Analysis of DeFi Token status and 2023 prospects

原文标题：《 一览 DeFi 代币现状及 2023 年展望 》

Original article by Matas Andrade and Kyle Waters

The DeFi way

Decentralized Finance (DeFi) is a fast-growing application of blockchain technology designed to provide financial services such as access to cryptocurrency mortgages, investment income and derivatives, with billions of dollars worth of cryptocurrencies locked in various DeFi protocols. At the heart of these agreements are DeFi tokens, which are digital assets used to facilitate governance and economic incentives within these agreements.

This article will provide an overview of the latest developments in tokens in the DeFi space, including market dynamics, supply statistics, and adoption measures.

A year of construction

As the chart below shows, DeFi Token's total market cap has experienced a significant decline over the past few months. This decline can be attributed to a variety of factors, including rising interest rates resulting in competition with gainful DeFi products, overall macroeconomic uncertainty and technical stereotypes, as well as the recent unwinding of improper investments within the crypto space.  

Source: Coin Metrics Network data

Despite recent declines, the DeFi ecosystem has seen tremendous growth over the past few years. In January 2020, the entire DeFi ecosystem was worth less than $2 billion. Today, it's worth about $18 billion, although it's still below its peak valuation of about $100 billion.

The previous bull market may have helped spur investment in protocol development, which, while down, has had a huge impact in helping to fund ecosystem development. It is important to note that while total market capitalization may fluctuate, the underlying innovation and infrastructure development driven by these high valuations may create sustained value in some, but probably not all, projects.

Source: Coin Metrics Formula Builder

One of the interesting dynamics happening on the Ethereum blockchain (the smart contract platform with the most DeFi activity) is the ratio of the Token market cap to the underlying layer asset ETH. As a result of the market's performance in recent months, savvy investors have parked their wealth in Stablecoins while avoiding riskier assets, as shown by the increasing share of stablecoins in total value. DeFi Token's market cap share skyrocketed on the Ethereum blockchain during the spring 2021 bull market.  

Source: Coin Metrics Formula Builder

Despite this development, the relative performance of ETH compared to various DeFi tokens is also noteworthy. It is clear that investors' appetite for risk has tightened considerably, but they have also become more selective as they rethink their holdings. So far, ETH has maintained value more effectively than DeFi Tokens.

Supply-side Token economics

One of the most important issues to consider when judging the relative performance of DeFi tokens, especially when extrapolating future performance, is the relative number of tokens held by the money pool, developers or early investors. While most tokens free up most of the supply to trade freely on the market, most also have lock-ups where certain investors can buy tokens in advance or at a discount, on condition that the tokens are held for a minimum period.

Depending on how many tokens are locked, they can have a significant impact on the market after release, especially if Token owners want to realize returns by liquidating their holdings. With this in mind, you can look at the 1-year active supply percentage indicator in the figure below to estimate the supply percentage of inactive transactions.

Source: Coin Metrics Network data

We could also consider borrowing a measure of these effects from traditional financial markets, called the Float Ratio. This ratio refers to the share of assets that can be traded in the market and can help one estimate the potential future risk of significant volatility and price swings resulting from large asset holders clearing their tokens.

Source: Coin Metrics Formula Builder

In the context of DeFi tokens, a floating ratio can be used to protect a user's investment from volatility by identifying tokens with low floating ratios. Interestingly, while floating ratios and 1-year active supply charts are different interpretations of the same idea, they are basically the same.

We can see that the relatively low 1-year active supply and the low floating ratio of UNI provide consistency to this idea. The 1 billion UNI tokens minted by UNI in the Token origination phase in 2020 have a 4-year issuance schedule. Similarly, we can see that the floating ratio has been trending upward over the last year, indicating that supply is gradually unlocking.

adopt

The number of addresses interacting with DeFi Token has declined since the beginning of 2021. But looking at the active addresses interacting with DeFi tokens is a very rough metric when measuring adoption rates for DeFi applications. This is because the use of protocols is usually separate from protocol governance (usually in the form of decentralized autonomous organizations or DAOs).

For example, Uniswap users do not need to have an UNI Token to interact and trade assets with Uniswap smart contracts (unless UNI is one of the tokens being traded).  

Source: Coin Metrics Network data

Looking at the number of DeFi Token owners also helps to gauge adoption rates and interest. In the context of the DAO, a decentralized owner base can be beneficial because it implies a broader base of voters with diverse views on issues. Most tokens saw a slow upward trend in the number of on-chain owners in 2022, then a significant uptick in November as many users transferred their tokens out of the exchange.

Uniswap's UNI remains one of the most popular DeFi tokens, with more than 280,000 unique addresses having the Token. As is well known, UNI was first distributed by air drop to historical Agreement users in September 2020, and its owner base has grown ever since.

Source: Coin Metrics Formula Builder

conclusion

As an emerging industry with uncertain cash flows, DeFi Token went through a period of investor de-risking in 2022. There are some possible catalysts that could help restart the DeFi Token  in 2023; Interest.

First, some projects may continue to experiment with basic Token Dynamics. Last year, the MakerDAO community discussed revisions to the MKR Token dynamics, including the addition of a pledge mechanism. On the regulatory front, any move to clarify the issue of Token securities versus commodities would be welcomed by industry progress, including the possible adoption of a new disclosure framework for Token issuers.

With a keen awareness of the recent failures of centralised agents, expectations are high for DeFi to perform well in 2023. In fact, the CMBI Decentralised Finance Sector Even Index (CMBIDFIE) - an even-weighted basket of all assets in the decentralised finance sector that contains data - has started the New Year up 14 per cent.

DeFi watchers will be keeping a close eye on Token performance - but, as we've described in this article, it's important to separate the DeFi Token from the underlying adoption of the protocol. With DeFi Token data, it is possible to paint a broad picture of the field, but more refined protocol data is needed for proper due diligence and adoption analysis. To that end, we look forward to expanding the breadth of DeFi analysis in 2023.

Network data: Summary indicators

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