Why be bullish on DeFi?

Original authors: Ignas, Stacy

Original compilation: Luccy, BlockBeats

Editor's Note: In this cycle, the most active areas for degens are airdrop mining and meme coins, while seemingly dead are DeFi tokens. However, under the staking narrative, Pendle remains well-insured, rising about 750% during the same period, and the fee switch of Uniswap may become a turning point for other DeFi protocols to emulate. DeFi researchers Ignas and Stacy discussed recent trends, and they believe that there has not yet been a game-changing altcoin season. However, Ignas remains bullish on DeFi, and BlockBeats compiles the original text as follows:

The OG tokens in the DeFi (Decentralized Finance) space seem to be dead.

But the market is about to undergo a significant shift, with a wave of new FOMO set to flood into DeFi. Here are the reasons why DeFi is about to rise:

The performance of DeFi tokens has lagged far behind ETH. The DeFi Pulse Index (DPI) has been declining relative to ETH for three consecutive years. During this cycle, ETH itself has also underperformed BTC. DPI includes tokens such as UNI, MKR, LDO, AAVE, SNX, and PENDLE.

The only exception is PENDLE, which has risen about 750% during the same period.

Why Pendle? The answer is multifaceted. They successfully found a strong product-market fit (PMF) during the points meta period.

Airdrop mining and meme coins are the most active areas for degens in this cycle.

Airdrop mining has reached a turning point: low-circulation projects launch as sell-off airdrop events, while high FDV means more tokens will continuously be sold into the market. But no one wants to buy these tokens! Moreover, behind every successful meme coin, there are 99 that head towards zero.

DeFi OG tokens are the opposite of airdrop mining and meme coins:

First, a large number of DeFi OG tokens are already circulating in the market. For example, the market cap/full diluted valuation (MC/FDV) ratios are:

• SNX - 1

• MKR - 0.95

• AAVE - 0.93

• LDO - 0.89

• UNI - 0.75

This results in less selling pressure for holders. The opposite continues in token issuance: in just six months, we have minted over 540,000 new tokens. Traders' attention and capital are spread thin. However, only a few DeFi OG tokens have solid businesses and revenue sources. If funds start to flow in.

Meme coins thrive in a climate of financial nihilism and oppressive regulatory environments. However, regulatory clarity may bring about the biggest bull market, driven by the following factors:

• Shift from narrative to product-market fit (PMF)

• Clear metrics for success

• Easier access to funding

• A booming mergers and acquisitions (M&A) market

For further reading, refer to the tweet by Hartmann Capital Managing Partner @FelixOHartmann. If regulatory clarity is achieved, the digital asset market may transform in a way that opens the largest bull market to date. Several predictions stand out: · The shift from narrative to product-market fit Currently, there is no compliant way to value most crypto assets, so most crypto asset issuers are even too lazy to create products that can capture value. Ironically, the ability to capture value is a good litmus test to determine whether the product itself truly needs enough funding to persuade consumers to part with their hard-earned money. Instead, crypto founders often build things that consumers care little about, and they have to pay users tokens to use them. So something happens. The quality of building improves, and… · Projects will have clearer metrics to measure success Currently, many digital asset valuations seem purely based on sentiment and freely floating numbers of compensation. While most markets are certainly inefficient, as even stock trading often diverges from its earnings, the stock market does quite well in lifting the cream to the top. Therefore, tokens with the most substantial product-market fit and revenue may begin to dominate conversations and portfolios more frequently. This, in turn, leads to… · A more favorable funding environment for digital assets Funding for digital assets is primarily skewed toward private markets, and the ability to raise funds post-token issuance often turns into a dice roll based on the market regime the founders are in. This leads to a cyclical rise and fall of "alternatives," with each new cycle bringing a batch of new projects that raised a stellar round of funding during private financing, often running out of funds or failing to properly utilize the next bear market, sometimes even if they actually built a good product. Then, the private market rotates to the next queue. Through this rotation, a considerable amount of redundant costs and value is discarded. Thus, stronger fundamentals will allow protocols to raise funds more easily while… · A thriving M&A market Throughout 2022-23, we witnessed many DeFi projects sidelined that could have been prime acquisition targets for better-funded DeFi projects. For example, well-capitalized Uniswap or relatively capital-rich AAVE could expand their products by acquiring some of the well-functioning but undercapitalized participants in the on-chain perpetual contracts and options market, or more substantively enter the real-world assets (RWA) space by facilitating token swaps with one of the leading RWA protocols, which trade at about 1% of Uniswap's market cap. The maturation of individual crypto assets and the entire market may open doors for truly savvy traders and operators to build value in ways we have never seen before in digital assets, significantly accelerating product development and innovation, which in turn brings us closer to adoption. For instance, some Layer 1 blockchains may leverage M&A to acquire much-needed products and turn them into public goods. This would lower user costs while increasing the usage and fuel expenditure of the chain itself, driving the value of network tokens (the fat protocol thesis expresses its inquiry).

DeFi has the clearest product-market fit (PMF) in the crypto space: we trade on decentralized exchanges (DEX), lend in lending markets, and use DeFi stablecoins or LSTs as collateral, among other things. Additionally, established DeFi teams have substantial capital reserves—they can continue to develop for years without selling tokens.

