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Effects of sell-off on health and valuation of DeFi

source-logo  thecoinrepublic.com 29 May 2021 16:37, UTC
  • DeFi project seems directly proportional to Ethereum crypto crash
  • DeFi lending activity shows strength with healthy utilization rates
  • Leading stablecoins maintained their sustainability in the recent crypto market crash, but UST received heavy impact
  • High Gas prices tend several retail investors to exit over the period of sell-off
  • Performance of DeFi in the recent sell-off period proved its strong strength

DeFi or decentralized finance-based protocols faced turbulence a week ago and now is observed showing their capacity to recover. After the bullish performance of the crypto market since the beginning of this year, it changed its momentum. However, amid the declining market, DEXs (DEXs) achieved new all-time high volumes. On the other side, derivatives platforms also observed an increment in usage. Ultimately, increasing revenues of the several protocols caused severe deflation in cryptocurrency prices.

Ethereum and DeFi are performing relatively

From the latest all-time high, DeFi widely declined during the recent cryptocurrencies market crash. According to Glassnode, the decentralized finance sector has primarily followed the deflation of Ethereum. The price correction in Ethereum and decentralized finance chart shared by Glassnode highlighted that the industry remained relatively high beta to the world’s second most famous crypto asset.

Glassnode

On the other hand, data from DeFiPulse revealed that the total value locked (TVL) in intelligent contracts has declined by more than 42%. Notably, the fall of value locked was also observed directly proportional to Ether.

Glassnode

Decentralized exchanges observed increment in volume

According to the data from Dune Analytics, the total volume traded over DEXs has skyrocketed amid the crypto market crash. On May 19, 2021, DEXs crossed the benchmark level of $11.7 billion for the first time.

Dune Analytics

Among the DEXs, Uniswap topped the list with a $5.7 billion volume. And SushiSwap followed Uniswap in the list with a $2.8 billion volume. Moreover, with the increment in the daily trading volume, the DEXs have also seen massive user growth.

Read more: DeFi Growing Popular among Crypto Hedge Funds

The data from Glassnode also revealed that 30-Day unique traders in such exchange had achieved ATH. Hence, the total number of new 30-Day traders surpassed a million traders for the first time. Indeed, it is excellent to observe such an increase in the count of traders in such a turbulent period.

Decentralized finance sector shows strength in lending activity

Due to the crypto market crash, the prices became more volatile in the cryptosphere. In such scenarios, fulfilling the collateral requirement gets more complicated. Moreover, the volatile interest rates could increase due to unprecedented indemnity, liquidations, and varying utilization levels. Hence, volatile interest rates could ultimately result in withdrawals.

However, by luck, this time, stable crypto assets and utilization remained healthy. The healthy and sustained means helped DeFi protocols to show strength. Moreover, the value locked remained strong, and liquidations stayed at a minimum level.

Read more: What Is Decentralized Finance (DeFi)?

Read more: DeFi uses and importance? 

Utilization rates in the lending market are healthy

The latest corrections caused temporary volatility in the Utilization rates. After the observed fluctuations, the utilization pushed past 80% on Aave for a short time frame.

Read More: Aave Price Analysis: With Defi Booming, Aave Might Be Successful in Breaking Out

However, liquidations, security posting, and yield chasers pull back the utilization back to acceptable levels. Indeed, the interest rates returned to their level for suppliers and remained healthy over the period. On the other hand, lend and borrow also remained correlated to the utilization rates.

Parsec Finance
Crypto market crash’s effect on stablecoin

Major Stablecoins like USDT and USDC had maintained their pegged value over the crash period. The sustainability of stablecoins helped the traders exit confidently. However, not a drastic spread, but the peak and trough of USDT remained in the range of $1.02 to $0.99 on major DEXs. Notably, the wicks lasted for a brief timeframe.

In contrast to last year’s crash, DAI held its sustainability firm. And the performance of DAI was exceptionally favourable for the DeFi sector. Moreover, DAI also maintained its circulating supply by adjusting in response to security requirements. Ultimately, DAI helped collateral and liquidations to stay healthy while maintaining its peg.

