Analysis

One Yr Later, DeFi Bear Market Exhibits No Finish in Sight

Key Takeaways

  • Crypto’s DeFi sector has been buying and selling in a bear marketplace for over a yr, with lots of its high initiatives falling over 80% from their all-time highs.
  • MakerDAO, Aave, and Uniswap have been buying and selling downwards over the interval, regardless of retaining or enhancing fundamentals.
  • The second-largest lending protocol, Compound, has misplaced 92.5% in worth and arguably deteriorated throughout the board in fundamentals.

Resulting from shaky macroeconomic circumstances accelerated by Russia’s Ukraine invasion in February, risk-on like equities and crypto have trended down all through 2022. Nevertheless, one crypto area of interest has suffered for longer than the remainder of the market: DeFi tokens.

Ethereum DeFi Droop Continues 

Though DeFi has provided clear product-market match and comparatively sturdy fundamentals, lots of the area’s high belongings have been buying and selling in a bear marketplace for over a yr.

The governance tokens of a few of crypto’s hottest DeFi protocols, together with MakerDAO, Aave, Uniswap, and Compound, have plunged between 80% to 92.5% in worth from their all-time excessive costs recorded in Might 2021. Except for the general bleak circumstances permeating practically all markets this yr, with the Nasdaq struggling a 27% drawdown, and Bitcoin bleeding 57.5%, DeFi has been hit far more durable than most different crypto belongings. 

MakerDAO, the protocol behind the favored decentralized DAI stablecoin, has seen its MKR token fall to round $1,300, down over 79% from its Might 2021 all-time excessive value of $6,292. That places its market cap at $1.1 billion, wanting DAI’s $6.8 billion. Apparently, Maker’s fundamentals have improved over the previous yr regardless of MKR’s weak value efficiency. DAI’s market cap has grown by round 40%, indicating that it nonetheless has utility throughout the DeFi ecosystem. DAI not too long ago reclaimed its spot as crypto’s high decentralized stablecoin following the collapse of Terra’s UST, weeks after Terra’s Do Kwon had pledged to kill DAI. And whereas the protocol’s revenues haven’t caught as much as final yr’s highs, Maker has averaged round $7.2 billion in month-to-month revenues year-to-date, a slight lower on its 2021 month-to-month common of round $7.41 billion. The Ethereum-based challenge can be set to broaden to StarkNet this yr, that means customers will have the ability to entry it at a decrease value on Layer 2. 

Aave, the biggest cash market protocol in DeFi, can be in a hunch. Its AAVE token is presently altering palms for round $98, down roughly 85% from its Might 2021 all-time excessive value of $661 regardless of arguably enhancing fundamentals. Per information from Defi Llama, Aave held round $11.8 billion in complete worth locked within the lead-up to UST’s collapse, roughly the identical quantity of liquidity it held this time final yr (Terra’s wipeout prolonged to the DeFi area as customers rushed to exit the ecosystem, draining liquidity from Aave and different protocols). In accordance with information from Token Terminal, Aave’s price-to-sales ratio has decreased from round 19.8x to eight.38x, indicating that the AAVE token has gained in intrinsic worth. Aave not too long ago launched a V3 replace with cross-chain performance throughout Ethereum Layer 2 and different networks, however that did little to assist AAVE achieve momentum. 

Crypto’s largest decentralized change, Uniswap, has additionally had a rocky yr in value efficiency phrases. UNI, Uniswap’s governance token initially given away to early customers following a “vampire assault” from Sushi, is presently buying and selling for round $5.60 per token, down 87.4% from its Might 2021 excessive of $44.92. When it comes to fundamentals, nonetheless, Uniswap has not skilled an enormous drawdown. Earlier than Terra’s collapse, the whole worth locked throughout all liquidity pairs on the platform was round $7.8 billion, or solely barely down from its all-time excessive complete worth locked of about $10.3 billion. In buying and selling quantity, in the meantime, Uniswap presently boasts a mean month-to-month buying and selling quantity of round $46 billion. In Might 2021, Uniswap was dealing with about $31 billion. Nonetheless, UNI has bled since.

Compound, one other lending protocol that’s typically described as an Aave competitor, has suffered the worst among the many high 4 initiatives in value phrases. Compound’s COMP token is presently altering palms for $68.50, 92.5% down from its Might 2021 excessive of $910. Nevertheless, it’s price noting that Compound’s fundamentals have arguably weakened over the previous yr. The cash market has seen a drawdown throughout all key metrics, together with complete worth locked, complete income, and price-to-sales ratio.

DeFi had an auspicious run in the summertime of 2020, giving rise to the appearance of yield farming and a heady interval of buying and selling exercise that turned generally known as “DeFi summer season.” It additionally outperformed relative to the broader market in early 2021, however the sector has endured a brutal winter part for the reason that Might 2021 crypro crash. Priced in Bitcoin and Ethereum phrases, the returns for DeFi initiatives are even worse. As different crypto sectors like NFTs and “different Layer 1” gained steam within the second half of 2021, DeFi’s value efficiency has been weak relative to the remainder of the market. Now that all the area is struggling, the DeFi drawdown is exhibiting no signal of a turnaround.

Disclosure: On the time of writing, the writer of this piece owned ETH, xSUSHI, and several other different cryptocurrencies.

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