DeFi’s (non)Progress This Cycle

Celia Wan
Dragonfly Research
Published in
7 min readJun 29, 2022


You know it’s the end of a cycle when people start to question everything they believed during the bull market.

The most recent crypto cycle, which started with Compound launching COMP and bringing the concept of yield farming to the mass, has officially ended with Terra killed by Anchor’s promised 20% yield and hyperinflating LUNA.

The crash has triggered a series of soul-searching questions on the validity of every other DeFi project:

and even of Bitcoin —

Usually, when a trend collapses, froth also evaporates. In the case of Terra, which was once the biggest success story of DeFi and L1s, its failure means that yield farming has lost its luster, expectations are re-evaluated, and prices are adjusted.

Though many tokens are now at their all-time low, the market is now converging on new prices that are based less on hype and more on a realistic look at what we have achieved over the last cycle. Winters are a good time to review the last year and what progress we’ve actually made.

source: DeFi Llama (not including double count, staking, pool 2, and borrows)

To put this last price cycle in context, we benchmark the current prices of some of the most prominent DeFi and L1 projects against their All-Time High, and also against their prices from November 1, 2020. This latter date was chosen because it was at the onset of the cycle, where things started to look positive for DeFi and L1s, but froth was still minimal — Uniswap launched its token two months prior but the price had not picked up at this point; DeFi’s TVL was on the brim of crossing the 10 billion dollar mark but it had yet to see exponential growth; projects such as Avalanche, Solana, and Terra hadn't kickstarted their respective liquidity mining programs and were rarely discussed.

These price points could shed light on a few insights: 1) the max return investing in a project could generate since the beginning of the cycle; 2) the project’s ability to retain value at the end of the cycle; 3) the drawdown the token experienced from ATH to the end of the cycle.

As it turned out, both DeFi and L1s underperformed Ethereum and Bitcoin in drawdowns. This is not surprising given that ETH and BTC have the strongest market consensus, and this consensus is less affected by the market’s ebb and flow. For the same reason, Ethereum and Bitcoin post worse max returns compared to most DeFi and L1s tokens.

Current prices as of June 28, 2022. Data source: Coingecko

Meanwhile, L1s were the clear winners of this cycle when it came to max returns. The top two projects, Solana and Polygon, made their names this cycle through generous ecosystem funds and liquidity mining incentives. Each of them posted a 5-digit max return, far surpassing other L1s such as Avalanche and Near.

Overall, L1s overall performed better than DeFi. The DeFi blue chips in general were lagging behind (although still posting very impressive 4-digit gains). COMP and SNX did even worse, but this is likely due to the fact that their price cycles mismatched with the one under discussion (SNX launched in 2018 and COMP had a run before November 1, 2020).

This pattern tells us one thing — over the past cycle, DeFi did not generate much alpha on top of the L1 beta.

Jason Kam (@mapleleafcap) has a good mental framework to think this argument through. In the height of DeFi summer in 2020, he posed a quite poignant question — if ETH is similar to the energy commodity upon which the petrochemical value chain (DeFi) is built, then “is it better to invest in oil or petrochemical / industrial chain equities?”

Source: Maple Leaf Cap

Looking back at what we have achieved over the past cycle, I think the answer to this question is clear — the underlying token has a better risk-reward ratio than any app built on top of it, at least for now. Over the past two years, blue-chip DeFi tokens experienced similar drawdowns as L1s when the market went under, but showed less upward potential than L1s when the industry took flight.

Heuristically, this is easy to understand. Most of the hype around DeFi so far is because it could bring “users” and “liquidity” to L1s. However, when users do come to L1s, most of the time drawn by yield farming incentives, they quickly find out that these incentives are the only thing they can do on the blockchain. Then when the yield runs low, they move on to a greener field with a higher yield on other L1s.

In this relationship, L1s are not value-additive to DeFi. DeFi is there to make L1s look good — it is the means to the end of growing TVL and user counts, which then lead to the appearance of L1s having “adoption”. However, many DeFi projects themselves do not benefit from building on a different blockchain, and some are even hindered by EVM-incompatible chains with poor dev documentation.

As such, these DeFi projects lack the inner momentum to sustain their market cap. Not only that their growth highly dependent on the expansion of L1s, but their upsides are also capped by the ecosystems they belong to.

The most telling numbers that reveal this vicious growth pattern come from comparing these projects’ token prices now against those from the cycle’s beginning. To refresh, these numbers show how much value DeFi and L1 projects could retain after most froth had been washed away due to the LUNA crash.

Current prices as of June 28, 2022. Data source: Coingecko

The result shows that although almost all tokens gained greater than two-digit growth (except for COMP, 1INCH, and SNX) over this time period, DeFi did not beat Ethereum or L1s in value retention. Take UNI as an example, its return from November 1, 2020, till today is 128.22%, while Ethereum’s is 208.26% (UNI also gained an additional price boost recently due to the acquisition of Genie and the new NFT roadmap). In other words, if you had some Ethereum at the beginning of the cycle and held through, you would have outperformed DeFi at this point (“held through” is important because Ethereum underperforms UNI in max returns). The same goes for a lot of the other DeFi tokens.

This observation is a sobering view of what these projects are left with at the end of the cycle. The old model of attracting users to DeFi with liquidity incentives and airdrops is no longer working. DeFi brought users to L1s without caring what exactly these users do. The end result is that DeFi, which, at its core, is a part of the services industry, could only serve itself — users participate in DeFi for the sake of participating instead of leveraging it for other activities. This kind of self-serving sometimes can degenerate into a ponzi.

Of course, price is not the only thing that matters. There were also real innovations that happened in DeFi over the past cycle whose progress cannot be quantified by token prices. For example, Uniswap V3’s groundbreaking concentrated liquidity feature opened up a huge design space for new applications to emerge; increased demands for block space have inspired a slew of block space financialization protocols such as Flashbots and Alkimiya.

Lastly, there are also DeFi protocols that launched their tokens later in the cycle and haven’t had a chance to live up to their full potential. For example, projects like Lido, Ribbon, and dYdX all have multiple products or industry updates on the horizon that will further drive their growth.

Lido’s TVL will receive a huge boost after the Ethereum merge completes. Ribbon offers a slew of structured products that are perfect fits for an on-chain composable environment but are currently under-explored. dYdX and a few other derivatives protocols still have a huge untapped market to capture, especially when you compare their volumes to their off-chain counterparts’.

Source: The Block

The truth is, even though L1s were able to outperform DeFi over the last cycle, neither one of them can advance further if we couldn't figure out where new users come from.

DeFi will be exciting again when new categories emerge that can bring real users to blockchains, who have actual financial needs that DeFi can serve. And the rise of NFTs and Web3 in the second half of the cycle has already signaled a different kind of demand than over-leveraging on tokens. These categories will attract new users and bridge them back to DeFi, and this will be the story of the next cycle.

Until then, there are still questions to be answered and teams working on important research in DeFi. And the bear market will give them the much-needed time to focus on their products instead of rushing to token-based go-to-market.



Celia Wan
Dragonfly Research

Certified paradigm shift identifier because I read Kuhn thrice; History and Philosophy of Mathematics @UChicago