Author | Luke Posey
Amidst high price volatility and extreme Gas prices, DeFi demonstrated its resilience at the protocol level. The clearing and arbitrage mechanism worked as planned and remained stable while the stable coin maintained its stability, seeing significant transfer volumes and usage across the ecosystem. dexs reached the highest trading volumes in history, usage of the derivatives platform increased, and token valuations reached all-time lows as protocol revenues increased and token prices declined.
In this report, we cover.
DeFi’s reaction to the drop in token prices
Token valuation after the plunge
Gas prices and usage of
DeFi’s activity in the token price drop
DeFi’s reaction to the widespread ATH drop has been mixed. Blue-chip DeFi’s token prices largely followed ETH’s decline, showing a relatively high beta to ETH, but no more than 15% decline from ETH in UNI, MKR, AAVE, COMP, SUSHI and SNX.
The total value locked in smart contracts fell 42% from peak to trough, generally in line with the price trend of Ether, which fell 51% from peak to trough.
As volatility intensified, DEX volume soared to record levels. May 19 saw a record $11.7 billion in volume amid the selloff. Uniswap dominated with $5.7 billion in volume and $5.8 billion in liquidity, while Sushiswap came in second with $2.8 billion in total liquidity.
The number of daily traders also saw a massive increase. the number of 30-day daily traders in DEXs reached an all-time high, as did the number of 5-day traders. sushiSwap’s volume/trader was higher than any other exchange. sushiSwap’s trading volume was high, but the number of traders was small compared to Uniswap. the 30-day daily trader The total number of traders exceeded 1 million traders for the first time. While it is good to see an increase in the number of traders in these turbulent times, the real test of product market resilience will come if/when DeFi enters a prolonged bear market.
Lending agreements have manifested themselves, with value locking remaining strong and liquidation kept to a minimum. Loss of stablecoin collateral is a key risk for borrowers during market crashes. As prices become more volatile, collateral requirements become more difficult to meet. In addition, volatile collateral, liquidation and varying levels of utilization can cause interest rates to fluctuate. Volatile interest rates can lead to further withdrawals by borrowers. Fortunately, stablecoins stayed healthy, utilization rates stayed healthy, and the lending market generally performed as expected during periods of high volatility. During the collapse, 415 borrowers faced liquidation events on Aave for only $38.4 million
Interest rates have remained healthy. As lending and borrowing have remained roughly correlated, utilization rates have remained similarly healthy. The schedule for most lending markets is shown below.
The correction beginning on the 16th caused temporary fluctuations in rates as borrowing had a brief period of above optimal utilization.
During a short period on the 19th, rates rose to >14% and Aave’s utilization (borrowings/collateral) exceeded 80% as price volatility reduced stability.
Liquidation, collateral posting and yield drivers pulled utilization back to normal levels, bringing the vendor’s rates back to around 3%.
Stability of Stable Coins
The major stablecoins have maintained their price stability in a healthy manner throughout the crash. None of the top 3 stablecoins used on Ether deviated sharply from their anchor prices for a long period of time, allowing sellers to confidently exit the stablecoin when they saw fit. The most dramatic USDT/USD spreads on the major exchanges were peaks around $1.02 and troughs around $0.99. These swings lasted only a few seconds to a few minutes in most cases. Otherwise, stablecoins kept their prices stable for most of the crash, with the volume-weighted average price (VWAP) remaining at $1 for most of the time. Contrary to the crash in March 2020.
This was particularly positive for DeFi due to the performance of the DAI during the collapse. the DAI held its stability well and the supply in circulation was adjusted accordingly to the requirements of the collateral and the stability of the agreement. As collateral holders redeem, the collateral is repossessed and the DAI is removed from the supply. This behavior keeps the collateral on track, liquidation at a normal level, and the DAI maintains its price stability.
Unfortunately, a stablecoin with a relatively high adoption rate (~$2 billion in circulation) has failed to maintain its stability. terraUSD (UST) lost its anchor price on the 18th as its collateral from LUNA was worth less than the value of the stablecoin it was collateralizing. the LUNA/UST ecosystem is currently suffering additional risk, in part due to its market size. the DAI/ MakerDAO ecosystem provides over $8 billion of ETH collateral for a $5 billion supply of DAI, while UST’s $2 billion supply is close to and sometimes below its roughly $2 billion in LUNA collateral. Fortunately, the loss of price anchoring during the crash caused less severe losses.
UST’s losses simultaneously caused instability in its lending market anchors, with positions more easily liquidated on local lending platforms where UST saw significant demand. As the value of LUNA has been pushed back above UST, its peg has largely rebounded since the crash.
All in all, the stablecoin performed as expected, with a record $52 billion in on-chain transfers for the stablecoin.
ETH performance and valuation
The percentage of Ether supply in smart contracts has been very healthy, with over 23% of supply still in contracts throughout the selloff. Exchange supply jumped from 11.13% to 11.75%.
While we have seen a shift in valuation of DeFi against the U.S. dollar this year, ETH remains the reserve currency and the benchmark of choice. deFi/ETH has largely underperformed in 2021 and was no exception during the crash, as some saw ETH as a flight to safety. This manifested itself in ETH’s strength against DeFi during the crash. However, this decline was less pronounced in the highest market cap blue chips, such as UNI, AAVE and MKR, which only saw an excess market cap weighted decline of ~6.5% against ETH after the crash.
