Author: Alex Xu
introduction
As one of the oldest tracks in the crypto field, the Defi track has not performed well in this bull market. The overall increase of the Defi sector in the past year (41.3%) is not only far behind the average level (91%), but even lags behind Ethereum (75.8%).
If we only look at the data from 2024, the performance of the Defi sector is also difficult to say well, with an overall decline of 11.2%.
However, in my opinion, in the peculiar market context where BTC hit a new high and then altcoins fell together, the Defi sector, especially the leading projects therein, may have ushered in the best layout time since its birth.
Through this article, the author hopes to clarify the views on the value of Defi at the current moment by discussing the following questions:
The reason why altcoins underperformed BTC and Ethereum in this round
Why now is the best time to pay attention to DeFi
Some Defi projects worth paying attention to, as well as their value sources and risks
This article is far from covering all the Defi projects with investment value in the market. The Defi projects mentioned in the article are only for example analysis and are not investment advice.
This article is the author’s interim thinking up to the time of publication. It may change in the future, and the views are highly subjective. There may also be errors in facts, data, and reasoning logic. Criticism and further discussion from colleagues and readers are welcome.
The following is the main text.
The mystery behind the sharp drop in altcoin prices
In my opinion, the current round of altcoin price performance is not as good as expected. There are three main internal reasons in the crypto industry:
Insufficient growth on the demand side: There is a lack of attractive new business models, and PMF (product market fit) is far away in most tracks.
Supply-side overgrowth: industry infrastructure is further improved, the threshold for entrepreneurship is further lowered, and new projects are over-issued
The wave of unlocking continues: tokens of low-circulation and high-FDV projects continue to be unlocked, bringing heavy selling pressure
Let’s look at the background of each of these three reasons.
Insufficient growth on the demand side: The first bull market lacked an innovative narrative
In the article "Preparing for the main uptrend of the bull market, my phased thoughts on this cycle" written by the author in early March, I mentioned that this bull market lacks business innovation and narratives of the same magnitude as Defi in 2021 and ICO in 2017. Therefore, the strategy should be to overweight BTC and ETH (benefiting from the incremental funds brought by ETFs) and control the allocation ratio of altcoins.
So far, this view is very correct.
The lack of new business stories has led to a significant reduction in the inflow of entrepreneurs, industry investment, users and funds. More importantly, this situation has suppressed investors' overall expectations for the development of the industry. When the market has not seen stories such as "Defi will devour traditional finance", "ICO is a new innovation and financing paradigm" and "NFT subverts the content industry ecosystem" for a long time, investors will naturally vote with their feet and move towards places with new stories, such as AI.
Of course, I do not support overly pessimistic views. Although no attractive innovations have been seen in this round, the infrastructure is constantly improving:
Block space fees have dropped significantly, from L1 to L2
Cross-chain communication solutions are gradually becoming more complete, with a rich list of options
User-friendly wallet experience upgrades, such as Coinbase's smart wallet supports fast creation and recovery without private keys, direct call of cex balance, no need to recharge gas, etc., allowing users to get close to the product experience of web2
Solana’s Actions and Blinks features can publish on-chain interactions with Solana to any common Internet environment, further shortening the user’s usage path.
The above infrastructure is like water, electricity, coal and roads in the real world. They are not the result of innovation, but they are the soil for the emergence of innovation.
Excessive growth on the supply side: excessive issuance of projects + continuous unlocking of high-market-value tokens
In fact, looking at it from another angle, although the prices of many altcoins have hit new lows this year, the total market value of altcoins has not fallen as badly as compared to BTC.
So far, the price of BTC has fallen by about 18.4% from its high, while the total market value of altcoins (displayed as Total3 in the Trading View system, which represents the total crypto market value after deducting BTC and ETH) has only fallen by -25.5%.
The limited decline in the total market value of altcoins is based on the substantial expansion of the total amount of newly added altcoins and their market value. From the figure below, we can intuitively see that the growth trend of the number of tokens in this bull market is the fastest in history.
It should be noted that the above data only counts the token issuance data of the EVM chain. More than 90% are issued on the Base chain. In fact, more new tokens are contributed by Solana. Whether it is Solana or Base, most of the newly issued tokens are memes.
