Posted on August 13, 2024 at 5:36 p.m. EST.
Although decentralized finance as a sector has performed poorly in terms of price this year, the ecosystem has strong fundamentals, leading some to wonder whether DeFi is about to experience a turnaround.
Since the start of the year, the decentralized finance ecosystem has seen an 11.1% decline in its total market capitalization, from $80.1 billion to $71.2 billion at the time of writing, according to CoinGecko.
As a result, its dominance – the ratio of DeFi market cap to total cryptocurrency market cap – has fallen by more than 28.3% over the same period, from nearly 4.5% to 3.2%. This is the lowest level in three years for the subsector of the crypto space known for providing financial services, such as readywithout centralized intermediaries.
The native tokens of major oracle protocols Chainlink and Pyth have seen their tokens, LINK and PYTH, decline by 31.6% and 16.8% respectively since the start of 2024. Similarly, governance tokens for decentralized exchanges Uniswap and lending platform Aave both fell by more than 16.2%.
LDO, the governance token of dominant liquid staking provider Lido, fell 63.0% from $2.92 on Jan. 1 to $1.08 at press time, while CRV, the cryptocurrency that governs popular stablecoin exchange Curve Finance, was down about 50.9%.
Learn more: MakerDAO Considers Divesting WBTC as BitGo Plans Custody Changes
Some DeFi tokens, however, have bucked the trend. For example, MKR, the governance token of stablecoin issuer MakerDAO, and JTO, another governance token of Solana’s leading liquid staking provider Jito, are both up around 24.8% so far in 2024. Leading the pack is AERO, the native token of Aerodrome, the largest decentralized exchange on L2 Base incubated by Coinbase, which has skyrocketed by nearly 1,300%.
The challenges of DeFi
The overall weak price performance of DeFi tokens stems in part from the challenges faced by the tokenomics smart contract protocol models. DeFi projects are still refining their mechanisms for distributing value to token holders.
DeFi protocols also face regulatory hurdles. “For DAOs with significant operations in the United States, risks may arise if the DAO controls the protocol’s revenue or serves as an intermediary for the protocol’s economic activity and makes that activity programmatic,” a16z Crypto said in a report published last week. “Combining voting rights and economic rights may raise concerns under U.S. securities laws, particularly with simple and straightforward mechanisms such as pro rata distributions and token purchases and destructions.”
Meanwhile, the U.S. Securities and Exchange Commission has involved in a lawsuit against Ethereum software provider Consensys that Lido’s flagship product, stETH, is an unregistered security. trialinitially filed last year in the U.S. District Court for the Northern District of California, claims that the protocol’s governance token, LDO, is also a security that has not been registered with the SEC.
Others have pointed out the zero-sum relationship between DeFi and the current memecoin frenzy, where resources such as attention and capital are shared between the two.
“The end of the memecoin cycle would be necessary for DeFi to bottom out, which I don’t know when that will happen,” Paul Vaden, a core contributor to the Lyra Foundation responsible for developing the Lyra derivatives trading platform, told Unchained. Pump.Fun, a platform that allows people to create and stake memecoins, is the eighth highest-fee crypto project in the past 30 days, raising $28.57 million, ahead of Aave, Maker, Aerodrome, and Curve Finance, according to data from DefiLlama.
Learn more: Cat-themed tokens and Solana Meme tokens offer exceptional value for money
Solid fundamentals to bounce back?
According to the Index of alternate seasonswhich tracks the percentage of the top 50 cryptocurrencies that have outperformed BTC over the past 90 days, AAVE is the only DeFi token that has performed better.
“Despite many DeFi projects’ tokens underperforming BTC and ETH throughout 2024, underlying fundamentals have remained strong with resilient DeFi activity,” Toe Bautista, research analyst at crypto market maker GSR, told Unchained via email.
“For example, Q2 DEX volumes hit $520 billion, outstanding borrowings hit year-to-date highs of $16 billion in July, and the cumulative stablecoin market cap has increased 28% year-to-date. Additionally, DeFi has been gaining market share, with the DEX/CEX spot volume ratio hitting an all-time high of 14% in July,” Bautista added.
A number of DeFi protocols are also looking to revamp their tokenomics. MakerDAO is overhauling its ecosystem with the launch of Endgame and is expected to introduce a new stablecoin, governance token, and sub-DAOs, among other changes.
Aave spent a governance vote snapshot Ten days ago, the goal was to create “a clear path and roadmap for the protocol’s ‘fee shift’,” which aims to increase the utility of Aave’s token by allowing it to collect rewards from protocol revenue.
Curve Financing also saw its CRV emissions decrease from an annual inflation rate of 20.37% to 6.34%, according to the protocol documents And Account XAccording to CoinGecko, CRV is the biggest gainer among DeFi tokens, growing 34.3% over the past seven days to trade at 30 cents.
Learn more: Cryptocurrency industry executives complain about lack of access to banking services in meeting with top Democrats
“DeFi, as the sector with the best product-market fit in crypto, recently hit a 3-year low relative to the global crypto market cap. I expect this level to bottom out in the coming months and make a big comeback as we enter a new interest rate cycle,” wrote Arthur Cheong, CEO and founder of venture capital firm DeFiance Capital, on X.
On the other hand, “most DeFi tokens will never return to their all-time highs,” Lyra’s Vaden said. “I don’t really know when DeFi will bottom out, a lot of them still don’t look attractive.”
And yet, GSR’s Vaden and Bautista pointed to DeFi’s reflexive behavior. “DeFi metrics are super reflexive,” Vaden says. “When tokens start to go up, the metrics (volume/TVL/etc) go up and reinforce the narrative, so[there can be a big pump if ETH does well].” In a similar vein, Bautista noted that DeFi’s reflexive behavior suggests potential upside if prices rebound.
Chris Eberle, a cryptocurrency angel investor, told Unchained on Telegram: “If there’s one thing I’ve learned in nearly eight years in crypto, it’s that you never know if the bottom has truly been reached, at least not in terms of price, but in terms of the current state of DeFi versus its potential, I’m incredibly bullish.”
“Whenever there is a breakdown in the traditional financial sector, such as last week’s debacle with Schwab, Fidelity and TD Ameritrade (temporarily stop trading on their platforms), DeFi looks attractive… So, no idea where the markets will go from here, but the use cases for DeFi seem to be getting stronger every day.
The price of ETH has jumped 8.5% in the past seven days and 15.4% year-to-date to trade at $2,715, giving it a market cap of $326 billion at press time, according to CoinGecko.
