From Geek Toys to Mainstream Investment Vehicles: The Rise of DeFi and DeETF

In recent years, decentralized finance ( DeFi ) has become a hot topic in the financial world. A few years ago, when some tech geeks started trying to build new types of investment vehicles on Ethereum, few anticipated that these experimental projects would eventually attract the attention of traditional financial giants on Wall Street.

Between 2020 and 2021, DeFi experienced explosive growth. The total market's locked value (TVL) skyrocketed from several billion dollars to a peak of 178 billion dollars. Protocols such as a certain DEX and a certain lending platform became star projects in the global crypto space.

However, for most ordinary investors, DeFi is still a challenging field. Complex wallet operations, difficult-to-understand smart contracts, and security risks deter many people. Data shows that even during the peak of DeFi, the actual participation rate of traditional financial institutions was less than 5%. Investors are interested in DeFi, but often hesitate due to various barriers.

Against this backdrop, a new tool designed to simplify the DeFi investment process has emerged - the Decentralized ETF ( DeETF ). It combines the concept of traditional ETFs with the transparency of blockchain, retaining the convenience of traditional fund products while fully leveraging the high growth potential of DeFi assets.

The DeETF is like a bridge, one end connecting to the high-threshold new world of Decentralized Finance, while the other end leads to a vast number of investors familiar with traditional financial products. Institutional investors can continue to use their familiar financial accounts for investment, while blockchain enthusiasts can easily combine their investment strategies as if operating a game.

The development of ETFs can be roughly divided into the following stages:

Early Exploration (2017-2019)

During this period, early DeFi projects represented by a certain stablecoin project and a certain lending platform began to emerge, showcasing the potential of Decentralized Finance. The launch of a certain DEX brought revolutionary changes to on-chain trading. By the end of 2019, the TVL of DeFi had approached 600 million dollars.

At the same time, some keen traditional financial institutions have begun to pay attention to blockchain technology, but are still hindered by technical barriers. Although the concept of "DeETF" has not yet been clearly proposed, the need for a bridge between traditional capital and Decentralized Finance is already beginning to emerge.

Market Explosion and Concept Formation(2020-2021)

The global pandemic in 2020 drove a massive influx of capital into the cryptocurrency market, leading to explosive growth in Decentralized Finance (DeFi). TVL surged from $1 billion to $178 billion. Various novel DeFi models emerged like mushrooms after rain, but at the same time, they also exposed a significant barrier to user participation.

Against this backdrop, some traditional financial companies have begun to seize opportunities. A Canadian listed company has decisively transformed itself and launched financial products that track mainstream Decentralized Finance protocols, allowing users to participate in DeFi investments as simply as buying and selling stocks. This marks the formal emergence of the "DeETF" concept.

At the same time, projects in the decentralized realm are also starting to attempt to manage ETF portfolios through smart contracts, but they are still in the early stages.

Market Restructuring and Model Maturity(2022-2023)

A series of black swan events in early 2022 severely impacted the DeFi market, with TVL dropping from $178 billion to $40 billion. However, the crisis also created opportunities. The market turmoil prompted people to realize the urgent need for safer and more transparent investment vehicles in the DeFi space, which in turn drove the development and maturation of DeETF.

During this period, DeETF gradually developed two distinct models:

1. Traditional financial channels are further strengthened: Some institutions are expanding their product lines, launching more robust ETP( exchange-traded products), and listing them on traditional exchanges. This model significantly lowers the participation threshold for retail investors and is also favored by traditional institutions.

2. The rise of on-chain decentralized models: Some on-chain platforms have officially launched, directly implementing asset management and portfolio trading through smart contracts. These platforms do not require centralized custody, allowing users to create, trade, and adjust their investment portfolios independently, which particularly attracts crypto-native users and investors seeking absolute transparency.

The parallel development of these two models has gradually clarified the DeETF track: on one hand, through traditional financial channels, and on the other hand, emphasizing complete decentralization and on-chain transparency.

Advantages and Challenges of DeETF

The DeFi ETF demonstrates numerous advantages:

• Strong usability, significantly lowering the participation threshold.
• More transparent and flexible investments
• Helps with risk control and investment diversification

But it also faces some challenges:

• The regulatory environment is uncertain, and compliance costs are high.
• Security risks in smart contracts still exist

Despite these challenges, DeETF is still viewed as one of the important innovations in the future financial market. It is blurring the lines between traditional investors and the crypto market, making asset management more democratic and intelligent.

The Blooming of the DeETF Sector

From a Single Model to Diverse Exploration

After 2023, the DeETF field has entered a "hundred flowers bloom" stage. Unlike the early single ETP model, DeETF is now rapidly evolving along two paths:

1. Continue to use traditional financial logic to issue ETP through formal exchanges, constantly enriching the asset classes of Decentralized Finance.

2. A pure on-chain, decentralized DeFi ETF platform that is more in line with the spirit of cryptocurrency. Users only need a cryptocurrency wallet to autonomously create, trade, and manage asset portfolios on-chain.

In the direction of on-chain native asset portfolios, some platforms have become pioneering explorers. They support multi-theme combination strategies, providing users with an "one-click purchase + trackable" ETF product experience, attempting to solve the portfolio management threshold issue in a more lightweight manner.

