Ethereum DeFi Activity Has Slowed Down to 2020 Levels
Let's start with the good news: Ethereum transaction fees, which have been growing larger, are back down to 2020 levels.
The bad news: That's because demand for Ethereum and Ethereum-based DeFi protocols has fallen, along with prices, as partly evidenced by a 28% drop in Uniswap trades from a mid-May peak.
Ethereum transfer volume, as measured in dollars, has declined by 60% in two weeks, according to a recent report by Glassnode Insights.
That's not all.
"By almost all on-chain activity metrics, the recent month has been a historically large decline, transitioning rapidly from booming on-chain economies at [all-time-high] prices, to almost completely clear mempools and waning demand for transactions and settlement," wrote the analytics firm, referring to a paucity of queued transactions.
Glassnode also looked specifically at governance tokens for four decentralized finance (DeFi) protocols, which aim to allow people to lend, borrow or trade cryptocurrencies without going through financial intermediaries. The number of transfers—and the total value of those transfers—on Compound (COMP), Aave (AAVE), Uniswap (UNI) and Yearn Finance (YFI) have "dropped significantly" since May.
"These metrics are simple yet reasonably effective as a high level gauge for mass investor sentiment and can be seen to map reasonably well to trends in price," Glassnode wrote. Put simply, lower transaction demand correlates with lower price.
Indeed, the price of YFI is down 26% in the last month, Uniswap has lost 40% of its value, Aave has fallen 27%, and COMP is off a full 55%, according to data from Nomics.
Most DeFi projects probably aren't too concerned, however. Uniswap transaction volumes are near a baseline established during DeFi Summer, said Glassnode, when interest in Ethereum-based tokens took off in mid-2020. And according to DeFi Pulse, the dollar value of the tokens locked into just those four protocols is more than $30 billion. That's nearly twice the value of all DeFi protocols on January 1.
Prices too are still up year-to-date. UNI tokens, for instance, are worth more than 300% more than they were at the start of the year.
Moreover, assuming liquidity in DeFi lending protocols and exchanges remains high, trading can now commence at much lower fees.
Average Ethereum transaction fees on May 30 stood at $4.82, their lowest rate since January 1; at their height, on May 19, the average fee was $71.72 as DeFi traders, NFT buyers, and others using protocols on the Ethereum blockchain tried to push through transactions on the congested network.
Maybe a few slow weeks isn't so bad.