Among them, the representative memes with higher market value that have emerged in this round of bull market are:
Dogwifhat: 2.04 billion
Brett: 1.66 billion
Notcoin: 1.61 billion
DOG GO TO THE MOON: 630 million
Mog Coin: 560 million
Popcat: 470 million
Maga: 410 million
In addition to memes, a large number of infrastructure tokens are also or will be issued this year, such as:
The second layer network includes:
Starknet: Market capitalization: 930 million, FDV: 7.17 billion
ZKsync: Market capitalization: 610 million, FDV: 3.51 billion
Manta network: Market capitalization 330 million, FDV 1.02 billion
Taiko: Market capitalization: 120 million, FDV: 1.9 billion
Blast: Market capitalization 480 million, FDV 2.81 billion
Cross-chain communication services include:
Wormhole: Market capitalization: 630 million, FDV: 3.48 billion
Layer0: Market capitalization: 680 million, FDV: 2.73 billion
Zetachain: Market capitalization: 230 million, FDV: 1.78 billion
Omni network: market capitalization 147 million, FDV 1.42 billion
The chain building services include:
Altlayer: Market capitalization: 290 million, FDV: 1.87 billion
Dymension: Market capitalization: 300 million, FDV: 1.59 billion
Saga: Market capitalization 140 million, FDV 1.5 billion
*The above market value data is from Coingecko, the time is 2024.6.28
In addition, there are a large number of tokens that have been listed and are facing massive unlocking. Their common characteristics are low circulation ratio, high FDV, and early institutional rounds of financing, and the token costs of institutional rounds are very low.
The weakness of demand and narrative in this round, coupled with the over-issuance of assets on the supply side, is the first time in the crypto cycle. Although the project parties tried to maintain valuations by further reducing the token circulation ratio at the time of listing (from 41.2% in 2022 to 12.3%) and gradually selling them to secondary investors, the resonance of the two finally led to the overall downward shift of the valuation center of these crypto projects. In 2024, only a few sectors such as Meme, Cex, and Depin maintained positive returns.
However, in my opinion, the collapse of the valuation center of high-market-value VC coins is a normal response of the market to various crypto anomalies:
Batch creation of ghost town Rollups, with only TVL and robots but no users
Financing through refurbished terms, actually providing similar solutions, such as a large number of cross-chain communication services
Start businesses based on hot topics rather than actual user needs, such as a large number of AI+Web3 projects
The token has no value capture because it has not found a profit model or simply does not find one.
The decline in the valuation centers of these altcoins is the result of the market’s self-healing, a benign process of bubble bursting, and a self-rescue behavior of funds voting with their feet and clearing the market.
The reality is that most VC coins are not completely worthless, they are just too expensive, and the market will eventually put them back to where they belong.
It’s the right time to pay attention to Defi: PMF products, get out of the bubble period
Since 2020, Defi has officially become a category in the altcoin cluster. In the first half of 2021, the most popular projects in the Top 100 Crypto Market Capitalization Rankings were Defi projects. At that time, there were so many categories that it was dizzying, vowing to redo all existing business models in traditional finance on the chain.
In that year, Defi was the infrastructure of the public chain. DEX, lending, stablecoins, and derivatives were the four must-haves after the new public chain went online.
However, with the over-issuance of homogeneous projects and a large number of hacker attacks (embezzlement), the TVL obtained by the Ponzi model of stepping on the left foot with the right foot collapsed rapidly, and the spiraling token prices spiraled back to zero.
Entering this round of bull market cycle, the price performance of most Defi projects that have survived to this day is not satisfactory, and primary investment in the Defi field is getting less and less. As at the beginning of any bull market, investors like the new stories that emerge in this cycle the most, and Defi does not belong to this category.
But it is also because of this that Defi projects that have emerged from the bubble have begun to appear more attractive than other altcoin projects. Specifically:
Business: Have a mature business model and profit model, and the leading projects have a moat
DEX and derivatives earn transaction fees, lending earns interest rate spread income, stablecoin projects earn stability fees (interest), and staking services earn pledge service fees. The profit model is clear. The user demand of the leading projects in each track is organic, and they have basically passed the user subsidy stage. Some projects still achieve positive cash flow after deducting token emissions.
According to Tokentermial’s statistics, of the top 20 most profitable protocols so far in 2024, 12 are DeFi projects, classified as follows:
Stablecoins: MakerDAO, Ethena
Lending: Aave, Venus
Staking service: Lido
DEX: Uniswap labs, Pancakeswap, Thena (income comes from front-end fees)
Derivatives: dYdX, Synthetix, MUX
Revenue Aggregation: Convex Finance
The moats of these projects are varied, some of which come from the multilateral or bilateral network effects of services, some from user habits and brands, and some from special ecological resources. However, judging from the results, the leading Defi projects have shown some commonalities in their respective tracks: market share tends to be stable, the number of later competitors decreases, and they have certain service pricing power.
As for the moat of specific Defi projects, we will elaborate on it in the project part of the third subsection.
Supply side: low emission, high circulation ratio, small scale of tokens to be released
