Decentralized finance has come a long way from the days when it was regarded as little more than a fringe movement. While it’s not there yet, it’s fast morphing into a real financial revolution, and the constant growth of the market over the last year has given birth to countless new innovations that will further change the game.
DeFi is a place where dozens of new trends occur each year, and in 2024 alone, we’ve seen the emergence of concepts like perpetual LP pools, intents-based architectures, virtual liquidity layers, and yield-bearing tokens. But what do these new trends actually entail, and what will their impact be? Read on to learn more about them.
Perpetual LP pools
The earliest liquidity pools in DeFi were designed to support peer-to-peer trading, but newer protocols have expanded on this concept to support “trading against the house” in the perpetual markets. In doing this, DeFi platforms make life easier for liquidity providers, who no longer need to pay such close attention to their LP positions. It also enables a concept known as “pooling” of yield because liquidity providers now simply provide liquidity for the house they support.
A prominent example of this is GMX, a decentralized exchange that’s focused on perpetual futures and runs on Avalanche and Arbitrum. With GMX, users can trade crypto assets with high leverage, making it one of the first DEXs to provide trading opportunities for decentralized derivatives.
On GMX, liquidity in its LP pools is represented by the $GLP token, which consists of nine separate assets ranging from stablecoin pairs to large market cap tokens. The platform generates revenue via trading fees, distributing these to $GLP token holders.
Essentially, by holding $GLP, you’re providing liquidity to the GMX DEX, which enables you to earn a share of the transaction fees it generates, as well as other incentives, such as the platform’s governance token, $GMX. As such, liquidity providers don’t just profit from the appreciation of $GLP but also from the performance of the underlying liquidity pools.
Virtual liquidity
Introducing a new concept known as “virtual liquidity” is the revamped Dolomite DeFi platform, which is both a decentralized money market protocol and DEX that offers vast token support and unparalleled capital efficiency.
The virtual liquidity system paves the way for users to access over-collateralized loans, spot and margin trading and various other financial instruments.
Dolomite works on behalf of its users to ensure their digital assets are optimized to earn maximum yield generation. When a new user first deposits assets into the protocol, such as USDT or ETH, the interest accrual begins right away.
With its virtual liquidity system, users can provide liquidity to AMM pools, earn interest through margin lending and engage in yield farming with high leverage, all at the same time. In addition, the platform supports multiple borrow positions simultaneously, from the same wallet, with each one collateralized by up to 32 different assets. This means users can leverage almost any asset as collateral, including staked tokens or interest-bearing tokens.
For instance, by participating in Dolomite’s ETH-USDC liquidity pool, they can earn not just a share of the trading fees but also continue to accrue lending interest. The narrative extends further when the underlying LP token becomes available for lending and borrowing, resulting in a cascade of different avenues for investors to multiply their earnings. It’s an ingeniously designed system that provides opportunities for every asset to be reused in some way to generate yield, representing a seamless fusion of everything DeFi has to offer.
This vision is illustrated by Dolomite’s novel Zap feature, which opens the door to numerous possibilities, such as instantly swapping an asset and using it as collateral in a single transaction, directly employing collateral to settle loans, depositing collateral in an unheld asset or extracting collateral in a distinct asset.
Intents-based architectures
DeFi is still widely regarded as a confusing place that’s hard to navigate, but this reputation is being eroded thanks to new, intents-based architectures that abstract away much of the complexity involved.
DeFi users are often required to execute transactions across multiple blockchains and protocols, and that requires a lot of know-how and transaction signing processes. This is because traditional architectures are focused on “how” an action should be executed, instead of just the desired outcome of the user’s action.
These changes with intent-based systems make it possible for users to simply define their desired outcome without modeling each transaction parameter. The goal of intents-based architectures is to enable DeFi users to achieve the best possible result without having to specify which platforms they want to use or the timeframe for execution. They spare users the intricate details of each transaction parameter, making DeFi more efficient and user-friendly.
A compelling example of intent-based architecture is Aperture Finance, which uses AI algorithms to allow users to express their desired end goal for an LP position. The transaction will only be executed if the desired outcome can be obtained. Aperture’s platform is powered by large language models that translate user’s intents, expressed in natural language, into a domain-specific language.
Advocates of intent believe they are the innovation DeFi needs to attract more casual users into the crypto space and help them explore the possibilities for wealth creation that the industry provides. By simplifying the jargon and closing the knowledge gap, intents-based architectures can make DeFi much more accessible to a much broader clientele.
Principal tokens
Pendle Finance is the creator of a novel platform that’s designed to improve yield trading by tokenizing future yield, so it can be traded by users. It brings new capabilities to yield-management in DeFi, dividing yield-bearing assets into principal and yield tokens, which can then be leveraged in numerous ways. For instance, using Pendle, DeFi investors can hedge, lock-in, or trade their future yields, paving the way for multiple yield-management strategies that will generate a significant passive income stream.
With Pendle Finance, Principal Tokens represent the ownership of underlying assets that generate yield through traditional DeFi mechanisms. They provide a way to separate yield from the underlying asset, so users not only gain the implied yield of that token but can leverage it elsewhere for additional yields.
Marginly is one of the first DeFi platforms to leverage PT tokens. With it, users can deposit PT into a single-sided liquidity pool, with traders posting collateral, selecting their leverage, and executing their trades. When a trader borrows funds from a single-sided pool, those funds immediately purchase more of the selected asset to increase leverage.
Another platform taking advantage of Pendle’s innovation is Dolomite, which provides a way for users to borrow against their PTs. Users simply deposit their PT token as collateral to borrow the asset they desire, increasing their trading leverage.
Innovation never stops
As we near the end of 2024, the DeFi industry is nearing a pivotal moment, gaining traction in both traditional lending and borrowing and the numerous niche markets enabled by the innovations detailed above. It’s a thriving industry that’s characterized by its rapid evolution and never-ending innovation, giving birth to a stream of new financial primitives that can only exist on-chain.
As these new DeFi trends mature, we can expect to see the DeFi industry shift to a more consolidated market structure that’s focused on a narrower range of the most advantageous approaches to yield generation. Of course, the industry will continue to evolve as yet more innovations rear their head, giving rise to yet another new generation of financial primitives.
DeFi is a place where innovation never stops, and investors must be on their toes to keep tabs on which new trends are likely to thrive.
Image credit: Furkan Demirkaya/Flux AI
