The decentralized finance (DeFi) market has seen very strong growth since the summer of 2020 by DeFi and over the last year. We have seen several Ethereum Layer-1 competitors such as Solana and Fantom gain popularity.
However, the recent crash in the crypto space has particularly hit the DeFi space heavily. Although Bitcoin has seen a 50% correction since November 2021, some of the most popular DeFi protocols such as Compound, AAVE, and MakerDAO face deeper corrections.
In addition to the strong liquidation, the DeFi sector has also recently seen the departure of developers and the migration of users. Pedro Herrera, senior data analyst at tracking firm DappRadar, said that if the crypto bear market lasts for a year, we could see 80% of DeFi applications being driven out of the market. Speaking to Bloomberg, Herrera said:
“Until crypto winter, DeFi dapps have never experienced it. They’ve been through crashes, but this looks like an impending one. Perhaps 20% of applications that represent 80% of the industry value will survive. And we can see protocols that are not widely used disappear. “
According to DappRadar, there are currently 150 DeFi applications on the market holding a total of $107 billion in user funds. In the crypto market landscape, there is a drop of $30 billion since the beginning of 2022.
Strong loan liquidity in DeFi
Since some of the top DeFi tokens have plummeted recently, it has led to a stratification effect of loan liquidation. According to Dune Analytics, $300 million worth of assets in DeFi protocols were liquidated last week.
Between January 22 and January 24 alone, more than 1,000 positions were liquidated on platforms like Compound, Aave, and MakerDAO. Spencer Bogart, general partner at Blockchain Capital, said that amid the crypto market movement last week, approximately $600 million worth of mortgage debt on MakerDAO was about to be liquidated.
Besides, user activity on DeFi applications is also decreasing. Some active user wallets interacting with popular DApps have dropped 20-30% in the past two weeks. Also, the majority of DeFi apps pay developers with their own tokens. As a result, the drop in token value forced developers to switch to other protocols. Jeff Dorman, chief investment officer at Arca, said survivors say survivors will emerge stronger. Dorman says:
DeFi doesn’t even stand out in the slightest. None of the protocols are down. There is no problem with users withdrawing money. That confirms why many of us think this is the future of finance.