DeFi Market Commentary | July 2022
With major contributions from structural deleveraging and liquidations, the crypto drawdown (-70%) continues to be one of the fastest ever. While some signs are pointing to a potential bottoming, risk appetite is still low. Investors, who are focused on the global macro environment, are optimistic about the possibility of inflation peaking, but still taking into account the increasing possibility of a prolonged recession.
The possibility of inflation peaking (as well as the upcoming Merge) has piqued investor interest enough to rally markets – Ethereum alone has rallied ~55% in the month of July.
Despite the market rallying, DEX volume is still relatively low and slightly decreased from the the prior month. This may indicate that most activity is focused on ‘sound money’ and blue chips rather than active trading on alt-coins.
This graph shows monthly decentralized exchange volume divided by centralized exchange volume (as a percentage). From June to July, it has seen a significant decrease. Taking into account a market rally, it again shows more evidence of decreasing broader market DeFi activity in favor of ‘sound money’ and bluechips.
Monthly DeFi revenue has again decreased in light of a market rally. Still, investors are not yet convinced enough to undertake DeFi risk.
However, in the second half of July, DEXs have seen net added liquidities in pools increase significantly from past months. Although the broader DeFi ecosystem has not recovered, investors are increasingly staking assets into DEXs. Staking (depositing assets into smart contracts that these exchanges use for liquidity, in return for some yield) in DEXs is seen as a safer form of yield relative to alt-coins and more novel DeFi protocols due to a combination of its battle-tested, proven model, higher TVL, and importance in the ecosystem.
While DeFi is mainly focused on Ethereum today, budding ecosystems across different Layer-1s have been seeing traction. Some speculate on a multi-chain, interoperable future with bridges like Nomad who are able to secure assets cross-chain with ease. Though a noble quest, security of bridges has shown to be difficult (previously, Axie Infinity’s Ronin Bridge was exploited for ~$650M, and Wormhole for ~$300M) as Nomad’s bridge has been exploited and drained of nearly ~$200M. These exploits continue to stress the importance of security and raise questions about the validity of the cross chain thesis.
In light of prolific blowups like the Terra Luna ecosystem, an interesting development in the algorithmic stablecoin space is Aave’s new stable coin $GHO. Aave users will be able to mint $GHO by using existing assets on the platform, where 100% of the fees will go towards the Aave treasury. Other projects, like Curve, may be interested in a similar model – this may signify a point of increasing verticalization of DeFi products between ecosystems, where high TVL projects may want to own the whole stack.
July has been a relatively strong month in the context of a bear market. While correlation with traditional markets was broken from DeFi-native liquidations and capitulation, there are small indications that we may be nearing at least a local bottom (current market expectations are beginning to be priced in) . Macro economic conditions should be monitored closely, in particular for growth and recession indicators.
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