Why are you bullish on DeFi?

Ignas

24-06-29 10:30

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Original author: Ignas, Stacy

Original translation: Lucy, BlockBeats

Editor's note:

During this cycle, the most active areas of degen are airdrop mining and meme coins, corresponding to the seemingly dead DeFi tokens. But under the staking narrative, Pendle is still well insured, up about 750% in the same period, and Uniswap's fee switch may be a turning point for other DeFi protocols to follow suit.

DeFi researchers Ignas and Stacy discussed recent trends and believe that no game-changing altcoin season has been reached yet. But Ignas is still bullish on DeFi, and BlockBeasts translated the original text as follows:

The OG token in the DeFi (decentralized finance) field seems to be dead.

But the market is about to undergo a major shift, and a new wave of FOMO is about to surge towards DeFi. Here are the reasons why DeFi is about to rise:

DeFi tokens have lagged far behind ETH. The DeFi Pulse Index (DPI) has been declining relative to ETH for three consecutive years. And ETH itself has also lagged behind BTC during this cycle. The DPI includes tokens such as UNI, MKR, LDO, AAVE, SNX, PENDLE, etc.

The only exception is PENDLE, which is up about 750% in the same period.

Why Pendle? The answer is multifaceted. They successfully found a strong product-market fit (PMF) during the points meta.

Airdrop mining and meme coins are the most active areas of Degen in this cycle.

Airdrop mining has reached a turning point: low circulation project launches are sell-off airdrop events, and high FDV means more tokens will continue to be sold on the market. But no one wants to buy these tokens! And, for every successful meme coin, there are 99 that go to zero.

DeFi OG tokens are the opposite of airdrop mining and meme coins:

First, a large number of DeFi OG tokens are already circulating in the market. Take the market capitalization/fully diluted valuation (MC/FDV) ratio as an example:

• SNX - 1

• MKR - 0.95

• AAVE - 0.93

• LDO - 0.89

• UNI - 0.75

This puts less selling pressure on holders. The opposite continues in token issuance: in just 6 months, we have minted over 540,000 new tokens. Traders’ attention and capital are spread thinly. However, only a few DeFi OG tokens have a solid business and revenue stream. If the money starts flowing in.

Meme coins have thrived in a climate of financial nihilism and repressive regulation. However, regulatory clarity could bring the biggest bull run, driven by:

• Shift from narrative to product-market fit (PMF)

• Clear indicators of success

• Easier access to capital

• A thriving mergers and acquisitions (M&A) market

See also: @FelixOHartmann, Managing Partner at Hartmann Capital.

If regulatory clarity is forthcoming, the digital asset market could transform in a way that kicks off the biggest bull run yet. A few predictions stand out:

· Shift from narrative to product-market fit

Since there is currently no way for crypto assets to be legally valued, most crypto asset issuers don’t even bother to create products that can capture value. Ironically, the ability to capture value is a good litmus test for determining whether a product itself actually warrants enough funding for consumers to part with their hard-earned cash. Instead, crypto founders often build things that consumers care so little about that they have to pay users tokens to use them. So something happened. The quality of construction improved, and…

· Projects will have clearer metrics to measure success

Currently, many digital asset valuations appear to be free-floating numbers based purely on sentiment and compensation. While most markets are certainly inefficient, as even stocks tend to trade far from their earnings, the stock market does do a pretty good job of lifting the cream to the top. As a result, the tokens with the most substantial product-market fit and earnings may start to dominate conversations and portfolios more frequently. This, in turn, leads to…

· A more permissive environment for digital asset funding

Funding for digital assets is heavily skewed toward private placement markets, and the ability to raise money after a token launch tends to become a roll of the dice depending on the market regime the founders are in. This has led to a cyclical rise and fall of "alternatives", with each new cycle bringing a new cohort of projects that raised a wonderful round when private, and often ran out of money or failed to properly capitalize on the next bear market, sometimes even if they actually built a great product. The private market then rotates to the next cohort. There is a considerable amount of duplication of costs and value being discarded through this rotation. As a result, stronger fundamentals will enable protocols to raise capital more easily while making...

· Booming M&A Market

Throughout 2022-23, we have witnessed many DeFi projects being left aside that would have been prime acquisition targets for better-funded DeFi projects. For example, well-funded Uniswap or fairly well-capitalized AAVE could expand their offerings and become a DeFi superapp by acquiring some of the many well-run but undercapitalized players in the on-chain perpetual swaps and options markets, or more substantially move into real-world assets by facilitating a token swap with one of the leading real-world asset (RWA) protocols that trades at around 1% of Uniswap’s market cap. The maturation of individual crypto assets and the market as a whole could open the door for truly savvy traders and operators to build value in ways we haven’t seen before in digital assets, and materially accelerate product development and innovation, which in turn brings us closer to adoption. For example, some layer 1 blockchains could use M&A to acquire highly desired products and turn them into public goods. This would reduce costs for users while increasing usage and gas expenditures on the chain itself, driving the value of the network token (the fat protocol thesis gives its voice).

DeFi has the clearest product-market fit (PMF) in crypto: we trade on decentralized exchanges (DEX), borrow on lending markets, use DeFi stablecoins or LST as collateral, etc. In addition, established DeFi teams have large reserves of funds - they can continue to develop and build for years without selling tokens.

