The future of decentralized finance: stability instead of hype
In just five years, the decentralized finance (DeFi) market has grown from a niche tool into a global financial infrastructure, with its volume estimated at $159 billion as of August 2025.
However, back in 2021, this figure exceeded $175 billion amid the DeFi boom, driven by the hype around protocols offering unusually high annual percentage yields (APY).*
* APY (Annual Percentage Yield) is the yearly percentage return, showing how much an investor can earn over a year, including compound interest. In DeFi, APY usually refers to the annual yield from providing liquidity, staking, or farming tokens.
The economic models of many of these protocols proved unsustainable, which worsened the sector's collapse during the crypto market correction of 2022–2023. As a result, by early 2023, the total value locked (TVL) in the DeFi market had plummeted to a two-year low of $38 billion (more than a 4.5x drop).
"The first steps of DeFi": the problems of farming
With the rise of early decentralized exchanges (DEXes) like Uniswap, SushiSwap (now simply Sushi), and Balancer, open and public liquidity pools* first appeared on the crypto market.
* Liquidity pools are special crypto "hubs" where users deposit their tokens so others can freely exchange them in decentralized applications.
These pools allowed any user to become a liquidity provider, giving rise to the concept of liquidity mining* — earning crypto through trading fees.
* Liquidity mining is a way to earn in DeFi by depositing cryptocurrencies into a liquidity pool and receiving a share of the fees paid by traders for token swaps.
In the early years of DEXs, liquidity and trading volumes were relatively low, so yields for liquidity providers were not very attractive. For example, by the end of 2019, Uniswap's daily trading volume was under $1 million, and its TVL barely reached $25 million.
To attract more liquidity, many new protocols introduced farming mechanisms, allowing liquidity providers to earn additional income from newly generated tokens (either native platform tokens or partner tokens).
Thus, many DEXes, aggregators, and other DeFi protocols launched their own tokens:
- Uniswap — UNI
- SushiSwap — SUSHI
- 1inch — 1INCH
- PancakeSwap — CAKE
- Aave — AAVE
- Balancer — BAL
- Compound — COMP
At launch, some farming pools offered yields of several thousand percent due to token distribution. However, since these tokens weren't backed by anything, the entire DeFi market effectively turned into a global financial bubble that inevitably burst.
The crypto market's correction clearly exposed the unsustainability of farming: within just two years of its 2021 peak, farming yields fell dramatically (from 50–100% to 3–10% on average). During the same period, farming-related transactions dropped nearly threefold.
A vivid example of a crypto asset badly hit by the unsustainable farming model is PancakeSwap's native token (CAKE), which has lost more than 93% of its value since peaking in November 2021.
Other key problems of the farming model include:
- As liquidity pools grow, dynamic APYs drop quickly, forcing providers to leave platforms.
- Investors are reluctant to buy tokens created "out of thin air" without real backing, shifting capital to more stable assets such as major altcoins and stablecoins.
- Impermanent losses caused by volatility: according to Chainalysis, liquidity providers lose up to 30–40% of their assets' value to impermanent losses.
On top of this come hacking risks and regulatory pressure, which repel institutional capital. According to PwC, 67% of DeFi projects fail to meet AML (anti-money laundering) requirements. Major protocols like Uniswap have also faced repeated scrutiny from the U.S. Securities and Exchange Commission (SEC).
Another major issue has been smart contract exploits caused by the lack of proper security audits.
Transition to a sustainable DeFi economy
Analysts at Messari note that the DeFi market has gone through its "Wild West" phase. Now the focus is shifting to quality over quantity. The surviving protocols will tackle real challenges: risk management, TradFi integration, and transparency.
Experts believe that sustainable economic models will be built on the adoption of TradFi* standards and real-world assets (RWA). Over the past two years, this sector has become one of the fastest-growing in crypto: according to DeFi Llama, as of August 2025, the RWA market grew more than 4x — from $3.6 billion to $14.9 billion.
* Traditional Finance (TradFi) — the established financial system outside the realm of cryptocurrencies and Web3 technologies.
Analysts argue that integrating traditional assets like mortgages, bonds, and commodities into DeFi reduces dependence on crypto volatility. For example, MakerDAO (issuer of the fourth-largest stablecoin, DAI) partnered with Centrifuge to launch loans backed by commercial real estate.
Another lending protocol, Goldfinch, issued $180 million in loans for real business projects in Latin America.
Another step toward sustainable DeFi is the establishment of fixed rates in decentralized protocols and the development of structured products. Experts believe fixed rates will attract institutional funds, for which predictable returns are critical.
For instance, Ondo Finance offers institutional investors a tokenized money market fund (OUSG), giving access to low-risk short-term U.S. Treasury bonds. Essentially, it functions as a stablecoin whose value grows over time from bond yields of around 4% per year. Protocols like Notional Finance and Element Finance also offer fixed APYs (4–7%) via derivatives and tokenized bonds.
Another trend is the growing dominance of protocols linked to liquid staking and restaking. Unlike farming, staking doesn't rely on excessively high yields: demand for tokens is sustained by rising network activity.
Examples include SOL and BNB, both of which have multiplied in value over the past two years. Unlike CAKE, Solana, and BNB not only appreciated in price but also set new all-time highs in 2025, driven by the rapid growth of their ecosystems.