DeFi Detective: Progress Through 2022

Understanding DeFi 

The cryptocurrency phenomenon began with the advent of coins that had a straightforward, singular purpose. Bitcoin and others aimed to be money for the digital age by making transactions efficient, borderless, and secure. Down the line, other innovative visionaries began to realize how blockchain technology could revolutionize a number of industries. 

Decentralized finance, or DeFi, has rapidly become the most intriguing and highly-speculative branch of the cryptocurrency space. Centered around decentralized apps (dApps), DeFi empowers users with increased functionality and programmability by integrating blockchain technology into legacy financial systems. Imagine a mobile banking app that can also function as an NFT gallery, grant access to cryptocurrency swaps, or enable crypto staking. These new possibilities are already becoming a reality.

All of this is not only possible, but is actively being developed at remarkable speed. While the cryptocurrency space is currently facing the same uncertainty plaguing traditional markets, the DeFi development is continuing nonetheless. Let’s put the DeFi space under a magnifying glass and see how the first half of 2022 has fared for the industry. 

DeFi by the numbers

If you are a newcomer to the DeFi space, one of the most omnipresent terms you’ll encounter is total value locked (TVL). This is a measure of the combined value of cryptocurrency assets dedicated to DeFi dApps and platforms. During times of extreme momentum in the crypto market, TVL can be used as a revealing gauge of the general level of interest in DeFi. In the next section, we will refer to the TVL to determine how DeFi has managed thus far against the “crypto winter” of 2022. 

TVL performance in 2022

Source: Glassnode

Performance overview:

• January 1, 2022: $235.8 billion 

• April 1, 2022: $220.2 billion 

• June 30, 2022: $72.8 billion 

• YTD change: -69.12% 

• Quarter 2 change: -66.94%

With the sensational cryptocurrency explosion from 2020-2021 came an immense amount of participation in DeFi and dApps. In November 2021, DeFi TVL reached a historic milestone after surpassing the $250 billion marker for the first time. While there was a noticeable decline leading into January 2022, the TVL was still relatively high at $235.8 billion. 

However, as the excessive selling pressure of the oncoming bear market ensued, TVL gradually dropped as a result. The second quarter of 2022 brought the most dramatic change. April began with a total TVL of $220.2 billion. However, as the value of crypto leader BTC dropped by 64% from April through June, DeFi TVL simultaneously dropped nearly 67% as well. 

DeFi quarter performance by category 

Data Source: DeFi Llama

Performance overview:

• Dexes: -63%/ $23.22 billion TVL 

• Lending: -71%/ $15.19 billion TVL 

• Yield: -68%/ $6.53 billion TVL 

• Liquid staking: -76%/ $5.53 billion TVL 

• Cumulative DeFi: -66.94%/ $72.8 billion

Chains and dApps by revenue

Source: Token Terminal

To date, there are hundreds of different DeFi chains and dApps. Each has its own aspirations, and unique market gaps or utility that it seeks to address. Ideally, each project should be able to find success or failure based on its own merits and design. This concept may sound typical under the lens of a standard business, but in the cryptocurrency world, there are outside factors that exude immense pressure on the DeFi market as a whole, often through no fault of the individual companies. 

While a dApp may be focused on serving its users in the best way possible, a pullback in the cryptocurrency market can cause dApp and DeFi users to flee. When BTC and others began their downslide, users left these DeFi platforms in droves, and took their funds with them. As a result, many dApps have struggled to find their footing since the drop. However, some have managed to stay in business despite the drawback. Let’s take a look at a few of the biggest chains and dApps by revenue through Q2 of 2022. 

Ethereum (ETH): 

Ethereum closed the quarter as the clear leader by cumulative revenue. In fact, nothing else comes close or should be expected to. For the 90-day period ending on June 30, Ethereum earned users $1.1 billion in revenue. Most of this revenue was a result of the protocol and actions on the network. 

As gas is burnt for transfers and other actions, deflationary pressure is asserted on the rest of the circulating supply. This helps to raise the value of the remaining ETH. Supply-side revenue is another metric that refers to the amount that ETH miners are paid for their services.

Source: Token Terminal

OpenSea:

OpenSea, a platform dedicated to NFTs, generated $155.8 million in the same time frame. They provide everything from information and organization of collections, to the marketing and sale of unique assets. OpenSea deducts a flat fee from sales on the secondary market after individual NFTs have been minted and resold. 

LooksRare:

Arguably the biggest competitor to OpenSea is LooksRare. In the same manner, they brought in $87.1 million in revenue through Q2 of 2022. 

DeFi ecosystem updates

Crypto moves fast. With markets that never sleep, trying to keep up with the seemingly endless stream of events during a bull run is an impractical, if not impossible, feat. The news may slow down in a crypto winter, but weeks of inactivity are a thing of the past. Amidst the recent pullback in the crypto market, there were still many newsworthy events taking place. 

