DeFi Uncovered: DeFi Valuations Dislocate

As a predominantly leverage driven correction hits the market, we continue to see expansion in DeFi protocol usage, whilst token valuations struggle to keep pace.

DeFi Uncovered: DeFi Valuations Dislocate

The broader crypto markets saw a pullback after a relatively exuberant period following the release of EIP-1559, punctuated by significant activity and speculation within the NFT markets. Ethereum prices pushed towards their ATH, reaching just shy of $4,000 before pulling back sharply to an intra-day low of $3,168.

We saw quite the dramatic sell-off early this week as Ethereum traders saw leverage and exuberance flushed from the system. In our most recent newsletter, we noted that futures open interest for Bitcoin were elevated, whilst open interest for Ethereum futures had surpassed the previous ATH in the days before prices crashed.

This comes at a time when the Ethereum network continues to see massive usage and fee congestion, driven primarily by NFT minting and trades. Unsurprisingly, this massive interest and exuberance has been reflected in derivatives markets, with volumes and open interest reaching new heights.

Ethereum options markets haven't seen quite the same spike or correction in open interest. Open interest in options can often express professional traders' view that a position needs hedging or that a large move is impending. It allows traders to manage position risk without needing to sell the base asset. Options OI certainly found a local high but far from an ATH.

In times of exuberance, traders tend to take on leverage via borrowing funds against collateral. DeFi is a key benefactor of this borrow demand, with recent interest rates and yields rising throughout the ecosystem. These yields impact returns on major lending platforms like Compound and Aave, which are then in turn used heavily in aggregators like Yearn Finance.

A spike in rates can provide an indicator that the system has taken on significant amounts of leverage. Note this doesn't necessarily signal an impending crash, as rates can stay elevated for some time, and in this case, they were only elevated for a very limited period after an extended period at around ~2%. Rates peaked at 12% before the price crash flushed out leverage, with rates since returning to around 3-4%.

Data Source: Parsec Finance

Leverage reduction during times of liquidations shows a clear picture of how the lending markets were been positioned going into the move. In this case, the market showed a clear dominance of ETH as the liquidated collateral suggesting a preference to borrow against and take on leverage via ETH. Per usual, governance tokens represented a comparatively smaller share of liquidations on-chain over the last 7-day period.

Data Source: Parsec Finance

As liquidations occur, we can view the updated positioning of where liquidation thresholds exist and how traders have re-positioned themselves post-crash. We see that the next round of significant liquidations don't start until the ETH $2,600 level.

Data Source: Parsec Finance

With the pain from a sharp decline in the price of beta (ETH and BTC) comes a corresponding move from alts, where governance tokens have been hit the hardest. We note, however, that despite the sell-off, DeFi protocol usage has pushed forward in its trajectory of capturing more and more value on-chain. Despite pullbacks in dollar value of ETH, cumulative dollar value in DeFi has propelled to new all-time highs.

Data Source: DeFi Llama

Time and time again we've watched DeFi protocols show strength and absorb more capital even amongst market corrections. Simultaneously, governance tokens have failed to show the same level of strength suggesting a potential divergence between protocol usage and token valuations. As TVL has pushed past the ATHs set in May, governance token prices are still far from an equivalent recovery. The question is whether this presents a potential opportunity for locating value, or whether this divergence in valuation is a more structural phenomena.

As the majority of activity in DeFi continues to center around stablecoins, the following governance tokens are still far off their ATH market cap, whilst protocol TVL has exceeded ATHs from the same period: Aave, Curve, Compound, MakerDAO, Convex.

First, we compare the Market Caps and Fully Diluted Values (FDV: market cap after including all future rewards/total supply, market cap only includes circulating tokens) vs the TVLs of the key players among the stablecoin heavy protocols. These are the five projects with the most TVL in DeFi by a wide margin.

Next we examine the present ratios against those from May. It tells a fascinating story of how much higher valuations were in May vs Present date. At present, each dollar in a protocol is being valued significantly lower than back in May.

The cause of governance tokens seeing less enthusiasm vs May, despite activity and value locked eclipsing previous highs is an intriguing observation. For now, interest in DeFi governance tokens remains in the back-seat relative to NFTs and even ETH itself while the actual usage of stablecoin-centric protocols continues to balloon.

