DeFi faces stagnation despite promising growth says Credbull CEO

DeFi became the unique selling proposition of blockchain in 2021, after a crypto boom that was initially led by Bitcoin. DefiLlama reported that the market TVL in May 2024 surpassed $100 billion after a year-long turmoil in 2023. However, it declined again before slightly recovering in July. Despite the rebound, the levels remain far below the 2021 peaks, when the cumulative value locked in DeFi chains was approaching $200 billion.

At the start of 2024, the total value locked (TVL) in decentralized finance stagnated at $50 billion before starting a steady rise by February. Cryptopolitan spoke with Jason Dehni, CEO and co-founder of Credbull, to understand the DeFi trend and growth prospects of Web3.

Inefficiencies in capital flow are a factor in TVL stagnation

According to Dehni, “There is an obvious inefficiency in the flow of capital and liquidity into the Web3 ecosystem as a whole, partially caused by the lasting disregard for prudent treasury management practices, which emanated from the previous super-cycle of 2020.” The executive believes that it is hard to manage DeFi funds due to the volatile and risky nature of the market.

Dehni also explained that new regulations like EU MiCA and VARA in the UAE are making investors cautious. He said, “There is still a fair degree of caution around regulatory uncertainty coming from investors, making them reluctant to plow capital into DeFi projects.”

Credbull’s CEO also hinted at slower growth due to market saturation. He said, “A slower growth rate is to be generally expected as a rule of thumb, given that the explosion of 2020 has gradually led to market saturation over time.”

According to Dehni, as the market gets more crowded, the pace of real innovation slows down. That said, he added, “there’s likely less attractive investment opportunities appearing in front of those who could contribute significant capital…”

Dehni suggests that Web3 start taking the initiative in making knowledge of the markets and investment methods more accessible to debunk its shaky reputation. He added, “It needs fresh new capital to expand the whole pie and that’s the most viable way to attract it.”

The executive is of the view that if DeFi projects keep competing for the same limited amount of liquidity, growth will remain stagnant.

Dehni noted, “The market needs mature institutional products that are managed properly to ensure they can provide stable returns.”

Traditional financial practices could lead to Web3 stability

The CEO maintains that some TradFi practices can be leveraged to build confidence in Web3.  As per the Credbull co-founder, Web3 needs professional expertise and strategic control just like TradFi to improve treasury management. He also recommends diversifying assets and using hedging strategies to reduce volatility.

Dehni believes,” Web3 – in spite of its exponential growth over the last half a decade – is still finding its feet in terms of the way things are done.”

The CEO also touches upon the opposition that introducing traditional hierarchical methods to decentralized systems may seem like a compromise. However, he calls it “a worthy compromise” for better treasury management.

Dehni said, “TradFi has been getting it right for a reason.”

The CEO also underlines that Web3 should diversify its investments like TradFi does, balancing risky investments with safer ones. He explained, “If it [web3] can go a step further and implement the use of hedging strategies to take on higher-yield investments with a safety net in place, investors would feel more assured when looking at the potential to place funds under the care of Web3 projects.”

But despite TradeFi providing a useful blueprint, there are challenges. According to Dehni, “The obvious challenge will be any regulatory grey areas that could crop up.”

The executive explained to Cryptopolitan that integrating traditional practices can disrupt existing compliance requirements. He added, “The ongoing SEC saga shows that token classification has a long way to go before achieving clarity. It’s still uncertain as to whether ICOs will become subject to securities laws as well, which would bring complexities to Web3 entities not familiar with traditional compliance requirements.”

Dehni cites that Web3 treasuries face challenges in implementing anti-money laundering (AML) and know-your-customer (KYC) protocols because of their decentralized nature. He also circles around incorporating internal conflicts within projects due to this intersection. According to him, “Some project members look to protect values such as innovation and decentralization; whilst others lean into the desire for financial assurance.”

Super-cycle of 2020 influences 2024

It would not be wrong to say that the super-cycle of 2020 has influenced the current treasury management practices in the DeFi space. Dehni reflected on how some believe the crash that followed instilled a more risk-aware attitude among some involved in treasury management.

He explained, “This is possibly true.” However, contrarily, he sees that some DeFi projects still lack careful planning with those DAOs voting poorly on hype cycles. Interestingly, TVL managed by DAOs has seen a 50% increase.

The CEO explained, “There’s a tendency within DAO treasuries to foster impulsive voting trends when it comes to budget allocation.”

Dehni also touched upon if 2020 sped up the development of stablecoins. He noted, “It’s almost customary for DeFi projects to at least consider diversifying their treasury holdings beyond their own native token. The need for stable assets in reducing exposure to extreme price fluctuations has definitely become more recognized.”

Efficient capital flow in Web3 could be a reality with Web2

“Regulators are going to have to become more involved across the board,” Dehni opined. He also explained that the emphasis on token classification by the SEC is not to impede crypto’s evolution but to help its responsible growth.

“This initiative, along with the evolution of CBDCs and stablecoins, points towards Web2 growing institutional interest investment possibilities,” he added. Dehni believes that capital flow will come into Web3 if it can allow solutions to be found.

“KYC and AML procedures have to develop in line with this to solidify the progress,” the CEO added. Another major opportunity, according to Dehni, is regulatory sandboxes for Web2 and Web3 to begin fostering a more efficient capital flow.

He explained, “If Web3 projects can demonstrate a compliant operational balance within controlled environments, necessary regulatory progress can be made much quicker.” That said, it appears that Web3 cannot thrive by isolating itself from Web2.

DeFi TVL | Source: DefiLlama

Dehni underlined, “DeFi projects and protocols are going to have to accept that there will be a need for partial reliance on an influx of capital from Web2 if the wider ecosystem is to expand. That’s just inescapable.” The executive is of the view that without collaborative approaches that create assured opportunities, there will be stagnation and volatility.

The CEO also stated that DAOs will need to adopt more traditional approaches to treasury management if they want to stabilize and sustain. He acknowledged that while decentralized governance cannot be compromised, the push and pull pattern will transform into one with elements of give and take.