Visualizing the Resilience & Innovation in DeFi Lending
Exploration of the sector’s supply and demand dynamics, market capitalization and trading volumes associated with these protocols’ tokens.
Decentralized finance (DeFi) protocols pioneered financial services that facilitate lending and borrowing directly on its platform, enabling users to lend and borrow assets without the need for conventional intermediaries. These protocols primarily employ smart contracts, which are automated agreements with their terms embedded directly in the code, providing enhanced transparency and security. Lenders contribute their assets to a liquidity pool, receiving interest as compensation, while borrowers can access loans by offering collateral. Interest rates are typically set algorithmically, reflecting the supply and demand dynamics of the assets within the pool. These protocols include risk management strategies, such as the liquidation of collateral when its value drops below a specified level, to safeguard the assets of lenders. This article offers an in-depth analysis of the present landscape of lending protocols in DeFi, exploring the supply and demand in this sector, their market capitalization, and the trading volume of the protocols’ tokens.
Supply & Demand
While 2022 experienced significant declines in Total Value Locked (TVL) across nearly all protocols, the end of 2023 witnessed a resurgence in TVL flowing back into lending. This trend may indicate that users are beginning to feel confident that the bear market has reached its lowest point, leading to a decreased risk of liquidation on leveraged positions. As users grow more optimistic about favorable price movements, it is probable that inflows will rise, with users leveraging their positions by engaging in borrowing.
The lending protocol category has carved out its own niche and has maintained relative stability compared to the broader market. The proportion of TVL in lending protocols has consistently held steady, accounting for 15–20% of the overall TVL in DeFi. This suggests that, even during bear markets, there is a persistent use case and demand for lending and borrowing assets.
The reduction in TVL in 2022 can be attributed in part to user behavior, as expectations of a bear market and falling prices lead to a decreased desire to borrow assets and engage in leveraging. Therefore, with reduced borrowing activity, lending rates also fall, prompting depositors to withdraw their funds. Conversely, in bull markets, the increased interest in borrowing and leveraging positions drives up lending rates, thereby attracting more capital into the protocol. This trend is clearly depicted by the loans outstanding indicator, which has begun to recover in 2023 along with market prices and sentiment.
Market Capitalization
As the largest protocol in terms of TVL, the AAVE token has consistently maintained a dominance in its market capitalization share compared to other lending tokens. Despite the emergence of new protocols like the Aave fork Radiant in the market, AAVE has sustained a market share dominance exceeding 60%. Other protocols like Compound (COMP) and Justlend (JST) have been more vulnerable to losing market share amidst the arrival of new entrants.
Aave’s success is attributed to various features, most recently, users have been leveraging the ‘e-mode’ functionality. This feature, designed for higher efficiency, enables borrowing across similar assets, such as ETH and wstETH. This type of strategies have drawn significant interest to Aave and its forks (Spark and Radiant), which witnessed large inflows in the latter half of the previous year.
Protocol revenue is another crucial factor that sustains these protocols and is essential for the viability of a lending protocol. Aave stands out as one of the leaders in this area too, consistently generating daily revenues exceeding $100k. This revenue generation helps the protocol’s security by providing the necessary funds to compensate developers and invest in enhancing the protocol’s security.
Governance Tokens Trading Volume
In the past year, the tokens recording the highest trading volumes have been from newer protocols like Radiant (RDNT) and Sonne (SONNE), while many older tokens continue to perform well, but with lower trading volumes than new less established protocols. This trend is largely attributed to the farming of incentives offered in the native tokens of these two protocols, which are frequently traded by liquidity farmers to realize gains. Consequently, the RDNT token has consistently accounted for nearly 40% of the total trade volume among the Lending protocol tokens over the past year.
These newer tokens have exhibited increased volatility. While they’ve shown substantial short-term price gains over the past year, this has led to instances where traders purchased at the very peak, only to find their initial investment has diminished in value. In contrast to the high volatility of these newer tokens, larger market cap, older tokens like AAVE and COMP have experienced lower levels of volatility.
In conclusion, the DeFi lending protocol landscape has demonstrated resilience and innovation, particularly through leading platforms like Aave. Despite market fluctuations, Aave has maintained a strong market share, supported by advanced features like ‘e-mode’ and consistent protocol revenue generation. Newer entrants like Radiant and Sonne have introduced fresh dynamics, marked by high trading volumes and associated volatility. This evolving ecosystem reflects the growing sophistication and diversification of DeFi lending protocols, offering varied opportunities and risks for investors and users alike.