While attention in DeFi remains muted, attention in NFTs has seen a pullback from recent peaks. Volume on OpenSea has finally relaxed from its historic run, returning to a daily volume about 1/3 that of ATH. Regardless of that shift, floor prices in major collections have remained strong in ETH terms.

Data Source: Dune Analytics

Distribution of NFTs is an interesting study. Seeking to understand who holds what and how these NFTs shift hands can give further insights into how the market functions.

Observing Cryptopunks and Bored Apes we can see the collections with the most holder turnover over various periods. While an older collection like Cryptopunks is seeing significant distribution from largest holders of Cryptopunks, Apes are being distributed from the largest holders less frequently.

As NFTs remain the dominant gas consumers on Ethereum, the network has become quite congested as Uniswap V3 now regularly competes for gas consumption with V2.

One of the largest NFT events in history happened yesterday as 18k+ addresses looked to mint NFTs from a new collection called The Sevens. This marked one of the highest record sustained mean gas price and consumption over a 10-min period in the history of Ethereum. The only other event with more usage in recent history is the June crash. 18,000+ users went to battle over the 7,000 available NFTs in the collection. Floor price currently sits at 1 ETH.

Closing Thoughts

As broader crypto markets see a significant leverage driven correction, DeFi protocol usage has pushed forward to new heights, even whilst token prices remain somewhat lackluster. Stablecoin-centric usage in DeFi remains the leading application for the ecosystem, as the top 5 protocols by liquidity are all centered around stablecoin usage in borrow, lending and exchange. It's one party of stacking stablecoin yields.

Meanwhile, NFTs have seen a slight pullback in overall secondary market interest. However, one of the largest minting events in history went down with The Sevens, which saw 18,000+ minters competing for 7,000 unique collectables. On top of that, the largest holders of premium NFTs in the CryptoPunks and Bored Apes appear to have moved into HODL mode, with fewer and fewer trades and changes of ownership occurring.

Uncovering Alpha

This is our weekly segment that briefly discusses some of the most important developments of the prior and upcoming weeks.

Builder momentum continues as L2 season ramps up, alternative L1s add incentives, and products add features across the space.

  • Olympus DAO sends contracts out for audit. This marks a milestone in the project's move towards integrations with other projects via wsOHM and the much anticipated Olympus Pro.
  • $TIME, an OHM fork launches on AVAX alongside Abracadabra's $MIM. The projects both from the same founder mark an interesting show of strength for Avalanche's legitimacy. The OHM fork $TIME promises to return 33% of its treasury to OHM in the form of holding wsOHM.
  • Solana announces its next hackathon, running from August 31st to October 8th. The hackathon will feature $5 million in prizes with countless judges and speakers from all across crypto.
  • Synthetix exchange Kwenta to launch perpetual futures. An interesting step for the exchange that has struggled to find many users. They hope to copy the success of Perpetual Protocol and other perps to find some interested users on Optimism L2.
  • Loot and $AGLD explode in interest. The text based NFT Loot finds wild interest as many professional investors announce their support. A split vote to support $AGLD as governance for LootDAO has marked some turmoil for the community's path forward. The floor currently sits at ~9 ETH/Loot.
  • Ruler & Cover shut down. In a drama-filled week for the projects, the core devs have left the project and announced the shutdown along with a plan to return funds to the community.
  • Cross-chain AMM Synapse mainnet goes live. Synapse is one of a handful of projects working on upping interoperability. The mainnet transition is marked by liquidity for swaps between Ethereum, Avalanche, Polygon, and BSC.
  • DyDx token becomes tradeable. The previously airdropped token has been announced to be tradeable starting the 8th. The unlock of the token comes after the platform saw massive strength as a leading exchange in DeFi.
  • MakerDAO/DAI launching on Arbitrum. Users on L2 Arbitrum will now have access to DeFi's most popular DeFi-native stablecoin and on-Arbitrum lending with MakerDAO.
  • Alchemix more actively participating in Curve bribes. The project has stepped up its game in Curve bribes as it looks to increase quality of life/yields on its deepest liquidity platform for alUSD.
  • Fantom launches its NFT marketplace Rarity. L1 chain wars continue to heat up as Fantom launches its own marketplace, highlighted by its drastically lower fees to mint and trade NFTs.

To keep up to date with the latest Glassnode analysis of the DeFi ecosystem, be sure to subscribe to this new content series below.

Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.