DeFi Adoption Will be Marked by Advanced Trading Models

by
Vitali Dervoed

Published: November 05, 2024 at 6:56 pm Updated: November 05, 2024 at 6:56 pm

by Ana

Edited and fact-checked:
November 05, 2024 at 6:56 pm

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As decentralized finance (DeFi) advances, it’s clear that its foundational technology needs to mature as well. Early innovations like Automated Market Makers (AMMs) and Centralized Exchanges (CEXs) were vital for DeFi’s adoption in its beginnings, but the ecosystem now requires more robust tools to support its next phase, one that attracts both everyday users and institutional DeFi investors. The next era of DeFi will be marked by advanced “financial primitives”—new mechanisms that can drive sustained growth. One advancement will be the introduction of hybrid trading models, which are essential for supporting institutional DeFi, the next generation of finance.

Mapping DeFi’s Waves of Innovation

The introduction of new financial primitives has marked each stage of DeFi’s adoption, each propelling the next wave of innovation. In the first major bull run, lending protocols like Aave and Compound, and AMMs like Uniswap, laid the groundwork for DeFi by introducing democratic access to liquidity and yield, allowing users to lend, borrow, and trade assets directly from their wallets without intermediaries.

The next wave of innovation was marked by the emergence of more advanced trading infrastructure, like the rise of order book-based systems, such as Central Limit Order Books (CLOBs). These innovations not only brought increased maturity to DeFi by increasing control and precision in trade executions but also by providing a familiar TradFi-user experience. Developments like these have helped introduce new participants into the ecosystem, particularly institutional players seeking greater flexibility and high-frequency trading capabilities.

The industry is now ready for its next wave of innovation and to continue on its path of maturity towards institutional DeFi. This next wave will require advanced financial primitives to support larger institutional entry and expansion into the space. This maturity will likely see the rise of a hybrid model that combines the strengths of both lending protocols and AMMs with the efficiency and sophistication of CLOBs. Hybrid trading models will represent a sophisticated approach that goes beyond the basic financial primitives that drove DeFi’s first wave of innovation and will offer a more nuanced and versatile trading ecosystem that can support the needs of institutions.  

DeFi’s Maturity Lies in Hybrid Trading Models

The next wave of DeFi growth is expected to be driven by increasing institutional investment and interest, and this will require a well-structured market to navigate. To accommodate this shift, DeFi must evolve beyond the limitations of AMMs, which are well-suited for everyday users, and develop infrastructure that meets the demands of more sophisticated traders. This is where creating a hybrid model with CLOBs has the potential to become a game-changer for DeFi, offering advanced trading capabilities, superior price discovery, and improved capital efficiency to support the needs of institutional participants. This integration would combine the features and benefits of both trading mechanisms creating a more versatile and efficient financial tool. 

In addition to providing a more advanced trading experience, a hybrid trading model can also help solve some of DeFi’s biggest pain points. Fragmented liquidity continues to be an obstacle as assets are often locked in different protocols and silos. Integrating AMMs and CLOBs can help stabilize and deepen native liquidity across DeFi platforms by pooling liquidity and creating easier access to capital and assets. This reduces the need for external incentives to attract users, such as liquidity mining, and creates a more sustainable liquidity model.

Institutional Adoption will Require A Familiar Trading Experience in DeFi

For DeFi to reach its full potential and bring in larger institutional players, it must offer a trading environment that balances ease of access with the efficiency and sophistication found in traditional finance. Hybrid trading models that integrate AMMs with CLOBs can offer this balance, delivering a refined trading experience that encourages deeper liquidity and stronger market dynamics. These hybrid models have the potential to define the future of DeFi, shaping an ecosystem that supports a wide range of participants and offers long-term stability and growth.