It is possible that we could see a potential decoupling from ETH/DeFi in those blue-chip coins that show increased usage, revenue and strong incentives. However, these weaker declines in the blue-chip coins are not consistent with the declines in the mid-cap coin, DeFi, which had a 15%+ larger relative decline. And in bearish sentiment, the correlation almost always creeps up.
Zooming in, ETH/BTC has shown resilience on the downside. In previous crises, risk typically fled from ETH to BTC, with ETH experiencing significantly larger declines. This time, the situation has changed and ETH still has a higher beta than BTC, but the difference is not significant. Since ETH has shown resilience to market declines compared to BTC, DeFi participants are likely to flee to ETH as a force rather than BTC and stablecoins.
Token Performance and Valuation
DeFi’s governance tokens were unsurprisingly sold off, with a maximum drop of over 75%. These are emerging tokens with high beta, limited liquidity, and a small number of holders. It should come as no surprise that widespread market volatility has sent these tokens to the downside. Interest in pricing these assets in USD rather than ETH has developed over recent history.
Increasingly, investors in DeFi are using traditional valuation metrics to understand these assets.Treasury’s assets, cash flows returned to holders, and other popular valuation metrics have become attractive in recent history, especially when compared to other growth assets.
Here, we present the price/sales ratio (P/S ratio), which measures the market value of the token divided by the revenue generated by the agreement. So far, early in the DeFi adoption curve, it is unclear whether revenue is the driver of token prices. In many cases, the willingness to bet on future revenue and narrative is as strong as existing adoption. However, the programs with the highest adoption are rapidly climbing to the top and rebounding strongly from their lows.
We have seen TVL continue to be a strong driver of price, with the two highest TVL agreements experiencing the softest declines from ATH. They have also seen a strong rebound from the lows, along with Uniswap and its dominant user base. Unsurprisingly, most of these TVLs are correlated with market capitalization. The larger market cap DeFi programs led the decline, with stronger liquidity softening the blow.
When grouping these tokens by protocol type, we see interesting trends emerge when we compare related metrics. In the chart below, we dig deeper into the small-cap assets in DeFi by protocol versus our blue-chip coins. We see that Uniswap continues to dominate despite its continued limited incentive and use of governance tokens. This trend will only get stronger as Uniswap v3 flips to V2. Bancor is also showing strength in higher revenue and healthier prices. While Curve’s market cap looks small, it has an FDV of over $5.5 billion.
On the lending side, we get an interesting finding when looking at baseline valuation metrics. compound’s valuations appear to be low, especially relative to aave. we see that TVL continues to swell above its competitors on aave, largely due to new incentives and the popularity of the center as an alternative form of collateral. The diversification of collateral, especially during a crash, is healthy for preventing liquidation. For example, Aave locked up about $200 million of xSushi, $500 million of LINK, and more than a dozen other non-standard assets, all with more than $5 million of locked collateral. That said, Compound has a healthy lending market with stable rates and strong incentives.
Gas is overpriced
Retail investors were largely squeezed out during the market’s sharpest sell-off. Gas prices spiked to an average gwei of 1000+ per hour at the peak of volatility as high volume traders, stablecoin transfers and arbitrage bots dominated gas consumption.
Many were forced to sit on their hands, for better or worse. If a trader wants to reduce their exposure by $3000, but gas prices are >$700 per trade, it is not surprising that they choose not to trade. For larger traders, $700/exchange is relatively easy to bear if the position size is 100 times the fee or greater. As the crash occurs, trading volume increases dramatically as larger holders transfer risk. Total trading volume drops as smaller trades are priced out of any action in the chain.
As a result, although Uniswap’s trading volume was high, during the crash, Uniswap’s cumulative trading volume did not exceed the 30-day average trading volume. Instead, activity from USDT transfers, USDC transfers, arbitrage bots, and other urgent activity during the huge price fluctuations occupied the block space.
In the left chart below, we see an hour of activity from MEV bots extracting value from the network through various means. In the right graph below, we see the smart contracts that contributed the most to Gas consumption during the hour of the plunge.
Uniswap V2 remains the clear leader in Gas consumption.
Stablecoin transfers came close to surpassing Uniswap in terms of Gas consumption. usdt and usdc were sent urgently to exchange wallets to distribute funds.
Anonymous accounts with large amounts of funds are busy with arbitrage activities, such as liquidation.
Gas prices have fallen significantly since then in the days following the crash. Gas consumption for stable transfers dropped by >60% and for Uniswap by ~50% from its peak, while arbitrage opportunities have mostly returned to normal levels since the crash. Throughout the crash, the peak of 1200 average Gwei put transaction costs above $500 per swap. With an average Gwei <75, smaller traders can now rebalance as they see fit.
DeFi suffered its first major price and liquidity test since TVL and users grew to over $100 billion and 2 million respectively. positive indicators of DeFi’s continued growth include
Strong revenue from transaction fees and peak volume of DEXs
Healthy lending market, high collateral, relatively low volatility in interest rates, and high utilization in stablecoins
Stablecoins maintain their pegs and usage continues to grow
Resilience of blue-chip coins to ETH and ETH to BTC
The biggest warning sign going forward is a decrease in usage and a corresponding decline in protocol fee revenue. So far, we have not seen such an event, as increased liquidity increases usage and fees. A decline in usage could lead to a depletion of liquidity as TVL/revenue increases and revenue is driven purely by token inflation. Loss of liquidity can worsen the user experience, resulting in the reflexive impact of fewer users, less revenue, and more liquidity exits. For now, growth remains strong, with DeFi usage advancing to new heights.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/how-has-defi-fared-in-the-519-market/
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