Here are some of the most eye-catching updates of the past quarter:

• Robinhood launched a self-custody Web 3.0 wallet
• Coinbase allows users to tap into ETH dApps from an exchange wallet
• Coinbase released a wallet feature allowing users to trade on dexes
• Andreessen Horowitz (a16z) $4.5 billion capital raise
• UST depeg
• Moonbeam (Polkadot) is adding liquid staking through Lido 
• SEC investigating UST and Terra
• Optimism exploited for $20 million 2 weeks after airdrop
• Circle to support USDC on Polygon 
• Oracle pricing error on Luna Classic leads to $2 million exploits
• STEPN’s decentralized exchange becomes the largest dex on Solana 
• Solana NFT marketplace Magic Eden raises $130 million at a $1.6 billion valuation
• Solana Mobile announces Saga Web 3.0 smartphone  
• PayPal enables crypto transfers on the platform 

DeFi trends to watch

Blockchain technology is evolving at a parabolic rate. DeFi in particular keeps expanding to encompass more industries, more utility, and a wider user base. As this progression continues, we’re likely to witness emerging trends shaping the future of DeFi in real-time. Here are some of the most important trends to keep in mind.

Dynamic gas fees

Appropriately named, gas is what fuels the Ethereum network. Different actions on the network all cost varying amounts of gas. For example, a simple ETH transfer requires less gas than deploying a smart contract. However, since every action requires some amount of gas problems can arise when the network is experiencing peak use time. 

Analysts have been quick to judge Ethereum’s scaling issues as evidence that the network will be unable to perform under widespread adoption. During certain periods of time, like the recent NFT craze, ETH transfer costs skyrocketed. It was not unheard of for individual transfers to cost hundreds in USD denomination. Users were willing to spend even more gas in priority fees to jump the line and have their transactions confirmed first. 

Though gas fees on the network have declined immensely during this crypto recession, they are expected to remain dynamic for the foreseeable future. In turn, exorbitant gas fees have propelled users to explore alternative Layer 2 networks.

The rise of Layer 2 solutions

Layer 2 (L2) solutions are protocols that run on top of the Ethereum network and help supplement its ability to scale. Providing alternative routes for transfers and actions has proved to be both appreciated and immensely successful thus far. While these L2 solutions have been around for the past few years, using the Ethereum base layer has been the better option in the past. 

However, during the immense network congestion we witnessed recently, L2s began to shine. More and more often, users are opting to use these alternatives. It is highly expected that these L2 solutions will continue to grow and change the way we interact with the Ethereum network. A significant note, gas is still used to finalize any transfers made through L2 solutions, meaning that ETH is still critical for all transfers that utilize the Ethereum network. 

Sources: Glassnode, Arbiscan, Optimistic Etherscan 

In the charts above, we can see how two L2 solutions, Optimism and Arbitrum, have taken an increasing amount of transactions from the Ethereum network. 

Here are some important effects L2 solutions can offer: 

• Lowering the cost of network actions.
• Allow for greater speed and throughput.
• Providing an alternative to roadblocks and bottlenecks.
• Allowing the base layers of a network to focus on security and decentralization without worrying about meeting the demands of mass adoption.

stETH decoupling from ETH

Staked ETH (stETH) has been trading at a discount for the past few months. It may seem logical to assume that one stETH should always trade at the equivalent price of one ETH, but this past year has shown us why that isn’t the case. This situation is complex, and many of the troubles with this price discrepancy can be traced back to liquid staking. 

Liquid staking

When coins are staked, they are normally inaccessible to the owner. This has presented obvious limitations and held back ecosystem growth to some extent. What liquid staking proposes is a method to retain asset mobility while coins or tokens are being staked. 

Key features of liquid staking:

• Liquid staking makes staked value more liquid by creating proxies of staked assets.
• These are essentially derivatives that have similar utility to the base asset.
• Liquid staking can reduce opportunity costs for networks.

For more about liquid staking, check out our recent blog post.

Currently, ETH that is locked in staking contracts cannot be accessed until a point after the upcoming “Merge.” Therefore, a secondary market has been developed around stETH and the associated value can differ from standard ETH. This is because stETH cannot currently be redeemed for an equal amount of ETH due to the lockup. Once this staked ETH is released, the value of stETH will potentially realign with ETH’s value. However, the Merge is not planned until September 19th, and there is no telling how this event will play out.

Stay tuned for more DeFi breakdowns and analysis as we look ahead to what Q3 may have in store. For more information, follow us on social media, and sign-up for our weekly newsletter to receive timely updates on events impacting the digital asset ecosystem.

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