The problem with DeFi tokens is that they lack practical use. However, this situation is starting to change: Uniswap's fee switch may be a turning point for other DeFi protocols to follow suit, and UNI surged after the news. In addition, regulatory clarity may accelerate the trend towards revenue sharing.

Another problem is that DeFi 1.0 is too boring. But new things are always interesting as long as the price goes up. However, DeFi tokens have stood the test of time. They survived the COVID crash in 2020 and the CeFi crash in 2022. As @sourcex44 said, "The only true audit is what has stood the test of time."

I believe DeFi tokens are a good choice for the reverse trade right now. There are very few people holding the original DeFi tokens right now, it's like we accumulated ETH during the bear market and saw SOL rise. So if the trend changes, only a few OG tokens can attract capital inflows.

Timing is critical. We are at a turning point, tired of new L2, celebrity coins, and waiting to see what will be next. Maybe the "next step" will be the old DeFi tokens? I think they have great potential to break out.

This post is in response to Stacy's questions about DeFi tokens. Most of these tokens are boring, but with solid businesses, good financials, and with regulatory clarity and token utility, DeFi has the potential to rise again.

Are DeFi tokens wrong?

You can blame Mt. Gox, miner rewards, or any other black swan event for the drop in portfolio value. But they are just noise, and the real problem lies more fundamentally in the following aspects:

Every market represents some kind of value redistributed among its participants. At some point, different markets converge. The ETH and BTC spot ETFs are a classic example. New capital flows in, but doesn't go further; capital gains from trading ETFs stay on traditional exchanges.

Meanwhile, existing crypto users benefit from new capital flowing into spot ETFs, and their gains are usually reinvested, which logically should lead to an altcoin season - but this time, things are different.

Since March 2024, we have seen several major trends:

• A series of airdrops and points programs from top protocols
• Tier-2 protocols rush to announce their token sales and TGEs
• Memecoins become one of the main metas
• TON joins the canonical in its ecosystem

The few DeFi protocols that show good growth are clearly related to the trends listed above. Now, we have this setup:

• Gains on Bitcoin and Ethereum are only partially settled in cryptocurrencies.
• Given the meta, these gains are mostly reinvested in new tokens or memecoins, or used to swipe points (locked in new protocols).
• Other DeFi protocols do not experience any price action, and holders start to lose hope.
• Few new protocols have seen an upward trend after the TGE, in part due to selling pressure from airdrop recipients and a lack of new capital.
• Alts keep bleeding.
• The memecoin frenzy keeps attracting more and more investors, again diversifying potential new capital from DeFi tokens.
• Bitcoin and Ethereum are the least affected, thanks to spot ETF investors.
• TON sits on the sidelines with its regulated onboarding efforts and mini-apps. Its ecosystem is not yet part of broader DeFi.

Meanwhile, there is no next big meta in DeFi. UX improvements and efficiency fixes are important — but they don’t attract new users, similar to early DeFi, NFTs, or even GameFi.

• Airdrops are not new.
• Stablecoin yields are not new.
• GameFi is not new.
• FDV for most Web3 protocols is already pretty fair, but new dApps are popping up every day with more lucrative terms, which increases supply for protocols but doesn’t stimulate new demand.

When Ethereum spot ETFs start trading (likely early July), we’ll see some new money pouring into Ethereum, and crypto-native ETH holders may start reinvesting gains into DeFi — but the big picture won’t change much. New money will go into trending meta (AI, RWA, DePIN, memecoins), and DeFi OGs will have trouble competing with at least ETH.

That’s okay. A new season has its own new heroes. What makes DeFi great again? Basically two things: a new (brand new) narrative and marketing.

The total market cap of DeFi is $90 billion, including LSTs like stETH ($3.2 billion) and DeFi stablecoins like DAI ($5 billion). In comparison, ETH’s market cap is $404 billion.

DeFi has many advantages over traditional finance, including a more lucrative passive income scenario. But have you seen any widely known DeFi applications promote their yield products to Web2 users?

When using DeFi becomes as easy as using a classic banking application, and DeFi starts to be promoted as the norm — we will finally see a new DeFi season. Or, we need a new meta that will inject new money into DeFi — similar to the early days of GameFi, NFTs, or even DeFi itself.

This new meta will gain the most attention, and a portion of the capital will flow to the broader DeFi. Similar to how the craze for Hamster Kombat or Notcoin boosted the broader ecosystem of TON. But do we have something similar now? Recently, I had a chat with Ignas and we discussed the current trends. Have we reached any game-changing altcoin seasons before? No.

I know this article may be disappointing. Bullish content gets the most attention on CT because people are willing to believe that their pockets will make money, and I know the feeling.

I have a lot of DeFi tokens in my portfolio that are bleeding money but I want to be realistic. I doubt if DeFi tokens will reach their ATH this year. I'll be happy if I'm wrong.

Sorry for the headline, I do believe DeFi has a chance for a big renaissance. Narratives change quickly in crypto, and the rotation of capital can leave a lot of people on the sidelines.

Right now, meme coins are in the spotlight, and you might laugh at me for being optimistic about DeFi. However, the fundamentals are solid. What matters is that others start to believe in its importance, and that belief may return sooner than you think. As long as DeFi outperforms other tokens for a period of time, others will FOMO.