DeFi Surge Ahead of Year-End
VYSYN Ventures Weekly Insights #76 — DeFi sector leads crypto market recovery ahead of new year
Decentralized Finance (DeFi) has posted a sharp comeback while recovering from the latest pullback that affected the entire cryptocurrency market. Amidst multiple regulatory setbacks, the latest recovery is almost vertical in terms of price appreciation and other relevant metrics, with the Total Value Locked (TVL) in DeFi set to reach a new all-time high (ATH).
In the latest VYSYN Release, we examine the behavior of the DeFi marketplace and how it is leading the most recent cryptocurrency market recovery. We also consider some of the factors behind this surge as the year 2022 approaches.
DeFi TVL surges to new highs
The cryptocurrency market retraced in the past month with prices almost dropping below some significant levels. Bitcoin price dropped to $53,308 after reaching an ATH of $69,000. Ethereum price also dropped below $4,000, having achieved an ATH of over $4,860.
These pullbacks were significant as they occurred when most indicators suggested further price discoveries towards the upside. However, most traders considered the markets overbought and thus the drops didn’t come as a surprise. As mainstream cryptos retraced, DeFi tokens followed suit.
Things have recently changed and the cryptocurrency market, led by DeFi, has resumed its surge towards higher levels. In less than four days, (from November 27th to December 1st, 2021), DeFi has almost recovered the entire loss in TVL. As of the time of writing, DeFi TVL stands at $111.27 billion and looks to reach a new ATH soon.
Other cryptocurrencies have followed this upward movement, with market indicators showing increased momentum to the upside. Bitcoin has bounced off its recent low price below $53,000 and is retesting the $60,000 price level. However, more significant is the recovery of Ethereum which climbed back from below $4,000 and trading above $4,700, looking poised to retest the existing ATH at $4,868, as reflected in the charts above.
Increase in volume across DEXes
One of the indicators of increased activity in the DeFi industry is the increased volume on Decentralized Exchanges (DEXes). Data shows that the volume traded on DEXes is at its second-highest level ever. The only time that the volume was higher was at the peak of the DeFi bull run in May 2021, before this year’s bear market. The monthly volume traded on DEXes has been on a steady increase, with Uniswap and Sushiswap leading the way.
Aside from statistical details, emotional sentiment plays a major role in what happens in the cryptocurrency market. During sell-offs fear kicks in and traders sell their assets. When there is a rally, they tend to buy, pushing the market to ‘extreme greed’ conditions. As a result of the recent pullback, prices fell towards extreme regions, indicating fear.
For experienced traders, this was the perfect opportunity to buy, because crypto prices appeared to be cheap. As of the time of writing, the cryptocurrency market remains in the fear zone, and the improving buying pressure could see it climb towards greed as the trading cycle evolves.
Other factors behind DeFi bullish momentum
There are other reasons why DeFi and the entire cryptocurrency market are in a significant upward movement. With the industry expanding and more use cases being realized, new protocols are being launched on Ethereum compatible networks such as Fantom and layer-2 solutions like Arbitrum. The ability of these platforms to enable increased speed and lower fees during transactions has made them attractive to users more recently.
One of the catalysts for Fantom’s recent expansion is the introduction of an incentive rewards program that dedicated 370 million FTM to supporting dev teams within the network. The program, which started on August 30th, 2021, rewards dev teams within the network according to the TVL on their protocols.
In its November 16th, 2021 update, Fantom acknowledged that the incentive rewards program has triggered exponential growth on the platform. As of the date when the program was launched, the TVL on Fantom was $755.25 million. However, by the middle of November, this value had skyrocketed to $5.1 billion. Other indices such as the total daily transactions, unique addresses, and average daily users also increased significantly.
Arbitrum has become the leading scalability platform behind many DeFi projects that are being created on Ethereum. In terms of Layer-2 usage, Arbitrum leads the rest of the pack by claiming up to 39.66% of the TVL in this category.
With a speed of 40,000 transactions per second, and transaction fees up to three times lower than the Ethereum network, Arbitrum is currently the most Ethereum Virtual Machine (EVM) compatible layer-2. The low transaction fees are also an attraction for ETH millionaires, as available data shows that 50% of them use the protocol for their transactions.
Market trying to repeat previous end-of-year behavior
The kind of bullish sentiment exhibited by various regions of the cryptocurrency market is not new to those who have been in the industry for long. Usually, as the year winds down the market becomes more volatile, and in most cases, it ends with price discovery towards the upside.
Many of the significant records set by crypto prices have been either towards the tail-end of the year or at the beginning of the following year. This factor influences the emotional sentiment of users and it is common for them to hold on to their digital assets, or enter new products.
The compatibility of DeFi with mainstream finance also places it in a position for greater adoption. Therefore, what we are seeing now could be a mere preparation for what is yet to come. Thanks to security and scalability being greatly improved, we expect the DeFi market to grow and head towards a full adoption.
About VYSYN Ventures
VYSYN Ventures is a longstanding venture capital company that specializes in funding and supporting disruptive startups in the blockchain and cryptocurrency industry. We have provided early-stage support to several projects that have grown to USD market capitalizations of hundreds of millions and even billions. Our incubation program focuses on providing capital allocations, versatile marketing support, and tech assistance.