In terms of institutional pathways, alongside traditional financial companies, some leading RWA players have also begun to tokenize traditional financial assets such as US private equity, corporate bonds, and real estate in a compliant manner, introducing primary market investors into the on-chain market.

These platforms propose the concept of "24/7 trading, no intermediaries, user self-organization," breaking the limitations of traditional ETFs constrained by trading hours and custodial institutions. As of recently, the number of active on-chain ETF portfolios on some DeETF platforms has surpassed 1,200, with a total locked value reaching tens of millions of dollars, becoming an important tool for native DeFi users.

In the direction of specialized asset management, some organizations have begun to standardize and package DeFi assets, providing users with "ready-to-use" DeFi blue-chip asset portfolios to reduce the risk of individual coin selection.

It can be said that starting from 2023, DeETF has transformed from a singular attempt into a diverse competitive ecosystem, with projects of different routes and different positions flourishing.

New Trends in Smart Asset Portfolios

In the past few years, the DeETF sector has undergone a phased evolution from "DIY free combination" to "preset combination one-click purchase". Some platforms advocate a combination mechanism that allows "user selection", while others lean more towards a productization path of "thematic strategies", such as GameFi blue-chip packages and L2 narrative combinations. Most of these platforms are aimed at users with an existing investment research foundation.

However, there are still few projects that truly automate the "portfolio strategy" with algorithms. Some emerging platforms are starting to explore this direction; they are not stacking portfolios on traditional Decentralized Finance, but rather trying to make DeETF more "intelligent".

For example, some platforms have built an AI-driven asset allocation recommendation system. Users only need to input their needs, such as "stable returns", "focus on the Ethereum ecosystem", and "preference for LST assets", and the system will automatically generate recommended portfolios based on on-chain historical data, asset correlations, and backtesting models.

This concept is similar to Robo-advisor intelligent investment advisory services in the traditional financial world, but it has been moved on-chain and completes asset management logic at the contract level.

In terms of deployment, some projects choose to run on high-performance public chains, significantly reducing usage costs. Compared to the GAS costs of several dozen dollars on the Ethereum mainnet, this architecture is more suitable for daily asset portfolio interactions and is more user-friendly for retail users.

In terms of portfolio security, some platforms' smart contracts support on-chain transparency of portfolio components, weights, dynamic changes, etc., allowing users to track strategy execution at any time, thus avoiding the "black box configuration" of traditional Decentralized Finance aggregation tools.

Some emerging platforms emphasize a combination experience of "self-deployment" + "AI portfolio recommendations" - addressing the pain point of "not knowing how to invest" while retaining the transparency and self-management of "asset control."

This type of product path may represent the direction of the next stage of the DeETF platform moving from "structured tools" to "intelligent investment research assistants."

The Fork Evolution of the DeETF Track

As the structure of crypto users shifts from a focus on trading to a demand for "portfolio management", the DeETF track is gradually differentiating into several distinct development paths:

• Emphasizes user autonomy in configuration and free combination, suitable for users with a certain level of understanding.
• Further productize the asset portfolio and launch on-chain themed ETFs.
• Focus on standard index products, aiming for long-term stable market coverage.
• Different compliance exploration paths for retail and institutional investors

From the perspective of user interaction, a new trend is emerging in the entire sector: a more intelligent and automated asset allocation experience. Some platforms are beginning to experiment with introducing AI models or rule engines to dynamically generate allocation suggestions based on user goals and on-chain data, aiming to lower the threshold and improve efficiency.

Although each path is still in its early stages, an increasing number of DeFi ETF platforms are beginning to shift from "pure tools" to "strategic service providers," revealing the underlying evolutionary logic of the entire crypto asset management sector: not only decentralization but also a financial experience that simplifies and removes professional barriers.

Conclusion: DeETF Reshapes the Future of On-Chain Asset Management

Looking back at the development of Decentralized Finance, we can see a clear main line: from the initial smart contract experiments to the construction of open trading and lending protocols, and then to triggering large-scale capital flows, DeFi has completed in six to seven years what traditional finance took decades to achieve. Now, the ETF is serving as the "upgraded user experience version" of DeFi, taking on the task of further popularizing and lowering barriers.

According to research reports, the DeFi market is expected to grow from $32.36 billion in 2025 to approximately $1.558 trillion by 2034, with a compound annual growth rate (CAGR) of 53.8%. This means that in the next five years, under the rapid development of DeFi, DeETF will not only be a part of the DeFi ecosystem but is also likely to become one of the most important application scenarios for on-chain asset management.

If the early DeFi solved the question of "Can we decentralize finance?", today's DeETF and some emerging projects are addressing the issue of "Can decentralized finance make it affordable and user-friendly for more people?"

On-chain asset management in the future should not be just an arbitrage tool for a select few, but rather a capability that any ordinary investor can master. And DeETF is the key to achieving this goal.

From the earliest DeFi projects to today's smart DeETF platform, every advancement in decentralized finance is a refresh of the concepts of financial freedom, transparency, and inclusiveness. And today, DeETF is redefining the way on-chain asset management works.