DeFi
DeFi Developments to Watch in 2024 – DL News
What you will learn
- 2024 could be the dawn of KYC’d DeFi.
- Modularity is DeFi’s shiny new toy.
- How many times can an Ether be staked?
With each passing year, the world of decentralized finance – which truly began in 2020 – becomes more and more complex.
What started as a handful of simple Ethereum applications allowing users to trade or lend against tokens is now a sprawling metropolis of interconnected protocols, each scrambling to capture as much data as possible. $52 billion DeFi market as possible.
It’s hard to make sense of it all – even more so now that the DeFi ecosystem spans more than 200 different blockchains.
To help understand the latest trends in DeFi, DL News has identified key developments that are sure to make waves in 2024.
Uniswap Hooks allow developers to create custom features, like KYC
Back when Uniswap first revealed its new Hooks feature as part of Uniswap v4, onlookers immediately warned that it could be used to create liquidity pools with compliance requirements, such as customer knowledge checks.
Some DeFi puritans have said that Hooks are contrary to DeFi’s founding principles, namely its permissionless nature.
But others argue that permissioned Uniswap pools could benefit DeFi by removing the very real fear among institutions to inadvertently interact with entities sanctioned by the U.S. Office of Foreign Assets Control via DeFi protocols.
As Uniswap is the most advanced in providing optional KYC functionality through Hooks, such development is expected to strengthen the moat and competitiveness of the protocol, VanEck said.
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If permissioned DeFi starts to gain traction with traditional financial players, Uniswap Hooks will likely be where it starts.
EigenLayer will make Ethereum more modular
In recent years, Ethereum has grown beyond the confines of the Ethereum mainnet and now also encompasses more than a dozen so-called layer 2 blockchains.
While these layer 2 chains offer significantly lower fees and faster transactions, they also introduce a significant problem: a fracture in Ethereum’s trust network, as transaction validation takes place outside of the Ethereum mainnet.
Validation involves checking whether transactions comply with the blockchain rule.
While Layer 2s ultimately send all transactions occurring there back to the Ethereum mainnet for finalization, they require an external validating network to do so. The finality is when validated transactions are made irreversible on the blockchain.
Currently, the companies that build Layer 2 manage this validation themselves centrally. But most, if not all, expressed a desire to decentralize their validation as much as possible.
It’s there that high-profile protocols like EigenLayer Come in.
EigenLayer will allow blockchains built on Ethereum, as well as other protocols such as decentralized Oracle Networks, to tap into mainnet validation for their various validation needs.
The desired outcome is a more efficient and aligned validation system that covers not only the Ethereum mainchain, but also everything dependent on it for transaction validation.
If EigenLayer succeeds, Ethereum should start to resemble modular blockchains like Cosmos, Celestia or Polkadot but with a much more decentralized validation network. Modular blockchains work by separating network functions into special layers instead of their monolithic counterparts like Bitcoin and Ethereum which attempt to manage all functions on a single layer.
EigenLayer has also taken things beyond validation. This also works on EigenDAa way to help Layer 2 scale by providing additional data availability.
It’s fair to say that the full launch of EigenLayer could be the spark that reignites interest in Ethereum and its many Layer 2 networks in 2024.
For investors, EigenLayer offers an enticing prospect by allowing them to reinvest their staked Ether, thereby providing even higher returns. But the recovery has also caused some anxiety within the Ethereum community.
Ethereum co-founder Vitalik Buterin warned that the takeover, if poorly constructed, could threaten the stability of the network.
Echoing Buterin, JPMorgan analysts are also wary of the fact that this restocking can lead to a “cascade of liquidations if the value of an asset involved falls sharply”.
Sreeram Kannan, founder of EigenLayer said DL News in May, he understands the fear and the project moves forward cautiously.
Big names ready to launch on Celestia
EigenLayer is not the only project offering the magic combination of modularity and data availability.
Celestia does the same, but instead of operating through a set of smart contracts on Ethereum, it uses a specially designed blockchain.
Rather than having to create a validation network themselves, blockchains can build on or migrate to Celestia to benefit from the validation and availability of data provided by the project’s main blockchain.
So far, only a handful of blockchains – or settlement layers – have been deployed on Celestia. But some big names are expected to deploy in 2024.
Berachain, who raised $42 million in its April Series A round, is probably the best known among DeFi natives. But lesser-known projects, like Neutrino and Layer N, should not be overlooked.
A number of existing infrastructure projects such as the Axelar cross-chain bridge, Optimism’s OP Stack, and the Cosmos SDK framework have also chosen to integrate with Celestia.
With such potential, Celestia’s growing ecosystem will likely be one of the biggest stories of the coming year.
Tim Craig is DL News’ DeFi correspondent based in Edinburgh. Contact us with advice at tim@dlnews.com.