The OG token in the DeFi (decentralized finance) space seems to be dead?
This was the focus of discussion during the remarkable black swan event in the crypto market on August 5. The global market was shrouded in recession fears, followed by a spectacular plunge, and the cryptocurrency market suffered a severe deleveraging shock. But in this stress test, the DeFi field, as the pillar of liquidity, did not show serious disconnection or credit risk, but showed a stronger ability to resist pressure than ever before.
Does this mean that the turning point of DeFi has arrived? Let’s re-examine this phenomenon.
Token Performance
Data from CoinGecko
Although Bitcoin hit an all-time high in March, we can find that most DeFi tokens lag far behind BTC and even ETH. The DeFi Pulse Index (DPI) has been declining relative to ETH for three consecutive years. And in this cycle, ETH itself has also lagged behind BTC. DPI includes DeFi-related tokens such as UNI, MKR, LDO, AAVE, SNX, PENDLE, etc.
TVL Total Locked Value
Data from DeFiLlama
As of August 21, 2024, the total value locked (TVL) of multi-chain DeFi has dropped to $8.46 billion. This figure is down 54.7% from the all-time peak of $18.68 billion set in December 2021, and is only 61% higher than the level after the market turmoil caused by the Luna incident. Part of this significant downward trend can be attributed to a general reduction in the consolidation of assets, such as Ethereum and Bitcoin’s encapsulated assets, while the compression of capital outflows also contributed to this downward trend.
Loan Amount
Data from Token Terminal
Lending volume - a measure of the value of outstanding debt in lending protocols - currently stands at $106. This is down 49.7% from the peak of $211 in December 2021. The decline in demand for lending leverage has directly contributed to the weakness of the DeFi ecosystem.
As one of the oldest tracks in the crypto space, the DeFi track has not performed well in this bull market.
If we only rely on the above three points, we will judge without hesitation that this round of bull market DeFi is far from meeting expectations.
DeFi tokens have similar reasons as most altcoins for their “continuous decline”, which can be summarized into three points:
First, demand growth appears weak. There is a lack of new and attractive business models in the market, and product-market fit (PMF) in many areas seems out of reach.
Secondly, the supply side is growing too fast. With the continuous improvement of industry infrastructure and the lowering of the threshold for entrepreneurship, a large number of new projects have emerged, and the issuance of tokens has exceeded the carrying capacity of the market.
Finally, the continuous emergence of unlocking waves. The tokens of projects with low liquidity and high fully diluted market value (FDV) continue to be unlocked, which has brought heavy selling pressure to the market.
The decline in the valuation center of altcoins is actually the result of market self-regulation, a natural process of bubble bursting, and a manifestation of self-salvation of funds through market selection.
Most venture capital-backed tokens are not worthless, they are just overvalued and the market eventually returns them to a reasonable price.
When you are surrounded by mountains and rivers and think there is no way out, you will find another village beyond the bends and flowers.
DEX Volume
Data from DeFiLlama
DEX trading volume has surged in recent months, reaching 80% of the peak of $308.6B on November 21, 2021. Trading volume in June 2022 is currently expected to reach $190B. As trading activity and price appreciation are highly correlated, this upward trend is likely to continue until the end of the year, along with the liquidity brought by ETF funds.
Stablecoin supply
Data from CoinGecko
The current market value of stablecoins is $169B. They have gained widespread attention and application around the world, gradually expanding from the narrow scenario of cryptocurrency transactions to an important option for global payments.
Institutional financing
Venture capital funding in the DeFi space is experiencing a remarkable renaissance. According to the latest data from Rootdata, in the first half of 2024, the total investment in the DeFi field has climbed to US$900 million. Although this number has not yet reached the glorious peak of 2021, it has clearly escaped the trough of 2023, showing signs of recovery in the market.
From the above three points, we will find that the current situation of DeFi is not that bad. Is the fact really as most people discuss? Is the value of DeFi still in the overvalued area like Layer2?
Let’s take a look at what several leading DeFi projects are doing.
