Glassnode data insight: how do you view the new normal of DeFi?

Last week, the cryptocurrency market continued to slowly decline, BTC has found itself trading below $30,000, and ETH is firmly below $2,000. This week, we put forward some indicators to demonstrate the short-term struggle of the DeFi department, but the long-term gains. The battle between bull and bear markets is still active because more funds than ever are still being put on hold.


The argument for bullish DeFi begins with the trajectory of its users. As a nascent market, starting from the initial growth curve, about a year later, DeFi is still a relatively undiscovered cryptocurrency field. However, the growth of DeFi’s user base is explosive, even in the bear market.

This ability to add to market difficulties is an important indicator of product market adaptability, and DEX and DEX aggregators are still clear leaders in adoption. The growth in the past few months has slowly begun to level off from the parabolic growth earlier this year.


The balance of ETH on the exchange continues to show a downward trend, although the price continues to fall. This demonstrates the utility of Ethereum in its own ecosystem, and the demand for ETH as a base layer collateral continues to exist. Since the DeFi summer, monthly cumulative capital outflows have continued, indicating that capital continues to be transferred from centralized exchanges to the DeFi ecosystem.


At the same time, tokens with limited uses like COMP have been sent to exchanges to hold or sell instead of staying on the chain. Please note that both SUSHI and COMP are actively farming through liquidity incentives. One remains on the chain due to its use in the ecosystem, and the other is sent to a centralized exchange.


Stablecoin flow

In risk-free capital (stable coins), billions of dollars are still swaying in the DeFi space. During the bull market, a generally touted bearish forecast is that once the market drops, liquidity will be lost from the ecosystem. Sitting in cash, DeFi’s capital efficiency will be an event isolated from the bull market. On the contrary, these venture capitals have remained firmly on the chain, most of which are positioned on DeFi.


During the bull market, the flow of stablecoins and the pool of funds are strongly led by DEX protocols (such as Uniswap and Sushiswap) because of the increased demand for risky trading and token farming.

In this low-risk period, naturally, the demand for risk closure capital in the ecosystem has also increased. This is manifested in the obvious dominance of Aave (borrowing), Curve (stablecoin DEX) and Compound (borrowing) in custodial stablecoin liquidity pools. The current market behavior is to deposit stablecoins in Aave, Compound, and Curve to earn income, which seems to be more popular than another way-leaving stablecoins on centralized exchanges to wait for purchase opportunities .

Although the overall liquidity of venture capital platforms such as Uniswap and Sushiswap is still flat or declining, the market has seen an increase in funds flowing into lending markets such as Aave, Curve and Compound. One indicator for observing a trend turning point is that when sentiment changes, the risk-resistant funds begin to flow back into the risk-resistant DEX market.


Although these arguments support low-risk methods to a large extent, they are optimistic about the future of DeFi in the medium and long term. Capital staying in the ecosystem as a stable for farming governance tokens means that allocators believe in these projects and support them. space. During the economic downturn, the fact that allocators turned to DeFi instead of leaving, fully explained the future of decentralized finance.

Short-term holders of ETH are in surrender mode, and the NUPL level has been pushed to a threshold of pain that has not been felt since the beginning of 2020. With the price of ETH falling 55% from the high point, the total unrealized loss of ETH buyers in the bull market is currently -25% of the market value of ETH. If 2018 is any form of guidance, there is still room for downside before reaching the same scale of surrender from mid-2018 to early 2020.


The trading volume of each DEX is very flat, and the volatility is also very flat. It can be said that in the nascent market, healthy growth looks like continuous monthly growth because it has grown cakes in a largely undeveloped market. Clear product market adaptability is often driven by this unwavering growth, and will only slow down or show a horizontal trend when the market penetration rate is high. The key question is, does the growth of DEX depend to some extent on speculation in the bull market? Where will the next 3 million users and $100 billion marginal volume come from?


We have repeatedly demonstrated the repression of risk-free interest rates on lending platform yields. Now, even if there is a liquidity incentive, it is firmly below 4%, and the yield aggregator proposes the next line of defense in chasing yield. Therefore, even for Yearn, the darling of DeFi, the rate of return is also compressed and is now less than 4%. After Yearn launched its V2 vault product, after a period of strong growth, TVL has also seen a corresponding decline. Liquidity can only seem to be as loyal as the differentiated rate of return it is chasing.


With the withdrawal of liquidity, the agreement income is also decreasing. The fees for token holders have been reduced. Debt no longer grows at the rate of the previous meteor. The rapidly growing team realized that they needed to diversify the funds in their treasury. Relying on one’s own token to obtain funds has become a problem. If the price of the token drops too low, they will not be able to pay the developers. Or the price paid to these developers with dollar equivalents will be too much token. This can be seen in the case of Sushiswap’s recent shift to institutional investors.

Recently, Sushiswap’s proposal to diversify funds through institutional investors has aroused fierce controversy in governance forums.


More and more teams are selling tokens on the open market, selling equity and tokens to investors to obtain stablecoins in inventory, and have taken some measures in total to show that there is a clear desire to hedge against any further recession risks in DeFi . Teams that sell tokens are at risk of driving down prices, and teams that don’t sell tokens are at risk of closing projects or firing developers in a severe recession. As we move on to uncharted territory, the teams will strive to achieve a healthy balance.

Concluding remarks

As DeFi’s valuation struggles to capture bids, the fundamentals are still a mixed bag of short-term bearish activity, but a medium-term bullish capital flow. Although the configuration is still low risk, the configurator retains a lot of liquidity in the ecosystem. This indicates that if fundamentals and valuations find a bullish basis, there will be a lot of funds waiting to be deployed to risky assets.

Fundamentals have driven the short-term bearish but medium-term bullish view.

  1. User growth continues to grow, but the speed is flat.
  2. ETH continues to net out of the exchange.
  3. Utility-driven governance tokens have seen a net exchange rate outflow, while governance tokens with less direct utility have seen a net inflow.
  4. Despite the turmoil in the market, stablecoin-centric platforms such as Curve, Aave, and Compound’s TVL still maintain a sideways upward trend.
  5. Trading volume has fallen back to January levels, yields have fallen, and agreement revenue has fallen steadily.
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