The last few months in crypto have shown that DeFi is no stranger to a chilling winter

Following FTX's collapse, centralized entities transferred billions of dollars to decentralized exchanges (DEX), increasing trade volumes in just November. Decentralized exchanges and lending platforms have performed well compared to some of their centralized competitors, despite the turmoil in the cryptocurrency market. The fundamental components of DeFi, including over-collateralized lending rules and smart contracts with settlement instructions included in the code, are what allowed Maker, Aave, and Compound to successfully recover $400 million from Celsius Network, a financially troubled borrower. The centralized borrower, who has now filed for bankruptcy, is still obligated to pay back over US$1 billion in unpaid liabilities.

For far too long, a lot of protocols lured users in by promising unreachable returns, as was the case during the steamy "DeFi Summer," which was fueled in part by a hospitable macro backdrop. Since then, the "risk-free" rate of return on six-month Treasury bills has exceeded 5%, interest rates have increased, inflation has shot through the roof, and the blockchain has lost favor (no pun intended).

There have been repercussions from the macroeconomic situation shifting. A few months ago, MakerDAO voted to raise its DAI savings rate tenfold to 1% in order to remain competitive after Coinbase boosted its USDC rewards to 2.36%.

Future success for DeFi depends on developing a financial solution that can outperform offerings from centralized finance (CeFi). We've previously sneaked a peek at novel ideas like zero-knowledge (ZK) privacy technology, liquid staking, on-chain underwriting, and distributed ledger technology (DLT) clearing and settlement. All of these concepts have the potential to increase the efficiency of DeFi's offering and underwriting procedures.

Both smart contract engineers and regulators play a significant role in much of this activity. By drafting regulations on topics including initial coin offerings, security token sales, and decentralized apps, Germany's financial watchdog, BaFin, has taken a proactive approach to regulating blockchain (dapps). Such strategy might offer monetary security while still encouraging innovation.

Liquid staking, which enables users to earn yield from staking while continuing to engage in DeFi activities, is another development in DeFi. Systems like Lido accept assets as payment, use those assets as staked collateral, and then offer alternative tokens that customers may spend on the network. This process is similar to CeFi's "repo transactions."

In order to stimulate greater activity and new participants into the DeFi market, it will be essential to enable a wider complex of assets on-chain. Tokenizing real-world assets like money markets, mortgages on residential or commercial property, trade finance, and infrastructure financing, among others, will result in value creation. DeFi may be able to offer more affordable financing solutions by fractionalizing capital and lowering the barrier to entry for investors via distributed ledger technology. Investors may have access to a greater variety of assets thanks to blockchain, which may ultimately increase portfolio diversity.

Central limit order books (CLOB), which are analogous to traditional exchanges where a database matches buy and sell orders for a certain asset, are now being implemented more frequently by DEXs like dYdX. Market makers can sometimes be added to a request for quote (RFQ) integration to add more liquidity. Liquidity and pricing execution are improved when AMMs are paired with professional market makers. Overcollateralization is frequently required for lending by DeFi lenders. To put it another way, they demand that traders pledge assets that are worth more than their loans.

In order to attract users from any chain, underlying cross-chain infrastructure providers like Axelar are being utilized by DeFi projects like Osmosis, which were developed within the interoperable Cosmos ecosystem. Osmosis can create one-time deposit addresses for users using Axelar, which is similar to a centralized exchange. Osmosis is based on Cosmos but can accept tokens from chains other than the Ethereum Virtual Machine (EVM).

DeFi has the potential to emerge stronger from the crypto winter thanks to the expansion of its product offering, enhancements to pricing and accessibility, enhancements to the user experience, and enhancements to cross-chain capabilities.