Lending: Aave
Aave is one of the oldest DeFi projects. After completing financing in 2017, it completed the transformation from peer-to-peer lending (the project was still called Lend at that time) to peer-to-pool lending model, and surpassed the leading project Compound in the same track in the last bull market cycle. Currently, it ranks first in the lending track in terms of market share and market value, with active loans reaching US$7.5 billion. Aave's revenue has exceeded the peak of the bull market and has strong profit quality.
Data from CoinGecko
As of the time of writing, the price of AAVE tokens exceeded $132, and the increase in the past 7 days exceeded 50%, reaching the peak level in March. For details on why AAVE has experienced explosive growth, please see Mars Finance’s previous article:
Aave: Is the severely underestimated crypto lending leader ready for explosive growth?
Dex：Uniswap
Data from Token Terminal
Since the launch of V2 in May 2020, Uniswap's market share in the field of decentralized trading has experienced ups and downs. It once peaked in August 2020, occupying nearly 78.4% of the market share, but fell to a low of 36.8% in November 2021 amid fierce competition in DEX. However, like a phoenix rising from the ashes, it not only regained its foothold, but also declared its tenacity and perseverance with a market share of 61.7%.
The problem with many DeFi tokens is that they lack real utility and serve only as governance tokens. However, this is starting to change: Uniswap’s fee switch could be a turning point for other DeFi protocols to follow suit, and UNI surged on the news.
In addition, regulatory clarity may accelerate the trend towards revenue sharing. In April 2024, Uniswap received the SEC's Wells Notice, foreshadowing that regulators may take enforcement action against it. Although this notice brought uncertainty, it also accompanied the positive progress of the FIT21 bill, depicting a clearer and more predictable regulatory future for DeFi projects such as Uniswap.
Restaking: EigenLayer
Restaking is the process of reusing ETH that has already been staked on the Ethereum mainnet to support the security of other projects. In this way, users can not only earn returns from their original stakes, but also increase their potential rewards by supporting more projects.
Founded in 2021, EigenLayer is a pioneer in the concept of re-staking. It is a middleware platform that sits between the Ethereum mainnet and other applications. The platform deploys a mainnet smart contract to allow stakers to re-stake their ETH and ETH Staking Derivative Tokens (LST) on EigenLayer.
Data from Token Terminal
Since its launch in June 2023, EigenLayer has experienced rapid growth and currently has a total staked value of over $12 billion, making it one of the largest blockchain protocols on the market, with a total staked value even exceeding many major decentralized finance (DeFi) platforms such as Aave, Rocket Pool, and Uniswap.
This shows that DeFi is not dead, but it is a great time to invest.
The DeFi field has already developed a mature business structure and profit model, and leading projects such as AAVE, Uniswap, EigenLayer, etc. have built a solid moat.
From a supply perspective, most of the leading DeFi projects have surpassed the peak period of token issuance by virtue of their early launch. With the full release of institutional tokens, the selling pressure on the market will be significantly reduced in the future.
Although DeFi's market attention and price performance in this round of bull market are not outstanding, and it seems relatively dull compared with emerging concepts such as Meme, AI, and Depin, its core business data - transaction volume, lending scale, and profit level - continue to rise. Taking AAVE as an example, the platform's quarterly net income not only surpassed the high point of the previous cycle, but also set a record high. This shows that the recent price increase of AAVE tokens is not aimless.
Considering the positive attitude of traditional financial institutions such as BlackRock towards crypto assets in recent years, whether it is promoting the listing of crypto ETFs or issuing treasury bond assets on Ethereum, DeFi is likely to become their key investment area in the next few years. With the participation of these financial giants, mergers and acquisitions may become a convenient way for them to quickly enter the market. Any signs of mergers and acquisitions, even the beginning of merger and acquisition intentions, may trigger a reassessment of the value of DeFi leading projects.
As cryptocurrency investment gradually returns to rationality, the bubbles formed during the irrational boom have been punctured by the market's liquidity tightening. In such an environment, crypto applications that have solid economic value support, high product-market fit, and strong resilience will be more likely to usher in new development opportunities.
