All markets fluctuate, with upswings and downturns. In some cases, enthusiasm – or sheer greed – can drive a bull market and in some cases lead to the formation of a bubble.
DeFi has been on the rise for some time now, with some great success stories and some projects that were more like raw fish.
But as we look ahead, we can see that although we may experience some market corrections, DeFi, along with a few related developments in the industry, continue to take root and as such we do expect significantly more growth in this area.
Assessing the state of DeFi
There are many different metrics that can be consulted to get a sense of how the DeFi space is doing in terms of traction, use, valuation, etc. But it’s important to know that just as with Bitcoin, price is not everything.
When it comes to Bitcoin, analysts often look at price, as well as trade volume, the number of wallet addresses that hold a certain amount of Bitcoin, as well as for how those wallets have held those funds, etc.
One way to assess the state of the DeFi space is by looking at the DeFi Futures chart on FTX. This particular financial product is a basket of eleven high-profile DeFi tokens, including Kyber Network, Aave and MakerDao.
Obviously, there is a downtrend and one might be quick to conclude, shorting DeFi is now the way to go. But we would say that while shorting DeFi can be profitable at this stage, DeFi is still very young and any big claims drawn from such short time frames should not be given too much weight.
Another important metric is the Total Value Locked (TLV) in DeFi. the TVL is quite a straightforward measure of the total price of DeFi assets held in smart contracts. Basically, it gives insight into how much is currently being stakes or held in yield farms.
DeFi pulse, by now a well-known data provider in the space, provides this useful chart which tracks TVL. As we can see, despite the downturn in price from September 2020 onwards, as we saw on FTX, we can see that the total value lock in DeFi has continued to rise.
Next to DeFi and oracle markets, we’ve also see a lot of growth happening in the NFT market. These ‘Non-Fungible Tokens’ may seem like some type of meme or Tamagotchi-like hype to some, but it is through play that we discover capabilities.
Money is just one metric by which we measure personal wealth. But aside from dollars in the bank, we also look at other, less liquid or even unique assets we might possess. An old-timer, a fine art piece, an antique, real estate, a bonsai tree, etc.
These types of assets come with a range of problems which we do not have to discuss at length here. But it comes down to the fact that ownership is not always so easy to prove – this is very different on the blockchain.
Bitcoin has held its own. Ethereum gave rise to a wide range of utility tokens. Stablecoins are (usually) pegged to the value of fiat, making it easy to move between fiat and crypto and to escape market volatility. But there is of course also a need for non-monetary, illiquid assets to have their digital counterpart. Hence the creation of NFTs.
We believe this is an important development in the industry that should be followed closely.
Lastly, as DeFi cools off, we do expect a more fervent demand for tokens that have clear utility beyond classical financial functions such as lending, borrowing and trading.
In this context, we see a trend forming that may bring the work around Web3 more into focus. Whether it’s do with decentralized cloud services or storage, changing conventional platform revenue models, reimaging domains, or building trusted social networks, the work around Web3 is unfolding fast.
For this reason, we have recently launched our AAX Web 3 series for all to learn more about the prospect of a decentralized internet, the various coins that play into that, but also the context within which this digital transformation is taking place.