What to make of the DeFi market in 2025?

The early 2020s saw a new trend on the global fintech market - Decentralized finance, or DeFi. 

The elimination of traditional intermediaries, such as banks and payment processors, seems like a promising idea for many industry professionals and everyday users. 

In fact, DeFi quickly became one of the most promising subsectors of finance brought about by the advent of blockchain technology. 

The DeFi market includes numerous different services, including decentralized exchanges like Uniswap, stablecoins like DAI, lending protocols like Aave, and more.

While DeFi services are quite diverse, the markets seem to have slightly soured towards them in recent months, with lower returns and a general lack of buzz among traders, investors and users.

However, this does not mean that this microsector is done. In fact, DeFi could be a promising growth story across 2025 and beyond. 

What is DeFi and how is it different?

DeFi, or decentralized finance, is a blockchain-based financial system that is permissionless and transparent and non-custodial, meaning that anyone with an internet connection can participate and users control their own assets, without intermediaries.

One of the most notable DeFi projects in operation is Uniswap, which is a decentralized crypto exchange built on the Ethereum blockchain that offers liquidity pools for trade execution.

The aforementioned three characteristics sets DeFi apart from traditional financial institutions, which act as intermediaries between users and financial services and instruments. 

With the non-custodial nature of DeFi comes heightened uncertainty and smart contract vulnerability, which are common concerns raised regarding such companies.

Nonetheless, DeFi provides users with an alternative to the traditional financial system that have become practically ubiquitous over the years. 

How rising interest rates affect the DeFi market

Due to the fact that the DeFi market is still relatively young and many companies in the field are either unprofitable or still in their growth stages, changes in monetary policy can greatly affect their performance.

Many DeFi companies are financed by VCs and private equity firms, which means that the returns generated by them must be able to beat bond yields for them to remain competitive and attractive.

As interest rates have risen in recent years, this has exerted pressure on fintech startups to perform, which has proven to be a challenge for companies that have yet to post a profitable year. Therefore, rising interest rates have adversely affected the overall market interest towards risky fintech companies, both publicly listed and privately held. 

The Federal Reserve has been relatively reluctant to cut interest rates, which places further pressure on the DeFi sector and investors. 

DeFi and changing crypto regulations 

The attitudes of regulators towards the crypto industry greatly affect the prospects and performance of DeFi companies. The new Trump Administration could prove to be more favorable for the DeFi market, as the creation of a streamlined crypto regulatory environment and an overall crypto-friendly attitude was one of the defining aspects of the election campaign across 2024. 

Therefore, a new approach to the crypto industry could boost the interest towards the market, which directly affects the bottom line of DeFi companies. 

The creation of a strategic crypto reserve could be a major catalyst for the market in 2025 - Shifting the long-term sentiment to confidently bullish among DeFi investors. 

DeFi prospects in 2025 and beyond

The rapidly changing crypto environment triggered by the election of Donald Trump could see the DeFi market experience considerable growth in 2025 and beyond, as the United States had been considerably less friendly to cryptocurrency investments over the past decade. 

New players on the DeFi market, such as Brickken, Balancer and others, have been attracting seed capital to prime themselves for a changing crypto landscape in the country, with less regulation and potentially more favorable tax regime.

For these reasons, investors seem to be hopeful for the near-term future of DeFi projects, with some doubling down on their initial investments in the sector. 

Conclusion

Decentralized finance has become one of the most important subsectors brought about by the blockchain revolution, allowing users to gain access to non-custodial, decentralized financial services, such as wallets, investment platforms, payment apps, etc. 

However, the recent increases in interest rates have put pressure on the DeFi market, leading to underperforming across the board.

However, the new Trump administration’s promises for a more crypto-friendly United States have made investors hopeful of a boom on the DeFi market in 2025 and beyond.

New DeFi projects have continued to secure seed funding to grow in the coming years and with a decreasing level of trust towards legacy financial services, DeFi could capitalize on changing consumer behavior and show strong growth in the coming years.