Original compilation: TechFlow intern
Original compilation: TechFlow intern
You know it's the end of a cycle when people start questioning everything they believed in during a bull market.
This crypto cycle began when Compound launched COMP and brought the concept of single-currency staking to the masses, and officially ended with Terra being killed by Anchor's promised 20% yield and overinflated LUNA.
The debacle raised a series of soul-searching questions about the validity of every other DeFi project — even Bitcoin:
Usually, when the trend collapses, the bubble also evaporates.Take Terra, which was once the biggest success story of DeFi and L1, as an example. Its failure means that single currency pledge has lost its luster, expectations have been reassessed, and prices have been adjusted.
While many tokens are now at all-time lows, the market is now converging on new prices that are less based on hype and more based on a realistic view of what we have accomplished in the last cycle, the bear market is looking back at the last year And good timing on the progress we've actually made.
To tie in with the previous price cycle, we compare the current prices of some prominent DeFi and L1 projects to their all-time highs, and also to their prices on November 1, 2020. This period was chosen because it was at the beginning of the cycle, during this period (2020/11/1), the situation of DeFi and L1 began to become clear, but the bubble was still small - Uniswap launched two months ago DeFi’s TVL is on the verge of crossing the $10 billion mark, but it has yet to see exponential growth; projects such as Avalanche, Solana, and Terra have yet to launch their respective Liquidity mining is rarely discussed.
These price points can reveal some patterns:
1) The maximum possible return from the investment project since the beginning of the cycle;
2) The ability of the project to maintain its value at the end of the cycle;
It turns out that
It turns out thatBoth DeFi and L1 underperformed Ethereum and Bitcoin in terms of drawdowns.This is not surprising since ETH and BTC have the strongest market consensus and this consensus is less affected by the ebb and flow of the market. For the same reason, compared to most DeFi and L1 tokens,at the same time,
at the same time,In terms of maximum returns, L1 is the clear winner of this cycle.The top two projects, Solana and Polygon, made a name for themselves this cycle with ample ecosystem funding and liquidity mining incentives. Their maximum returns all exceed 5 figures, far exceeding other L1s such as Avalanche and Near.
Overall, L1s outperformed DeFi overall, with DeFi blue chips lagging overall(Though still an impressive 4-figure gain). COMP and SNX fared worse, but that could be because their price cycles didn't match the one in question (SNX was launched in 2018, COMP was running before November 1, 2020).
This rule tells us one thing -In the past cycle, DeFi has not produced much Alpha above the Beta of L1.
Jason Kam has a good frame of mind to think about this issue. In DeFi Summer 2020, he raised a very meaningful question-if ETH is similar to the energy commodity that builds the petrochemical value chain (DeFi), then "is the investment Is oil better or petrochemical/industrial chain stocks better?"
Looking back at what we have achieved in past cycles, I think the answer to this question is clear -The risk reward ratio of the underlying token is better than any application based on it, at least for now.Over the past two years, blue-chip DeFi tokens have experienced similar retracements to L1 when the market fell, but showed less upside potential than L1 when the industry took off.
From a heuristic point of view, this is easy to understand. so far,Most of the hype around DeFi is because it can bring "users" and "liquidity" to L1. However, when users do come to L1s, most of the time they are attracted to staking incentives, which they quickly discover are the only things they can do on the blockchain.Then, when yields are low, they move to other higher-yielding L1s.
In this relationship, L1 has no value-added effect on DeFi. DeFi exists to make L1 look good - it's a means to achieve TVL and user growth, which causes L1 to appear "adoptive". However, many DeFi projects themselves do not benefit from different blockchains, and some are even hampered by EVM-incompatible chains and poor development documentation.
Therefore, these DeFi projects lack the intrinsic motivation to maintain their market value,Not only is their growth highly dependent on L1 expansion, but their dominance is also limited by the ecosystems they belong to.
The most convincing numbers for this vicious growth pattern come from comparing the token prices of these projects now to where they were at the beginning of the cycle. These numbers show how much value DeFi and L1 projects can retain after the LUNA crash wipes out most of the bubble.
The results show that DeFi has not surpassed Ethereum or L1 in terms of value preservation, although almost all tokens have achieved more than double-digit growth during this period (except COMP, 1INCH, and SNX).
Take UNI as an example, it has returned 128.22% from November 1, 2020 to today, while Ethereum has returned 208.26% (UNI also recently received additional price increases due to the acquisition of Genie and the new NFT roadmap ). In other words, if you have some ETH at the beginning of the cycle and hold on, you will outperform DeFi at this point ("Hold" is important because ETH's max return is lower than UNI), many other DeFi The same goes for tokens.
It’s a sobering look at the value left by these projects at the end of the cycle, and the old model of using liquidity incentives and airdrops to lure users into DeFi no longer works. DeFi brings users to L1 without caring what those users actually do. The end result is that DeFi, at its core, is part of a service industry that can only serve itself—users participate in order to participate in DeFi, rather than use it for other activities. This self-serving sometimes degenerates into a Ponzi scheme.
Of course, price isn't the only thing that matters. There has also been some real innovation in DeFi over the past cycle, the progress of which cannot be quantified by token prices. For example, the pioneering centralized liquidity feature of Uniswap V3 has opened up a huge design space for the emergence of new applications; the demand for block space has inspired a series of block space financialization protocols, such as Flashbots and Alkimiya.
Finally, there are also DeFi protocols that launched their tokens late in the cycle and didn’t have a chance to reach their full potential. For example, projects such as Lido, Ribbon, and dYdX all have multiple product or industry updates coming soon that will further fuel their growth.
After the Ethereum merger is completed, Lido's TVL will get a huge boost. Ribbon offers a large number of structured products that are well suited for on-chain composable environments, but are currently undeveloped. dYdX and some other derivative protocols still have a huge untapped market to capture, especially when you compare their transaction volume to their off-chain counterparts.
the fact is,While L1 was able to overtake DeFi in the last cycle, none of them will be able to grow any further if we can't figure out where new users are coming from.
DeFi will get exciting again when new categories emerge that can bring real users onto the blockchain who have real financial needs that DeFi can serve. While the rise of NFTs and Web3 in the second half of the cycle has demonstrated a different need than over-leveraged tokens, these categories will attract new users and reconnect them to DeFi, which will be the story of the next cycle.
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