Behind the DeFi renaissance: resilience and innovation of new and old protocols

Author: Alvis, Mars Finance

4 months ago, MarsBit boldly predicted that the turning point of the DeFi track may have quietly arrived, and many high-quality projects have ushered in an excellent layout opportunity.

Now, 4 months have passed, and the DeFi market has proven the accuracy of this conclusion with eye-catching data. Whether it is token performance, total locked value (TVL), or lending volume and other key indicators, they all show a strong recovery momentum.

All this indicates that this area, which was once considered to be "constantly falling", is gradually rising from the trough and has laid a more solid economic foundation and innovative path.

DeFi market cap chart, data from CoinGecko

Looking back on this period, the DeFi market cap has quickly risen from $70.5 billion to $132.4 billion, with an average token increase of 87%, far exceeding the 67% average increase in the overall cryptocurrency market. This not only reflects the excellent performance of DeFi in the market rebound, but also highlights its huge potential for future outbreaks.

Excellent performance of DeFi tokens: average increase of over 110%

DeFi Pulse Index, source from Messari

The DeFi Pulse Index (DPI) of Index Coop is a tokenized index that tracks the performance of the top decentralized finance (DeFi) assets available on the Ethereum blockchain. DPI provides diversified investment in the DeFi field through a single token, simplifying the investment process for users. It includes assets such as Uniswap, Aave and MakerDAO, representing a wide range of DeFi projects.

Bitcoin hit a new all-time high in December, but we can see that most DeFi tokens have recently performed far better than BTC and ETH.

The DeFi Pulse Index (DPI) has risen rapidly in the past month, exceeding the level of the peak in March this year as of the time of writing.

This means that the prices of most DeFi tokens have hit new highs, and investors have achieved an average return of over 110%.

TVL growth: a core indicator of market recovery

Total TVL of multi-chain DeFi, data from defillama

As of December 6, 2024, the total locked value (TVL) of multi-chain DeFi was $134.6 billion, up more than 59% from the $84.6 billion level in August, although this figure is still 38% lower than the historical peak of $186.8 billion reached in December 2021, but it is now showing a clear upward trend, partly due to the general increase in asset integration, such as new highs in wrapped assets of Ethereum and Bitcoin, and favorable crypto policies have also contributed to this upward trend.

Rebound in lending volume: increased demand for leverage stimulates market vitality

Major lending protocols on Ethereum, data from Token Terminal

The lending volume - the value of outstanding debt in lending protocols - is currently $18.8 billion. This is already close to the peak levels of $20 billion in March and November 2021. The rising demand for loan leverage has directly led to the prosperity of the DeFi ecosystem.

Explosion of DEX trading volume: the dominance of decentralized exchanges

Total trading volume of all Dexes, data from defillama

The trading volume of DEXes has surged in recent months, reaching $372.3 billion last month, exceeding the peak of $292 billion in November 2021. The current trading volume in December has reached $101 billion, and is expected to exceed $400 billion this month, setting a new high.

Dex trading volume ranking, data from defillama

Among them, the 24-hour trading volumes of Uniswap, Raydium, and PancakeSwap are $6.1 billion, $2.1 billion, and $1.8 billion respectively, ranking the top three, representing the Dex leaders in the Ethereum, Solana and BNB ecosystems respectively. From the token prices, it is clear that the price of UNI has risen from $6.5 to $16.2, Ray has risen from $1.3 to $5 in the past 3 months, and Cake has risen from $1.5 to $4.1.

Due to the high correlation between trading activity and price appreciation, accompanied by the liquidity brought by ETF funds, this upward trend may continue until March next year.

Expansion of the stablecoin market: stablecoins become the core of market liquidity

Stablecoin ranking, data from defillama

The current stablecoin market cap is $196.8 billion, up 16% from the previous $169 billion, setting a new high.

It is worth noting that the market cap of USDC has surpassed $50 billion, surpassing DAI to become the third largest stablecoin by market cap, and is also the largest decentralized stablecoin by market cap. Its governance token ENA has risen from $0.2 to the current $1.1 in the past 3 months.

