Author: Ignas, Stacy
Compiled by: Lucy, BlockBeats
Editor's note: In this cycle, the most active areas of Degen are airdrop mining and meme coins, which correspond to the seemingly dead DeFi tokens. But under the staking narrative, Pendle is still well-insured, rising by about 750% in the same period, and Uniswap's fee switch may become a turning point for other DeFi protocols to follow suit.
DeFi researchers Ignas and Stacy discussed recent trends, and they believe that no game-changing altcoin season has yet been reached. But Ignas is still bullish on DeFi, and BlockBeasts compiled the original text as follows:
The OG token in the DeFi (decentralized finance) space appears to be dead.
But the market is about to undergo a major shift, and a new wave of FOMO is about to surge towards DeFi. Here are the reasons why DeFi is about to rise:
DeFi tokens are lagging far behind ETH. The DeFi Pulse Index (DPI) has been declining relative to ETH for three consecutive years. And during this cycle, ETH itself has also lagged behind BTC. DPI includes tokens such as UNI, MKR, LDO, AAVE, SNX, PENDLE, etc.
The only exception is PENDLE, which is up about 750% in the same period.
Why Pendle? The answer is multifaceted. They successfully found a strong product-market fit (PMF) during the points meta.
Airdrop mining and meme coins are the most active areas of degen in this cycle.
Airdrop mining has reached a tipping point: low circulation project launches are sell-off airdrop events, and high FDV means more tokens will be constantly dumped on the market. But no one wants to buy these tokens! And for every successful meme coin, there are 99 that go to zero.
DeFi OG tokens are the antithesis of airdrop mining and meme coins:
First, a large number of DeFi OG tokens are already circulating in the market. Take the market capitalization/fully diluted valuation (MC/FDV) ratio as an example:
SNX-1
MSEK - 0.95
AAVE - 0.93
LDO - 0.89
UNI - 0.75
This puts less pressure on holders to sell. The antithesis continues in token issuance: In just 6 months, we have minted over 540,000 new tokens. Trader attention and capital are spread thinly. Yet only a handful of DeFi OG tokens have solid businesses and revenue streams. If money starts flowing in.
Meme coins thrive in a climate of financial nihilism and repressive regulation. However, regulatory clarity could bring the biggest bull run, driven by:
Moving from Narrative to Product-Market Fit (PMF)
Clear indicators of success
Easier access to funds
A booming mergers and acquisitions (M&A) market
See also this tweet from @FelixOHartmann, Managing Partner at Hartmann Capital.
If regulation is clear, the digital asset market could be transformed in a way that kicks off the biggest bull run to date. Several predictions stand out:
The shift from narrative to product-market fit
Since there is currently no way for crypto assets to be legally valued, most crypto asset issuers don’t even bother to create products that can capture value. Ironically, the ability to capture value is a good litmus test for whether the product itself actually has enough desirability for consumers to part with their hard-earned money. Instead, crypto founders often build things that consumers care so little about that they have to pay users tokens to use them. So something happened. The quality of the construction improved, and…
Projects will have clearer metrics to measure success
Currently, many digital asset valuations appear to be free-floating numbers based purely on sentiment and compensation. While most markets are certainly inefficient, as even stocks tend to trade far from their earnings, equity markets do do a pretty good job of lifting the cream to the top. As a result, tokens with the most substantial product-market fit and earnings may begin to dominate conversations and portfolios more frequently. This, in turn, leads to...
The digital asset financing environment is more relaxed
Funding for digital assets is heavily skewed toward private markets, and the ability to raise capital after a token launch tends to become a roll of the dice based on the market regime the founder is in. This leads to a cyclical rise and fall of “alternatives,” with each new cycle bringing a new cohort of projects that raised a wonderful round when private and often ran out of money or failed to properly capitalize on the next bear market, sometimes even if they actually built a great product. The private markets then rotate to the next cohort. There is a fair amount of duplication of cost and value that is discarded through this rotation. Therefore, stronger fundamentals will enable protocols to raise capital more easily while enabling…
· Booming M&A market
Throughout 2022-23, we have witnessed many DeFi projects being pushed aside that would have been prime acquisition targets for better-funded DeFi projects. For example, well-funded Uniswap or fairly well-capitalized AAVE could expand their offerings and become DeFi super-apps by acquiring some of the many well-run but under-capitalized players in the on-chain perpetual contracts and options markets, or more substantially move into real-world assets by facilitating token swaps with one of the leading real-world asset (RWA) protocols that trades at around 1% of Uniswap’s market cap. The maturation of individual crypto assets and the market as a whole could open the door for truly savvy traders and operators to build value in ways we haven’t seen before in digital assets, and materially accelerate product development and innovation, which in turn brings us closer to adoption. For example, some layer 1 blockchains could use M&A to acquire very needed products and turn them into public goods. This would reduce costs for users while increasing usage and gas spend on the chain itself, driving the value of the network token (the fat protocol thesis expresses its sentiment).
DeFi has the clearest product-market fit (PMF) in the crypto space: we trade on decentralized exchanges (DEX), borrow on lending markets, use DeFi stablecoins or LST as collateral, etc. In addition, established DeFi teams have a lot of capital reserves - they can continue to develop and build for many years without selling tokens.
