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The DeFi turning point has arrived. Is now a great time to make a layout?

BlockBeatsBlockBeats2024/08/22 03:51
By:BlockBeats

In this stress test, DeFi, as the pillar of liquidity, has shown stronger resistance to stress than ever before.

Original title: "Is DeFi on the decline? The recovery signal and future potential of decentralized finance"
Original author: Alvis, MarsBit


The OG token in the field of DeFi (decentralized finance) seems to be dead?


This is the focus of people's discussion in the remarkable black swan event in the crypto market on August 5. The global market was shrouded in recession panic, 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 are far behind BTC and even ETH. The DeFi Pulse Index (DPI) has been declining relative to ETH for three consecutive years. During 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 locked value (TVL) of multi-chain DeFi has fallen to $8.46 billion. This figure is down 54.7% from the historical peak of $18.68 billion in December 2021 and is only 61% higher than the level after the market turmoil caused by the Luna incident. This significant downward trend can be attributed in part to the general reduction in asset integration, such as wrapped assets of Ethereum and Bitcoin, while the compression of capital outflows has also contributed to this downward trend.


Loan volume


Data from Token Terminal


Loan volume - a measure of the value of outstanding debt in lending protocols - is currently $106. This is down 49.7% from the peak of $211 in December 2021. The decline in demand for loan leverage has directly caused the weakness of the DeFi ecosystem.


As one of the oldest tracks in the crypto field, the DeFi track has not performed well in this round of bull market.


If we only rely on the above 3 points, we will judge without hesitation that DeFi in this round of bull market has far failed to meet expectations.


DeFi tokens have similar reasons as most altcoins "falling continuously", which can be summarized into three points:


First, the growth on the demand side seems weak. There is a lack of new and attractive business models in the market, and product market fit (PMF) in many fields seems out of reach.


Second, the growth on the supply side is too rapid. 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 the lifting of restrictions. The continuous unlocking of tokens of projects with low liquidity and high fully diluted market value (FDV) has brought heavy selling pressure to the market.


The decline in the valuation center of altcoins is actually the result of market self-regulation, the natural process of bubble bursting, and the embodiment 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 in a desperate situation, you will find a way out.


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


Currently, the market value of stablecoins is $169B, which has gained widespread attention and application worldwide, gradually expanding from the narrow scenario of cryptocurrency trading to an important choice for global payments.


Institutional Financing



Venture capital 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 space has climbed to $900 million. Although this figure has not yet reached the glorious peak of 2021, it has clearly escaped the trough of 2023, showing signs of market recovery.


From the above 3 points, we will find that the current situation of DeFi is not so bad. Is the fact really the same as most people discuss? DeFi's value coins are still in the overvalued area like Layer2?


Let's take a look at what several DeFi head projects are doing?


Lending: Aave


Aave is one of the oldest Defi projects. After completing its 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 Compound, the leading project 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 of 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 writing, the AAVE token price is over $132, up more than 50% in the past seven days, reaching its peak in March.


Dex: Uniswap


Data from Token Terminal


Since the launch of V2 in May 2020, Uniswap's market share in the decentralized exchange space has experienced an ups and downs. It once peaked in August 2020, accounting for nearly 78.4% of the market share, but fell to a low of 36.8% in November 2021 amid fierce competition from DEXs. However, like a phoenix reborn from the ashes, it not only regained its footing, but also declared its tenacity and perseverance with a 61.7% market share.


The problem with many DeFi tokens is that they lack practical use 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 could accelerate the trend toward revenue sharing. In April 2024, Uniswap received the SEC’s Wells Notice, foreshadowing possible enforcement action by regulators. While this notice brought uncertainty, it also accompanied the positive progress of the FIT21 bill, painting a clearer and more predictable regulatory future for DeFi projects such as Uniswap.


Restaking: EigenLayer


Restaking refers to the reuse of ETH that has been staked on the Ethereum mainnet to support the security of other projects. In this way, users can not only get returns from their original stakes, but also increase potential rewards by supporting more projects.


EigenLayer, founded in 2021, 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 allows stakers to re-stake their ETH and ETH staking derivative tokens (LST) on EigenLayer by deploying mainnet smart contracts.


Data from Token Terminal


Since its launch in June 2023, EigenLayer has experienced rapid growth, and the total staked value has exceeded $12 billion, making it one of the largest blockchain protocols on the market, and the total staked value even exceeds many major decentralized finance (DeFi) platforms such as Aave, Rocket Pool and Uniswap.


This shows that DeFi is not only not dead, but it is an excellent time to lay out


The DeFi field has bred a mature business architecture and profit model, and leading projects such as AAVE, Uniswap, EigenLayer, etc. have built a solid moat.


From the supply perspective, the top DeFi projects have mostly surpassed the peak of token issuance by virtue of their early launch advantages. With the full release of institutional tokens, the selling pressure in 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 flat 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 acceptance of crypto assets by traditional financial institutions such as BlackRock in recent years - whether it is promoting the listing of crypto ETFs or issuing treasury assets on Ethereum - DeFi is likely to become their key investment area in the next few years. With the entry 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 with solid economic value support, high product-market fit, and strong resilience will be more likely to usher in new development opportunities.


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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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