The problem with DeFi tokens is their lack of real utility. However, this situation is beginning to change: the fee switch of Uniswap may become a turning point for other DeFi protocols to emulate, and UNI surged after this news broke. Moreover, regulatory clarity may accelerate the trend of revenue sharing.

Another issue is that DeFi 1.0 is too boring. But as long as prices rise, new things are always interesting. However, DeFi tokens have stood the test of time. They have endured the COVID-19 crash in 2020 and the centralized finance (CeFi) collapse in 2022. As @sourcex44 said, "The only real audit is standing the test of time."

I believe DeFi tokens are now a good choice for contrarian trading. There are currently very few holders of original DeFi tokens, similar to how we accumulated ETH during the bear market while seeing SOL rise. So if the trend changes, only a few OG tokens will attract capital inflows.

Timing is crucial. We are at a turning point, tired of new L2s, celebrity coins, and waiting to see what the next step will be. Perhaps the "next step" will be the established DeFi tokens? I believe they have significant explosive potential.

This post is a response to Stacy's question about DeFi tokens. Most of these tokens are quite boring, but if they have solid businesses, good financial health, and in a context of regulatory clarity and increased token utility, DeFi has the potential to rise again.

Are DeFi tokens at fault? You can blame the decline in portfolio value on Mt. Gox, miner rewards, or any other black swan event. But they are just noise; the real issues are more fundamental: Every market represents some value being redistributed among its participants. At certain points, different markets converge. The spot ETFs for ETH and BTC are a typical example. New capital flows in, but it doesn't go much further; the capital gains from trading ETFs remain in traditional exchanges. Meanwhile, existing cryptocurrency users benefit from the new capital flowing into spot ETFs, and their gains are often reinvested, logically leading to an altcoin season------but this time, things are different. Since March 2024, we have seen several major trends: • A series of airdrops and points programs from top protocols
• Tier-2 protocols eager to announce their token sales and TGEs
• Meme coins becoming a major meta
• TON adding regulations to its ecosystem A few DeFi protocols showing good growth are clearly related to the trends listed above. Now, we have this setup: • The gains from Bitcoin and Ethereum are only partially settled in cryptocurrencies.
• Given the meta, these gains are mostly reinvested into new tokens or meme coins, or used to farm points (locked in new protocols).
• Other DeFi protocols have not experienced any price movements, and holders are starting to lose hope.
• After TGEs, very few new protocols have upward trends, partly due to the selling pressure from airdrop recipients and a lack of new capital.
• Alts are bleeding continuously.
• The frenzy around meme coins continues to attract more and more investors, further diluting the potential new capital for DeFi tokens.
• Bitcoin and Ethereum are minimally affected due to spot ETF investors.
• TON stands by with its regulatory onboarding and mini-apps. Its ecosystem is not yet part of the broader DeFi. Meanwhile, there is no next big meta in DeFi. Improvements in user experience and efficiency fixes are important------but they do not attract new users, similar to early DeFi, NFTs, or even GameFi. • Airdrops are not new.
• Stablecoin yields are not new.
• GameFi is not new.
• Most Web3 protocols' FDVs are already quite fair, but new dApps emerge daily with more profitable terms, increasing the supply of protocols without stimulating new demand. When Ethereum spot ETFs begin trading (possibly in early July), we will see some new capital flow into Ethereum, and crypto-native ETH holders may start to reinvest their gains into DeFi------but the overall situation will not change much. New capital will flow into trend metas (AI, RWA, DePIN, meme coins), while DeFi OGs will struggle to compete with ETH at least. That's okay. New seasons have their own new heroes. What will make DeFi great again? Essentially, two things: new (entirely new) narratives and marketing. The total market cap of DeFi is $90 billion, including LSTs like stETH ($3.2 billion) and DeFi stablecoins like DAI ($5 billion). In contrast, ETH's market cap is $404 billion. Compared to traditional finance, DeFi has many advantages, including more profitable passive income scenarios. But have you seen any well-known DeFi applications promoting their yield products to Web2 users? When using DeFi is as simple as using a classic banking app, and DeFi starts to be elevated to the norm------we will eventually see a new DeFi season. Or, we need a new meta that will inject new capital into DeFi------similar to early GameFi, NFTs, or even DeFi itself. This new meta will receive the most attention, and part of the capital will flow into broader DeFi. Similar to how the frenzy around Hamster Fight or Notcoin drove the broader TON ecosystem. But do we have something like that now? Recently, I talked with Ignas, and we discussed the current trends. Have we reached any game-changing altcoin season before? No. I know this article may be disappointing. Bullish content gets the most attention on CT because people want to believe their pockets will profit, and I know that feeling. Many of the DeFi tokens in my portfolio are bleeding, but I want to be realistic. I doubt DeFi tokens will reach their ATH this year. If I'm wrong, I will be happy.

I apologize for the clickbait behavior; I do believe DeFi has a chance for a significant revival. The narrative shifts in the crypto space are rapid, and the rotation of capital will leave many on the sidelines.

Currently, meme coins are in the spotlight, and you may laugh at my optimism about DeFi. However, the fundamentals are solid. It is important for others to start believing in its significance, and this belief may recover faster than you think. As long as DeFi outperforms other tokens for a while, others will experience FOMO.