Back in 2021, the DeFi sector entered the crypto mainstream, promising to change the world of traditional finance. At the dawn of DeFi, in 2020, the total value locked (TVL) in DeFi projects did not exceed $1 billion. By the end of 2021, TVL has grown by over $175 billion, a spectacular result achieved by the emerging industry.

However, DeFi found itself under material pressure in the first half of 2022. Several catalysts triggered a strong outflow from DeFi. The collapse of Terra/LUNA put the whole DeFi business model under question, while the sharp increase in interest rates in the developed world made traditional instruments more attractive to many investors.

As a result, TVL pulled back from the peak near the $175 billion level to the bottom of around $37 billion, which was reached in October 2023. The rally in crypto markets, which was triggered by expectations of the approval of spot Bitcoin ETFs, provided support to DeFi projects. TVL started to grow again and surpassed the $100 billion level by June 2024.

Unfortunately for DeFi enthusiasts, this growth hit a speed bump put by the general correction in crypto markets.

Taking a look at the market cap of DeFi projects, it turns out that the sector is smaller than meme coins ($28 billion vs $40 billion). How did this happen?

From a big-picture point of view, the DeFi sector is searching for its place in the world of high interest rates in traditional financial markets. It should be noted that interest rates have moved away from their maximum levels, while the leading central banks have already started their rate-cut cycles. Ultimately, lower interest rates should boost interest in DeFi.

DeFi must define its unique value proposition to stay relevant. Back when DeFi emerged as the financial instrument of the future, its projects offered attractive yields compared to near-zero yields provided by traditional financial institutions. The significant difference in yields, and, therefore, potential profits, served as the key catalyst behind the robust growth of DeFi projects in 2021.

Users have quickly found out that DeFi was unable to support mouth-watering yields, which resulted in scandals and declining confidence in the whole sector.

In order to grow sustainably, DeFi must provide competitive yields compared to the yields offered by traditional finance. At the same time, such yields should be justified by a solid business model rather than by a Ponzi scheme. The sector must find a perfect balance between yields and safety and then sell the “DeFi product” to crypto investors.

Meanwhile, the memecoin sector offers a simple “product” — multi-baggers. Sure, most memecoins will never achieve the success of Doge or Shiba, but investors always hope to profit from the next star in the memecoin world.

Overall, the new rate cut cycle should push interest rates to lower levels and provide material support to the DeFi sector over time. However, the sector must also find internal drivers for sustainable growth. DeFi has a significant growth potential, but its value must be unlocked.