The problem with DeFi tokens is that they lack real-world utility. However, this is starting to change: Uniswap’s fee switch could be a turning point for other DeFi protocols to follow suit, with UNI surging on the news. Additionally, regulatory clarity could accelerate the trend toward revenue sharing.
Another problem is that DeFi 1.0 is boring. But new things are always interesting as long as the price goes up. However, DeFi tokens have stood the test of time. They survived the COVID-19 crash in 2020 and the centralized finance (CeFi) crash in 2022. As @sourcex44 said, "The only true audit is the one that has stood the test of time."
I believe DeFi tokens are good choices for the reverse trade right now. There are very few people holding the original DeFi tokens right now, it's like we accumulated ETH during the bear market and saw SOL rise. So if the trend changes, only a few OG tokens can attract capital inflows.
Timing is critical. We are at a turning point, tired of new L2, celebrity coins, and waiting to see what’s next. Maybe “next” will be the old DeFi tokens? I think they have great potential to break out.
This post is in response to Stacy's question about DeFi tokens. Most of these tokens are boring, but with solid businesses, good financials, and with regulatory clarity and increased token utility, DeFi has the potential to rise again.
Is there something wrong with DeFi tokens?
You can blame the decline in portfolio value on Mt. Gox, miner rewards, or any other black swan event. But they are just noise, and the real problems are more fundamental:
Every market represents some kind of value that is redistributed among its participants. At some point, different markets converge. The ETH and BTC spot ETFs are a classic example. New capital flows in, but doesn’t go further; capital gains from trading ETFs stay on traditional exchanges.
Meanwhile, existing crypto users benefit from new capital flowing into spot ETFs, with their gains typically being reinvested, which logically should lead to an altcoin season — but this time, things are different.
Since March 2024, we have seen several key trends:
• A range of airdrops and points programs from top protocols
• Tier-2 protocols are eager to announce their token sales and TGEs
• Memecoin becomes one of the main coins
• TON adds norms to its ecosystem
The few DeFi protocols that are showing good growth are clearly related to the trends listed above. Now, we have this setup:
• Proceeds from Bitcoin and Ethereum are only partially settled in cryptocurrencies.
• Given the yuan, most of these earnings are reinvested in new tokens or memecoins, or used to earn points (locked in new protocols).
• Other DeFi protocols are not experiencing any price movement and holders are starting to lose hope.
• Few new protocols have seen an upward trend following the TGE, partly due to selling pressure from airdrop recipients and a lack of new funding.
• Alts keep bleeding.
• The memecoin craze continues to attract more and more investors, once again diversifying potential new funds for DeFi tokens.
• Bitcoin and Ethereum are least affected because of spot ETF investors.
• TON stands on the sidelines with its regulated onboarding efforts and mini-apps. Its ecosystem is not yet part of the broader DeFi.
Meanwhile, there is no next big thing in DeFi. User experience improvements and efficiency fixes are important — but they don’t attract new users, similar to early DeFi, NFTs, or even GameFi.
• Airdrops are not new.
• Stablecoin yields are not new.
• GameFi is not new.
• The FDV for most Web3 protocols is already fairly fair, but new dApps emerge every day with more lucrative terms, which increases the supply of the protocols but does not stimulate new demand.
When the Ethereum spot ETF starts trading (likely early July), we will see some new money pouring into Ethereum, and crypto-native ETH holders may start reinvesting gains into DeFi - but the overall picture won't change much. New money will go into the trending meta (AI, RWA, DePIN, memecoins), and DeFi OGs will have a hard time competing with at least ETH.
That’s okay. A new season has its own new heroes. What makes DeFi great again? Basically two things: a new (and fresh) narrative and marketing.
The total market cap of DeFi is $90 billion, including LSTs such as stETH ($3.2 billion) and DeFi stablecoins such as DAI ($5 billion). In comparison, ETH's market cap is $404 billion.
DeFi has many advantages over traditional finance, including more profitable passive income scenarios. But have you seen any well-known DeFi applications promote their income products to Web2 users?
When using DeFi becomes as easy as using a classic banking app, and DeFi starts to be promoted as the norm - we will finally see a new DeFi season. Alternatively, we need a new meta that will inject new money into DeFi - similar to the early days of GameFi, NFTs, and even DeFi itself.
This new meta will get the most attention and a portion of the capital will flow to DeFi more broadly. Similar to how the craze for Hamster Kombat or Notcoin boosted the TON ecosystem more broadly. But do we have anything similar now? Recently, Ignas and I had a chat and we discussed current trends. Have we reached any game-changing altcoin seasons before? No.
I know this post may disappoint. Bullish content gets the most attention on CT because people want to believe that money will be put into their pockets, and I know the feeling.
I have a lot of DeFi tokens in my portfolio that are bleeding money, but I want to be realistic. I doubt that DeFi tokens will reach their ATH this year. I will be happy if I am wrong.
Sorry for the headline, I do believe DeFi has a chance to have a big renaissance. The narrative in crypto changes quickly, and the rotation of capital will keep many people on the sidelines.
Right now, meme coins are in the spotlight, and you might laugh at me for being optimistic about DeFi. However, the fundamentals are solid. What matters is that others start to believe in its importance, and that belief may return sooner than you think. As long as DeFi outperforms other tokens for a period of time, others will FOMO.