Stablecoins have gained widespread attention and application globally, gradually expanding from the narrow scenario of cryptocurrency trading to become an important choice for global payment.

At the same time, the growth in trading volume of altcoins is mainly driven by stablecoin and fiat currency trading pairs, rather than the traditional Bitcoin trading pairs, indicating that the market is experiencing substantive growth, rather than just asset rotation.

Institutional financing rebounds: Improved maturity of the DeFi market

Historical financing amount in the DeFi track, source from ROOTDATA

Venture capital funding in the DeFi field is experiencing a significant revival.

According to the latest data from Rootdata, the total investment in the DeFi field this year has risen to $1.48 billion. Although this figure has not yet reached the glorious peak of $2.2 billion in 2021, it has clearly emerged from the low point of 2023 and is approaching the level of 2022.

Innovation and future prospects of leading DeFi projects

In the DeFi track, leading projects (top 5 DeFi projects by CoinGecko market cap) such as Aave, Uniswap, Chainlink, Hyperliquid, and Ethena are constantly innovating and expanding their business boundaries, showing strong vitality and market competitiveness.

Oracle leader Chainlink

Chainlink token Link, source from CoinGecko

Benefiting from the narrative of RWA, the Chainlink token Link has risen from $10 to $24 in the past 3 months.

The LINK token of Chainlink is mainly used to pay for the verification services of data retrieval nodes, and apart from this, the token itself does not provide much utility. Although some believe that Chainlink as a business can continue to thrive without the LINK token, this logic will encounter problems with tokens based on real-world assets (RWA), as these tokens often automatically become yield assets, which may attract the attention of regulators, especially the SEC.

The reason why Chainlink is the leader in the oracle race is mainly due to its decentralized network design, strong security, and extensive ecosystem integration. As a decentralized oracle network, Chainlink provides reliable and diverse data sources by connecting multiple independent nodes, avoiding the risk of single point of failure. It collaborates with multiple blockchain platforms and traditional financial institutions (such as Google Cloud, Oracle, etc.) to support cross-chain compatibility, expanding the application scenarios of smart contracts.

In addition, Chainlink uses incentive mechanisms and staking mechanisms to ensure the accuracy and security of data, while continuously innovating technologies such as off-chain computing and privacy protection solutions to further enhance the functionality of smart contracts. Relying on its technological advantages, extensive partnerships, and strong community support, Chainlink has firmly established its leading position in the oracle field.

The potential driving forces for LINK include:

• Key developments and updates in the Chainlink ecosystem, such as the upcoming Staking v0.2 platform;
• Five Chainlink services being integrated into seven different chains, including Base and Arbitrum;
• Numerous collaborations with financial entities such as SWIFT to utilize Chainlink's cross-chain interoperability protocol (CCIP) for asset tokenization and cross-chain interoperability;
• The surge in TVL in the RWA domain and the hype surrounding this narrative.

Uniswap, the Leading DEX

Uniswap's trading volume and revenue, source: defillama

Since the launch of the V2 version in May 2020, Uniswap's market share in the decentralized trading domain has experienced fluctuations. It once reached a peak of nearly 78.4% market share in August 2020, but then fell to a low of 36.8% in November 2021 due to the intensification of DEX competition. However, Uniswap not only successfully regained momentum, but also proved its resilience and recovery ability with a market share of nearly 70%. At the same time, Uniswap also set a new historical high of $94.4 billion in average monthly trading volume.

As the leading Automated Market Maker (AMM) protocol, the liquidity pool updates of Uniswap V4 once again demonstrate its innovation and leadership in the decentralized trading protocol domain. This series of improvements has enhanced the protocol's flexibility and scalability, significantly improving its market competitiveness, making Uniswap V4 lead its competitors in multiple aspects and continue to consolidate its dominant position in the DeFi ecosystem.

