What will drive cryptocurrency bullishness in 2024?

Easing monetary policy, lower inflation, changing bitcoin mining sophistication, and growing confidence in DeFi are factors that will lead to a new surge in cryptocurrency prices.

Decentralized Finance (DeFi) has seen tremendous growth since its inception, rising more than 1,200% in 2021 in total blocked value (TVL) and exceeding $240 billion in invested assets. Although DeFi has since fallen to about 60 billion TVL as a result of broader macroeconomic trends such as rising inflation, DeFi has what it takes to reconfigure the fundamentals of our financial infrastructure in the next market cycle.

Historically, the return to a bull market follows a four-year trajectory. This time around, a recovery in 2024 is very likely due to the maturation of monetary policy and the easing of regulatory disincentives, which could allow for lower interest rates and a new influx of funding into the industry.

This bull market is likely to be driven by four factors:

– A taming of global inflation,

– Renewed confidence in the sustainability of DeFi business models.

– The migration of at least 50 million cryptocurrency holders from the world of centralized exchanges to the world of decentralized applications (there are currently over 300 million cryptocurrency holders worldwide, mostly through exchanges)

– The changing complexity of bitcoin (BTC) mining.

Everyone wonders if the next cycle will repeat the “Summer of DeFi” of 2020, only on a larger scale and with more users?

Transition to economic sustainability

Startup founders can no longer rely on “magic Internet money.” This means that the market is unlikely to return to the level of certainty that allowed the founders of the DeFi protocol to reward their first users with large numbers of tokens generated by the protocol, thus subsidizing annual returns of over 100% or even 1000% of invested capital.

While DeFi protocol tokens will continue to play a role, the minting of these tokens will come under scrutiny. Market participants will question whether the protocol is capable of generating enough fees to fund its coffers and ultimately retain (or invest) more value than what it distributes to end users through inflation or rewards.

Of course, this does not mean that DeFi protocols should be profitable from day one. Web3 founders will need to consider the concept of unit economics borrowed from Web2 and Silicon Valley. This will allow the technology-driven business model to generate free cash flow in excess of operating costs as well as user acquisition costs, because large investments will no longer be needed early on.

In the DeFi world, the concept of unit economics is turning into a need to achieve capital efficiency for liquidity providers and market makers. Simply put, this means that the DeFi protocol must eventually be able to generate sufficient transaction fees to reward liquidity providers once it can no longer rely on arbitrary inflation of protocol tokens.

What this means for decentralized exchanges

Decentralized exchanges (DEX), also called automated market makers, have always been at the forefront of DeFi. For example, SushiSwap pioneered the concept of rewarding first-time users sponsored by the protocol and “vampire attacks” to encourage liquidity providers to abandon Uniswap.

Historically, DEX has been inefficient in terms of capital, requiring large volumes from liquidity providers to decentralize every dollar of daily trading volume. Because the liquidity pools generated low fees per dollar of locked liquidity, they relied on tokens generated by the protocol to generate sufficient rewards for liquidity providers.

We are now seeing the emergence of more capital-efficient DEXs, and this trend is likely to accompany all other DeFi verticals.

For example, Uniswap V3 allows liquidity providers to concentrate their capital to trade only between certain price ranges. This allows one dollar of liquidity to provide daily trading volume for many more dollars as long as prices remain within that range, and thus receive more transaction fees per dollar invested in liquidity without relying on token inflation generated by the protocol.

Another example is dYdX, a decentralized derivatives platform. Because dYdX uses buy and sell order matching, it does not require regular users to allocate to liquidity pools, and instead relies on much more efficient professional market makers to act as counterparties for end users.

Capital efficiency as the name of the game

The next wave of DeFi innovation will come from project founders who are able to develop decentralized business models that create a sustainable unit economy for liquidity providers and market makers.

Startups that create these business models may not even exist today. As a result, we are seeing a proliferation of early-stage Web3 startup gas pedals looking for the “next big thing” (e.g., Cronos, Outlier Ventures or BitDAO).

For DeFi to continue to accelerate growth among the next generation of Web3 users, founders and projects will need to continue to create multiple options with different risk and reward profiles. With the rise of interoperable blockchains that offer high throughput and low transaction rates, developers have a wide range of options to further develop DeFi and decentralized revenue-generating applications. As Web3 moves toward a multichannel future, competition will drive innovation to deliver better products to end users.

Kotov Dmitry
CEO and Founder of Cryptoconsulting
Expert in web3 technologies

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