DeFi Market Analysis

DeFi assets and value locked are showing bearish signals, despite the recent recovery of the crypto market. DeFi dominance, a metric of DeFi token performance, has fallen to levels not seen since the 2021 bull market.

DeFi tokens are lagging in performance, reaching the lowest dominance levels since early 2021. DeFi dominance is down to 3%, before the 2021 rally for DEX and lending projects. During this market cycle, DeFi dominance had a small increase, reaching 3.71%, still far from around 5.9% during the 2021 bull cycle. In 2024, although DeFi was widely used, this wasn’t immediately reflected in token prices.

Source: TheBlock Data

Even top tokens like Uniswap (UNI) and Aave (AAVE) failed to meet expected rallies. The current low dominance may appear as a buying opportunity, but the market remains stagnant with no signs of recovery after prolonged sideways trading.

The poor performance of DeFi tokens mirrors the overall weakness of altcoins, with Bitcoin (BTC) absorbing most liquidity. DeFi tokens are also not utilized widely for their utility or security, as the sector relies on stablecoins, BTC, and Ethereum (ETH) collaterals.

The total value locked (TVL) in DeFi has also decreased to $90B, levels not seen since 2021. Traders are observing the downward shift in TVL, indicating a general bearish trend. Lending value has sharply declined, down to $39B from a recent peak of $51B.

DeFi tokens are trading near lower ranges, though traders are cautious in expecting a bounce. Interest in altcoins is near all-time lows, and DeFi is no exception. Even leaders like AAVE traded weakly at around $176.90. Expectations for AAVE were a hike to $400 or higher, based on recent loan growth.

The sector suffered from Ethereum’s lowered price, reducing collaterals’ value. DeFi is viewed as a proxy for the bull market, reflecting confidence in ongoing appreciation. Most protocols depend on a bull market to achieve desired yields or restructure loans and interest rates.

DeFi’s Response to Market Slowdown

DeFi has responded to multiple market cycles, reviving after the 2022-2023 bull market; however, TVL has never recovered to 2021 peaks. Most liquidity moved into Aave and Sky Protocol, along with similar applications on Solana and other networks. DeFi served as a tool to tap the value of altcoins, often accepted as collaterals.

Lending and yield farming remain risky, though these methods have been used to gain from stablecoin holdings. Despite a record stablecoin supply of over 227B tokens, DeFi shows signs of slowing down. Synthetic asset supplies also decrease in response to bearish market conditions.

The current list of DeFi tokens reveals several narratives. DEX tokens perform differently compared to lending assets. Overall, the sector’s valuation has decreased to $88.5B, with over $6B in total 24-hour volume.

Bear market attitudes and the slowdown of ETH significantly affect lending and yield farming. Supporting liquidity pairs remains risky despite high yields. Recently, liquidity providers on Hyperliquid market faced a $4M loss following the liquidation of a large ETH short position.

Several tokens stand out for their utility or anticipated growth. RWA has also emerged as a DeFi subset, with growth from Ondo Finance (ONDO) and Mantra (OM). Recently, Ethena (ENA) announced a pivot to providing L1 services for a dedicated settlement chain for traditional finance.

The DeFi sector added activity and liquidity from newly joined Hyperliquid (HYPE). The decentralized perpetual futures market is increasingly popular during market turbulence, with whales taking on risky positions of up to 40X leverage.