DeFi Decentralized Finance: Evolution, Challenges, and Future Trends 2020 — 2025

Back in 2020, when the decentralized finance ecosystem was establishing itself as an alternative to traditional financial markets, investors were quite skeptical about the potential of novel investment instruments to disrupt the existing tradfi system. Nonetheless, in just one year, the combined TVL of all protocols on Ethereum and Binance Smart Chain grew from $600 million to over $14 billion demonstrating a staggering 2,300% growth.

In November 2021, the industry reached its TVL ATH at $177,4 billion. It was a moment when the whole crypto community was cheering. DeFi protocols and ecosystems seemed to have no ceiling and could grow infinitely. Alas, it was a temporary bull run fueled primarily by the hype and overconfidence of early investors driven by the FOMO.

To attract long-term investors and create a thriving ecosystem, the DeFi sector needed to change. At the beginning of 2023, the combined total value locked across all protocols crashed to just under $39 billion. Note that this contraction happened despite the general increase in the number of protocols offering their novel investment tools.

Global economic impact on DeFi

Throughout 2024, the industry managed to increase the TVL by 220%. It grew from $53 billion at the start of the year to over $120 billion by the end. One of the reasons for this intense growth was the reaction from the community of capital holders to the political situation within the US as the new POTUS could ease the regulatory pressure and allow the capital to flow freely in the cryptocurrency market.

While it is important to understand how regulatory frameworks are shaping the future of DeFi, one must also keep in mind that other factors are feeding into the dynamic within the decentralized finance ecosystem.

Here are some of them:

• The general instability of the existing fiat system. Bitcoin was conceived, in part, as a reaction to the 2008 financial crisis. It wiped out $2 trillion from the global economy and forced the US government to step in and bail out centralized corporations. This move effectively increased the total volume of debt. The effect of this decision is still very impactful. With confidence in fiat currencies falling, DeFi investments start looking promising.
• The evolution of technology. According to industry surveys, up to 27% of all investors believe that difficult onboarding is one of the most significant entry barriers. We have seen a distinct trend among DeFi developers to create better user experiences and build UIs that can compete with what the traditional fintech industry has been developing for decades. Emerging tools and platforms for monitoring and managing DeFi investments are quite good at providing a much better UX than just a couple of years ago.
• The emergence of liquid staking and restaking. Liquid staking was introduced back in 2021 after the finalization of the Ethereum switch to the PoS consensus mechanism. It has always been a significant part of the DeFi ecosystem. In 2024, the TVL of liquid staking protocols grew by 212% from $31 billion to over $67 billion. Protocols like Lido and Binance Staked ETH were leading the pack. This and lending are the two most popular DeFi categories.
• Blockchain technology advancements. One of the reasons for the rapid evolution of the DeFi ecosystem is the evolution of the underlying blockchain technology allowing developers to build advanced solutions for an environment where users act as bankers, investors, and clients simultaneously. Smart contracts created a new paradigm, making it possible for DeFi users to engage in a variety of investment activities without ever encountering an intermediary.

These are the advantages of this growing ecosystem. Contemporary investors are still facing some issues with onboarding and may be doubtful about the future trends in decentralized finance. However, the general direction of the sector is clear. It promises to create an environment where users can engage in all sorts of economic activity including lending, borrowing, purchasing real-world assets, and more while enjoying the benefits of self-custody and partial anonymity.

Despite the improvements and visible evolution of the sector and many protocols offering unique approaches to capital allocation, it is impossible to claim that the industry does not have any problems at all.

Challenges in DeFi

Unfortunately, the combined TVL has dropped at the beginning of 2025. After reaching the $133 billion milestone in December 2023, it fell to under $88 billion, with liquid staking protocols taking the biggest hit. Lending managed to keep itself afloat. Protocols like AAVE, Compound Finance, JustLend, and others are now leading the market in terms of TVL.

The volatility of the sector and its investment instruments is one of the problems that continue holding it back.

Here are some other challenges to consider:

• Investor adoption of DeFi is still quite low. TVL per user has dropped by 28% with the number of unique wallets in the Ethereum ecosystem growing to 20 million when TVL reached $133 billion. It means that the vast majority of users are relatively large capital holders with individual investors holding back. Note that the number of wallets does not reflect the true number of actual users.
• Security and scalability in DeFi remain a big concern. Cardano and Solana seem to be quite good for higher volumes of transactions, but investors do not flock to infrastructures with better performance. Ethereum is still the biggest DeFi ecosystem thanks to its first-mover advantage. The low throughput of Bitcoin and Ethereum prohibits them from reaching higher adoption rates.
• Problems with interconnectedness. The DeFi ecosystem is fractured. Despite the existence of bridges, allowing users to move funds from one ecosystem to another, it is impossible to rely only on decentralized solutions. For instance, all bridges have to use Oracles, which are centralized institutions. The importance of cross-chain interoperability in decentralized finance is difficult to ignore and we still lack proper solutions.
• The lack of regulatory oversight is another big issue. The non-existent consumer protection means that individual users have to do their due diligence personally regardless of whether they have the necessary experience and expertise. A good solution is going to Rivo. The yield marketplace showcases excellent investment opportunities picked by experienced professionals and vetted by a team of specialists. The platform does all the legwork allowing you to focus on choosing the right investment strategy that suits your preferences and risk style.

Lastly, the role of community governance in DeFi project success is hard to define despite many protocols pointing at it as one of their strongest traits. According to research by Robin Fritsch et al., in prominent Ethereum-based decentralized governance systems less than 10% of tokens are engaged in voting meaning that just 7.5% of all tokens are enough to win any given vote. Despite being vulnerable to manipulation, some of the most reliable and successful DeFi projects are DAOs. For instance, MakerDAO arguably has the strongest stablecoin in DAI and it is managed by a decentralized autonomous organization.

The main takeaway

The last decade showed that the crypto industry is more than capable of surviving and growing. DeFi is a natural extension of the new economic system that does not rely on centralized institutions and even governments to function properly. The DeFi ecosystem offers thousands of investment strategies allowing investors to build unique portfolios.

Navigating this ocean of opportunities is a difficult task even for experienced crypto enthusiasts. Rivo is your trusty beacon in this chaos. Here, you can visit one of the best yield marketplaces and choose from selected strategies offered by projects attentively verified by a team of dedicated specialists. Make your move toward true financial independence with Rivo!