DeFi Starts 2023 with a Jump, but Will the Momentum Last?

After <a href=”https://www.financemagnates.com/cryptocurrency/whats-next-for-crypto-after-the-chaos-of-2022/” target=”_blank” rel=”follow”>a chaotic 2022</a>, the cryptocurrency
industry started out this year full of hope for a better turnout. Users’ and
investors’ confidence in the market was battered by the various events that
marked the industry last year. However, Bitcoin (BTC), the largest digital currency, gained significant
traction last month. At the start of the year, the price of BTC stood at $16,500. However, by January 30, the price surged by 45% to about $23,955, giving investors hope for better days ahead for the industry. This price rally is also
reflected in the decentralized finance (DeFi) industry. Finance Magnates reports that the DeFi market saw its tokens, minus
stablecoins and wrapped tokens, <a href=”https://www.financemagnates.com/cryptocurrency/crypto-market-cap-fell-by-641-to-829-billion-in-2022-report/” target=”_blank” rel=”follow”>collapse by 72.9% in 2022</a> “with various
governance and <a href=”https://www.financemagnates.com/terms/u/utility-tokens/” class=”terms__main-term” id=”5f74fe44-312a-4855-ad8b-6181eb376bbd” target=”_blank”>utility tokens</a> losing over $48.4 billion in value.” The
stablecoin market, for its part, decreased by 16.6% to $27.3 billion by year-end.However, a new dataset collated by BitcoinCasinos.com shows that the
total number of DeFi users increased by 35% year-over-year to 6.7 million in
January 2023. Furthermore, analysis by Dune Analytics reveals that the total
number of users engaging in DeFi projects skyrocketed from about 110,000 users
three years ago to 4.96 million users in January 2022. In fact, by the end of
last year, over 1.8 million new users had joined the DeFi industry. The data also shows that this number increased to 6.77 million users in January 2023.Andrew Thurman, the Head of Content at Nansen, a blockchain analytics platform,
explained that <a href=”https://www.financemagnates.com/cryptocurrency/ftx-the-rise-the-fall-and-the-reaction/” target=”_blank” rel=”follow”>the collapse of FTX</a> inspired a double-digit growth in users and
activities for many DeFi protocols “despite <a href=”https://www.financemagnates.com/cryptocurrency/can-lp-tokens-add-value-to-defi-lending-ecosystems/” target=”_blank” rel=”follow”>Total Value Locked (TVL)</a> plummeting as
Alameda and other major funds withdrew.”“I think DeFi was a major beneficiary of the ‘not your keys, not your
coins’ narrative. While DeFi has its own risk profile, with threats such as
<a href=”https://www.financemagnates.com/terms/s/smart-contract/” class=”terms__secondary-term” id=”65d5afa6-add5-4d5a-9d83-4cd4ddb791de” target=”_blank”>smart contract</a> exploits looming, a growing number of users want to leverage
on-chain financial services rather than centralized alternatives,” Thurman told
Finance Magnates.DeFi Market Cap Struggles despite Increasing UsersHowever, while the total number of DeFi users increased year-over-year
in 2022, there was no commensurate growth in the sector’s market capitalization, which was struggling to rise above the levels last seen in 2021. Although the market
cap increased from $113.4 billion in January 2022 to $166.4 billion in April, the figure declined to $51.8 billion in May and is yet to recover.Brandon Tucker, Growth Lead at Marinade Finance, the creator of the mSOL
token, noted that “a lot of the market cap of 2021 was due to over-leveraged
large actors like <a href=”https://www.financemagnates.com/cryptocurrency/news/three-arrows-capital-gets-liquidation-order-from-bvi-court/” target=”_blank” rel=”follow”>Three Arrows Capital</a> or FTX.”As of December 2022, the DeFi market cap stood at $29.9 billion, showing
further declines in the industry. However, this number recovered to $44.8
billion in January 2023, which is a growth of 50% month-over-month. Regardless, compared to the market cap achieved in January 2022, the number is still 60% down. Houston Morgan, the Marketing Director of ShapeShift, a
Switzerland-based crypto exchange, believes that users are possibly being more
cautious with their investments in the DeFi space due to the market downturn
and volatility. Nansen’s Thurman also holds the same view.“During 2022, DeFi had to compete with declining crypto asset prices and <a href=”https://www.financemagnates.com/cryptocurrency/news/treasury-yields-interest-rates-1-9t-stimulus-what-does-it-mean-for-btc/” target=”_blank” rel=”follow”>US treasury yields</a> often in excess of 4%. Few investors wanted their funds in
assets like ETH, and while they could earn yield with stablecoins, off-chain
yields were more attractive,” Thurman explained. Furthermore, Thurman believes that once the total amount of stablecoins
on chain begins to rise again, and withdrawals appear to have flattened,
investors are likely to want their dollars on chain and in DeFi rather than in
traditional asset alternatives.What Does the Future Hold for DeFi?In recent years, non-fungible tokens (NFTs) have come to play an important role in the
DeFi industry <a href=”https://www.blockchain-council.org/blockchain/role-of-nft-in-defi/” target=”_blank” rel=”follow”>with new use cases</a>. However, in recent
months, NFT trading volumes have been <a href=”https://www.financemagnates.com/cryptocurrency/nft-styles-are-shifting-to-reflect-bear-market-sentiment/” target=”_blank” rel=”follow”>declining significantly</a>, except in December
last year when the market experienced a short-lived spike after ex-President
Donald Trump launched an NFT collection. Although market observers reported that trading prices in the NFT market
<a href=”https://www.financemagnates.com/cryptocurrency/nfts-show-signs-of-life/” target=”_blank” rel=”follow”>have begun to pick up again</a>, there are concerns
about the slower pace at which new participants are joining the market.Despite these, Thurman says DeFi will continue to be “a hotbed
of innovation and growth in a new bull market” as DeFi provides an alternative
to centralized financial institutions and positively impacts the average user.“I expect the rise of <a href=”https://www.financemagnates.com/cryptocurrency/news/staked-launches-the-staked-eth-trust-offering-staking-rewards-to-investors/” target=”_blank” rel=”follow”>staked ETH</a>, in particular, to
lead to a new class of products as developers experiment with yield-bearing
liquid staking derivatives (LSDs),” the Nansen executive told Finance Magnates.On the other hand, Morgan noted that it is impossible to predict
the future of the DeFi industry “with certainty” as factors such as regulatory
developments, technological advancements, and market sentiment “will likely
play a role in determining its trajectory.” Regardless, the ShapeShift executive expects
continued DeFi growth.”DeFi is likely to continue growing in the larger
cryptocurrency market, but its relative importance may vary based on market
conditions and <a href=”https://www.financemagnates.com/thought-leadership/the-rise-of-enterprise-blockchains-as-the-future-of-defi/” target=”_blank” rel=”follow”>technological innovations</a>. However, as DeFi
continues to mature, it will become an increasingly significant part of the
larger cryptocurrency market. I see the largest room for growth in the area of
liquid staking and cross-chain decentralized application (DApp) aggregators
like ShapeShift taking prevalence,” Morgan explained.With the wider cryptocurrency industry yet to fully recover from the shock of 2022, most experts expect greater regulatory interference by government actors this year. This likely development, factored in with the increasing number of DeFi users spurred by the failure of centralized exchanges last year, means that it remains to be seen what turn the DeFi industry will take in 2023.