TerraUSD was impacted by the crypto crash

Where primary dollar-pegged crypto tokens remained unimpacted, TerraUSD (UST) lost its peg while the market crashed. It is found that the token hit as the value of its indemnity from LUNA fell below that of the fiat-pegged crypto assets it collateralized. Additionally, due to the market size, the LUNA/UST is suffering risk. However, UST’s performance remained unhealthy for Anchor, UST’s leading hub.

Ethereum TVL in smart contracts

Throughout the crash period, Ethereum TVL in smart contract remained very blooming. Following the data from Glassnode, more than 23% supply of Ether remained in smart contracts. Moreover, the supply of ETH in exchanges jumped by 0.62%. Hence, Ether remained the reserve currency and benchmark of choice in the sector. Moreover, many in the cryptosphere considered cryptocurrency as a flight to safety.

Gloassnode
Leading decentralized finance tokens faced sell-off

Several Blue Chip DeFi protocols like Uniswap, MakerDAO, and Compound were expectedly sold-off. Such nascent cryptocurrencies have high ETH beta, limited liquidity, and a small count of holders. Following the condition, it is acceptable that an overall crypto assets volatility could turn these assets downside. 

Glassnode
Are revenue or TVL acting as price drivers?

The majority of DeFi investors approach traditional valuation stats to understand leading cryptocurrency in the sector. It is unclear whether revenues drive the prices in DeFi’s adoption curve. It is also observed that TVL continues to act as a strong driver of price. However, DeFi projects with higher use cases are bouncing from lows. Glassnode grouped a few DeFi protocols, which revealed some interesting trends. The blockchain data provider dug deep into assets with smaller capitalization against leading protocols. 

Observing the data, Glassnode found Uniswap continuing to dominate despite limited revenue and the use of governance tokens. After the launch of UNI V3, the continued trend grew more assertive. Hence, the apparent dominance leads to softer drawdowns and more vital relief. On the other hand, Bancor Network showed healthy signs among heightened incentives and a more beneficial price to sales.

Among lending protocols, Glassnode observed COMP’s valuation appears low in comparison to AAVE. The TVL inflates on the protocol due to new revenue and acts as a popular space for alternative security. Simultaneously, over the sell-off period, diversification from indemnity can be beneficial for preventing liquidation.

Gas fired retail investors

During the time of the sharpest dip, retail traders were observed exiting. The primary reason for exits is the skyrocketing Gas prices. It is noteworthy that the pricing out of retail investors was observed through a steep drop in the total number of trades. Still, a dramatic increase was seen in total volume. The volumes surged as the large holders moved risk, but the complete transactions fell with the exit of retail traders.

After the sell-off period, Gas prices steeped significantly. Consumption of Gas from stable transfer also faced a significant decline.

DeFi’s first heavy test result is positive

The recent cryptocurrencies crash remained a more extensive test for the DeFi industry. Following the price and liquidity tests, the indicators showed positive growth in the industry. 

Hence, now the industry will see substantial revenue from trading fees and peak volume on DEXs. The aforementioned metrics also indicate that the DeFi lending zone will remain healthy with high collaterals. Interest rates are going to stay relatively declined. Among the stable cryptocurrencies, high utilizations are expected, and continued growth in usage is expected. Furthermore, leading protocols will recover soon from difficulties against Ethereum. And ETH will also provide resilience against Bitcoin.

According to Paolo Ardoino, the CTO of Bitfinex, markets do fluctuate, and now Bitcoin might enter a period of range bound trading. Following the aforementioned data, Ardoino highlighted that the ecosystem is exhibiting a quite indomitable strength. And DeFi have shown its resilience. the Bitfinex CTO, concluded that it seems like a natural system, and the cryptosphere has the capacity to shapeshift and evolve in the face of adversity.

Revenue from protocol fees could decline

Following all the scenarios and conditions in the cryptosphere, the most significant warning is a fall in usage. Also, the stats signal the revenue from token fees could decline. Notably, the dip in use could dry up liquidity as total value locked increases, and inflations of the cryptocurrency will propel returns.

Ultimately, the loss of liquidity will affect the experience of users and lower revenue. Following such a scenario, more users could exit from liquidity. However, in the short term, DeFi will continue to soar in the cryptosphere and cross new highs

thecoinrepublic.com