Outlook decentralized finance June 2024
Objective: Obtain a complete and detailed picture of the “health” state of DeFi within the main blockchain ecosystems.
How: Analyzing data… as usual. In particular we will see:
- Total Value Locked “total”
- Total value lock by blockchain
- Number of transactions
- Most used protocols
- Stablecoins Market Cap
LFG!
Total value lock “total”
The first metric of our analysis concerns the study of Total Value Locked (TVL), one of the most important metrics within this sector.
Before proceeding, it is important to reflect on why it is crucial to analyze this metric. TVL indicates the total value of cryptocurrencies locked or immobilized in DeFi protocols through smart contracts for various uses, such as cryptocurrency trading, lending, borrowing, liquidity mining, staking and other decentralized financial activities.
A high TVL suggests that the services offered by DeFi are widely used and that there is a strong interest in operating within the DeFi ecosystem while on the contrary a TVL indicates little interest in this type of decentralized financial solutions.
As we can clearly see from the graphic above, the overall TVL within all blockchains showed exponential growth during 2021, followed by a retracement that took the TVL from a peak of $180 billion to a low of approximately 30 billion dollars. However, over the past year, we have seen a new period of growth, with TVL currently hovering around $100 billion.
In line with the general trend of cryptocurrencies, the TVL also went through a period of strong distrust between mid-2022 and the end of 2023. This was partly due to the failure of the famous TerraLuna protocol and the subsequent bear market that hit the market. Despite this, the graph presents us with a rather positive picture for next year, highlighting significant growth in TVL in the last period. This growth is attributable to users’ newfound trust in DeFi products.
Total value lock by blockchain
Continuing the analysis of TVL, let’s now focus on where this value is kept. Until a few years ago, virtually 100% of TVL was on Ethereum. However, the situation has changed over time. While Ethereum remains the number one blockchain, an entire ecosystem of alternative blockchains has taken on an important role in the industry.
Small technical clarification: I would like to point out how it would not be correct to use the term “alternative blockchain” (to ethereum) for all existing blockchains. In fact, Ethereum’s layer 2, despite being autonomous blockchains, share much of their technology with Ethereum. As a result, rather than alternatives to Ethereum, these are considered an extension of Ethereum.
As anticipated, Ethereum still represents by far the most important player within DeFi, currently holding more than 60% of the total TVL. Next we find Tron with over 8%, the reference blockchain for the creation of the most used stablecoin in the sector, USDT. Followed by BSC with 5.19%, one of the most historic blockchains in the sector, which has seen a slight reduction in its importance within DeFi in favor of more technologically advanced networks such as Solana and Arbitrum, which hold 4.37% respectively % and 2.95%.
Following the Dencun update, I leave you here the link to my article which explains the importance of this update within the Ethereum ecosystem and its layer 2, what I expect to see (we are in the field of speculation) is a progressive increase in activity on the main layer 2, given the incomparable convenience and speed of operations compared to the Ethereum blockchain.
Number of transactions
Although I have prioritized the analysis of TVL within this article, while I consider this metric extremely important, I do not consider it the most indicative of the health of the ecosystem. In fact, the TVL is directly influenced by the value of the capital locked within the smart contracts.
Let’s assume absurdly that during a bear market period, similar to what happened between 2022 and 2023, no user had withdrawn capital from DeFi protocols. However, the depreciation of the underlying would still have caused a decrease in TVL, giving a false impression of an outflow of capital from the ecosystem.
This is why we now move towards analyzing the number of trades that occurred in DeFi protocols, convinced that it will tell us a different story than the TVL graph.
Looking at this graph, we can notice a significantly different situation compared to that highlighted during the TVL analysis. Although there is a decline in transactions after the summer of 2021, this decline is not comparable to that recorded in the TVL. Furthermore, it is important to note how the number of transactions, having subsequently reached a peak in the summer of 2021 and a decrease in 2022, contrary to what was seen for the TVL number, has already been largely exceeded in April 2023 and continues to record numbers higher than the 2021 peak, thus demonstrating growing interest in the DeFi sector and ever-increasing activity within these protocols.
Most used protocols
Let’s now analyze the previous graph from another perspective, focusing on the origin of the transactions in order to identify the most relevant protocols in DeFi.
What emerges from this graph, from my point of view, is truly surprising. Before starting this research, I imagined Uniswap (represented by the orange candles) as one of the most relevant protocols within this sector. However, the result left me speechless, demonstrating how Uniswap represents the vast majority of DeFi transactions from 2021 to date followed distantly by Sushiswap and Curve.
However, remaining amazed by this graph, it is essential to point out that the graph offers a representation of the number of exchanges that took place and not of the volumes/dollars transferred by the protocols.
Stablecoins Market Cap
The last metric of our analysis concerns the number of stablecoins present within DeFi.
But why is it important to consider the number of stablecoins in the ecosystem? for the simple fact that stablecoins = liquidity and liquidity = potential future investments. In fact, stablecoins represent the liquidity available in the sector, indicative of the investment capacity of the holders. An increase in liquidity leads to new investments.
As we can see, this graph, consistently with what is observed in the others, underwent a reduction between 2022 and 2023. However, this decrease was minimal and saw a subsequent recovery in 2024, with a small spike in the last few weeks. This brings us to levels close to the historic high of 190 billion recorded in the summer of 2022.
Conclusions
I hope that this overview of decentralized finance has offered you a deeper insight into the market and surprised you, as it did for me during the study for the realization of this work.
Despite my continued involvement in this sector during the study and writing of this article, I was truly amazed by some data, confirming once again how important it is to continuously keep up to date within this sector.
Useful links:
That’s all for today too, in addition to remembering that in case of any type of doubt regarding the explanation I will be more than happy to read and respond to your comments, I remind you that you can also find me on x as @Filippo_Pozzi_ or by clicking here.
Greetings from Filippo, see you next time!
