number of chains supported | 1 | 12 | 23 |
| Treasury | $106 m | $57 m | $2.6 b |
All these protocols have massive TVL numbers counting in billions, sizeable treasuries, and generate healthy revenues while offering unique investment opportunities to users.
Picking a good protocol to invest in is hugely important for the long-term perspective of your portfolio. Picking from over 4 thousand protocols can be a challenge even for investors with rich DeFi experience. However, you can separate the chaff from the wheat by following these simple rules:
As mentioned above, onboarding is a big issue in the sector with all developers recognizing the necessity of interface simplification. One of the recent trends in the DeFi sector is the standardization of connection processes that usually require users to simply use something like MetaMask to get started. All Ethereum-based protocols allow users to connect through Ethereum.
In other cases, you may need to install other types of software to connect your wallet to a protocol but it is usually a very simple process that does not require users to demonstrate their technical know-how.
If you still do not know where to start, we will give you a couple of suggestions. Note that we do not endorse any of the platforms below and do not advise you to invest in them. The information is for educational purposes only!
Decentralized finance is still a largely uncharted territory in many senses. Some new risks are still quite dangerous and do not have easy solutions. Newcomers to the industry must be aware of three hugely important risks that are unique to this sector:
DeFi protocols provide essential services to the participants of the crypto market and create a viable alternative to potentially compromised centralized systems. However, we are still far away from a future where these protocols are widely adopted and used regularly by individuals and institutions.
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