One Year Later, DeFi Bear Market Shows No End in Sight

Attributable to shaky macroeconomic situations accelerated by Russia’s Ukraine invasion in February, risk-on like equities and crypto have trended down all through 2022. Nonetheless, 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 robust fundamentals, most of the house’s prime property have been buying and selling in a bear marketplace for over a 12 months.

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 Could 2021. Except for the general bleak situations permeating practically all markets this 12 months, with the Nasdaq struggling a 27% drawdown, and Bitcoin bleeding 57.5%, DeFi has been hit far tougher than most different crypto property. 

MakerDAO, the protocol behind the favored decentralized DAI stablecoin, has seen its MKR token fall to round $1,300, down over 79% from its Could 2021 all-time excessive worth of $6,292. That places its market cap at $1.1 billion, in need of DAI’s $6.8 billion. Curiously, Maker’s fundamentals have improved over the previous 12 months regardless of MKR’s weak worth efficiency. DAI’s market cap has grown by round 40%, indicating that it nonetheless has utility inside the DeFi ecosystem. DAI not too long ago reclaimed its spot as crypto’s prime 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 12 months’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 venture can be set to develop to StarkNet this 12 months, that means customers will be capable of entry it at a decrease price on Layer 2. 

Aave, the most important cash market protocol in DeFi, can be in a stoop. Its AAVE token is presently altering fingers for round $98, down roughly 85% from its Could 2021 all-time excessive worth of $661 regardless of arguably enhancing fundamentals. Per data from Defi Llama, Aave held round $11.8 billion in whole worth locked within the lead-up to UST’s collapse, roughly the identical quantity of liquidity it held this time final 12 months (Terra’s wipeout prolonged to the DeFi house as customers rushed to exit the ecosystem, draining liquidity from Aave and different protocols). In response to data 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 acquire momentum. 

Crypto’s largest decentralized trade, Uniswap, has additionally had a rocky 12 months in worth 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 Could 2021 excessive of $44.92. By way of 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 whole worth locked of about $10.3 billion. In buying and selling quantity, in the meantime, Uniswap presently boasts a mean month-to-month trading volume of round $46 billion. In Could 2021, Uniswap was dealing with about $31 billion. Nonetheless, UNI has bled since.

Compound, one other lending protocol that’s generally described as an Aave competitor, has suffered the worst among the many prime 4 initiatives in worth phrases. Compound’s COMP token is presently altering fingers for $68.50, 92.5% down from its Could 2021 excessive of $910. Nonetheless, it’s price noting that Compound’s fundamentals have arguably weakened over the previous 12 months. The cash market has seen a drawdown throughout all key metrics, together with whole worth locked, whole 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 grew to become 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 section for the reason that Could 2021 crypro crash. Priced in Bitcoin and Ethereum phrases, the returns for DeFi initiatives are even worse. As different crypto sectors like NFTs and “various Layer 1” gained steam within the second half of 2021, DeFi’s worth efficiency has been weak relative to the remainder of the market. Now that your entire house 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.