Derivative Trading Platform Hyperliquid

Hyperliquid token HYPE, source: CoinGecko

In the cryptocurrency field, many projects rely on hype and trading volume subsidies to attract attention, but Hyperliquid is different. It has not done any promotion and has not accepted venture capital financing, relying entirely on its strong product strength to outperform its competitors. Hyperliquid is a decentralized perpetual contract trading platform, while also having a rapidly growing spot market, and is actively promoting meme culture. The team plans to solve the performance bottleneck of current L1 and L2 public chains by developing an L1 public chain optimized for high-frequency trading. The on-chain order book design ensures the transparency of transactions and avoids the problems of "front-running" and information advantages in traditional centralized exchanges. Hyperliquid's goal is not only contract trading, but to build a complete on-chain financial ecosystem, drive innovation in the DeFi field, and further expand to an efficient decentralized options market.

In addition to strong technology and products, Hyperliquid also enjoys community support, with many users using "xxx.hl" as their usernames to express their trust and support for the platform. For investors to capture value before Hyperliquid issues tokens, they can choose to buy its iconic meme coin "purr", invest in HLP, or purchase Hyperliquid Points. Since Hyperliquid has no venture capital support and has strong profitability, they have enough room to increase the airdrop ratio of points, which is expected to be at least 15% of the tokens. As a trader and DeFi enthusiast, I am full of confidence in Hyperliquid and believe that now is the best time to participate in its growth.

OKX has currently listed Hyperliquid (HYPE) for pre-trading, with a quoted price of $14, and more exchanges may list it in the future.

Lending Leader AAVE

AAVE TVL and revenue, source: defillama

Aave is one of the oldest DeFi projects, and after completing financing in 2017, it transformed from a peer-to-peer lending model (when the project was still called Lend) to a peer-to-pool lending model, and during the last bull market cycle, it surpassed the leading project in the same track, Compound. Currently, in terms of both market share and market capitalization, it is the number one project in the lending track.

The TVL exceeds $21.6 billion. Aave's revenue has been consistently higher than the previous bull market peak for half a year, demonstrating strong profitability.

As of the time of writing, the AAVE token price has exceeded $257, with a gain of over 83% in the past 3 months, reaching a new high in 2 years.

Ethena, the Leading Decentralized Stablecoin

Ethena token ENA, source: CoinGecko

In the past month, the total issuance of USDe has increased from $2.4 billion to $5 billion, achieving a monthly growth of over 110%. USDe has also surpassed DAI to become the largest decentralized stablecoin by market capitalization.

Ethena protocol annualized rate, source: Ethena website

The underlying logic of Ethena is that after BTC breaks new highs, the bullish sentiment is strong, and the rise in funding rates has increased the staking yield of USDe, leading to the growth of USDe. Although it has decreased somewhat compared to previous days, the APY shown on the Ethena website on December 6th is around 40%.

In this growth spiral, almost every participant is a beneficiary, with USDe's leveraged miners/lenders able to obtain extremely high but volatile returns through leverage.

Future Outlook: Deepening Integration and Institutionalization of the DeFi Ecosystem

Looking ahead, the DeFi market will continue to deepen its development in the following aspects:

• Institutionalization: As more and more traditional financial institutions enter the DeFi field, institutional investment will become an important driving force for the DeFi market, bringing more capital and technical support.
• Cross-chain and interoperability: The maturity of cross-chain technology will further promote the popularization of DeFi applications, especially with the help of oracles like Chainlink, DeFi will achieve more extensive cross-chain collaboration and data sharing.
• Compliance and regulation: As the regulatory framework is gradually improved, the DeFi market will gradually adapt to more stringent compliance requirements, which will pave the way for the long-term healthy development of the market.
• Optimization of user experience: DeFi platforms will continuously optimize the user experience and lower the entry threshold to attract more non-technical users to participate in this ecosystem, promoting the popularization of DeFi.

In summary, although DeFi is facing some volatility in the short term, the market data shows that the recovery momentum of DeFi is very obvious. With the continuous innovation of core projects, the increase of institutional investment, and the gradual support of policies, the DeFi ecosystem will present a broader development prospect in the next few years.