The DeFi Market Faces a Cold Winter: Challenges and Opportunities Coexist

TVL has significantly decreased, and the value of tokens has severely shrunk. The DeFi sector is undergoing a severe test. Looking back at the prosperous scene of the summer of 2020, when new projects emerged one after another, the "liquidity mining" craze brought annual returns of up to three to four digits, attracting a large number of users and funds. However, with the bear market approaching, the total locked value (TVL) in DeFi has dropped from a peak of $179.1 billion in November 2021 to the current $37 billion.

Even the governance tokens of leading DeFi projects like UNI have dropped by 90%. Some projects that can generate actual returns seem to have entered a reasonable valuation range. What has led to the widespread collapse of DeFi tokens? Has the valuation of DeFi hit bottom? Which DeFi sectors are favored for the future? What opportunities are there for market participants?

The "price and volume decline" of DeFi projects has forced some projects to shut down.

As the TVL of DeFi projects declines, the prices of governance tokens continue to fall, and yields decrease. Even projects considered the safest, such as Curve and Balancer, have encountered issues, exacerbating capital outflows. Against this backdrop, some projects have chosen to actively liquidate and shut down, such as Saddle Finance on Ethereum, Algofi in the Algorand ecosystem, and Friktion on Solana. Market confidence in DeFi seems to have dropped to a freezing point.

The founder of dForce believes that changes in the total supply of stablecoins better reflect the true development status of DeFi. From a peak of $190 billion, it has dropped to the current $125 billion, a decrease of 34%, which is much milder than the decline in TVL, indicating that a significant amount of capital remains in the market. He analyzed several reasons for the decline in governance token prices: first, the selling pressure brought by the unlocking of tokens from projects established after 2020; second, the burst of the bubble, with many projects overly reliant on Ponzi schemes being eliminated by the market; and finally, the impact of regulatory issues on project operations.

Partners at Nothing Research pointed out that DeFi tokens perform well in bull markets primarily because they benefit from liquidity premiums. However, in bear markets, funds shift back to undervalued Ethereum, causing this premium to disappear. Despite the continuous launch of new products by DeFi projects, prices have instead dropped.

A research director believes that the liquidity mining mechanism makes DeFi tokens more susceptible to price spiral effects. When the price of governance tokens rises, the mining yield increases, attracting more funds and further pushing up the price. Conversely, when the market declines, the decrease in yield leads to fund withdrawal, exacerbating the token's decline.

Real yield projects are favored, some may have already fallen out of the "golden pit"

As the market declines, metrics such as fees and price-to-earnings ratio are receiving more attention. Have certain projects that can generate real returns already fallen out of the "golden pit"?

The founder of dForce stated that the evaluation of DeFi protocols now focuses more on real yields, such as the recent popular RWA track, which introduces US Treasury yields into DeFi as a reasonable evolution. From a valuation perspective, many projects' secondary market valuations are already attractive, but most projects have not yet found a sustainable development path. Therefore, not every project has fallen out of the valuation "golden pit".

A research director believes that using traditional financial metrics such as P/E ratio to evaluate projects is an advancement. Only a few projects can clearly calculate P/E, mainly in the DeFi category. In the PoS public chain, ETH performs well, with a deflation rate of 0.2%, and a staking yield of about 4% after one year. In the DeFi space, assets like MKR have a P/E below 25. This stricter valuation standard increases the certainty of purchasing assets with real returns, while also imposing stricter requirements on other projects.

A certain researcher pointed out that due to the smaller market size, it is easily influenced by emotions, often resulting in a divergence of price from value. In addition, in the Web3 industry, emotional values such as culture and consensus are amplified. The success of DeFi projects often relies on community support, and this culture and consensus may trigger price fluctuations.

Current Practical Strategy: ETH Staking and Stablecoin Deposit Earnings

In a bear market, the opportunities for safely obtaining returns have decreased. A certain project's DAI deposit rate offers a good option. This project uses DAI collateral to purchase short-term U.S. Treasury-like products and distributes the earnings to DAI holders. As of October 16, the issuance of DAI is 5.55 billion, but only 1.69 billion DAI has been deposited in the DSR contract. Even if this portion of funds yields a 5% return, after deducting costs, the project still has a net profit of about 70 million dollars per year.

Another project launched a similar product this month, currently offering a yield of 6.85%. Due to the zero-cost swaps between USDC and DAI through a certain project, and an initial yield of 8%, a strategy combining ETH liquid staking and DAI deposits has emerged.

An investor shared their asset allocation and yield strategy. They stated that currently, the main funds are in a certain project, followed by ETH staking, corresponding to the two largest positions ETH and USDT, with an average yield of around 4-5%.

In addition to the widely watched DAI deposits, there are other options worth considering. For example, some projects' products also offer competitive yield rates. If you're pursuing higher returns, you might consider providing liquidity for ETH liquid staking derivatives on mature DEXs, or looking for opportunities on new public chains. However, higher returns also mean greater risks. Additionally, many RWA projects claiming to deliver real returns have emerged in the market, and investors need to be cautious in distinguishing them; long-running projects with a solid background are more trustworthy.

Promising Future Tracks: Native Yield, RWA, Stablecoins, Infrastructure

Decentralized Finance has developed multiple tracks, each with its own opportunities and challenges. Even the leading DEX with a large user base finds it difficult to bring substantial benefits to protocols and token holders. Although on-chain derivatives exchanges are considered to have vast potential, they currently rely heavily on trading mining to capture the market.

For the promising DeFi sub-sector in the future, a certain investor particularly emphasizes projects that can generate native yields. Although some DeFi projects can bring traditional yields into the crypto space, which helps retain existing funds, projects that can autonomously generate native yields are the key to attracting new users.

A certain founder focuses on decentralized stablecoins, believing that they are at the core of DeFi as the infrastructure of crypto finance. He stated, "Recently, decentralized stablecoins have been introducing RWA asset yields, and there are many opportunities in this niche around the combination of decentralized stablecoins, RWA real yields, and LSD assets."

A certain researcher is optimistic about the development of infrastructure, such as Web3 wallets, cross-chain solutions, and on-chain data. This infrastructure is crucial for promoting the development of the Decentralized Finance ecosystem. In addition, RWA is also worthy of attention as it is the connection point between the external world and DeFi, helping to facilitate the integration of DeFi with the real economy, providing broader application scenarios and opportunities for DeFi.

The value of DeFi projects has already become apparent; survival is the top priority during a bear market. DeFi is a rapidly developing field, and almost all leading projects are actively iterating and updating, some of which may become the driving force for the next bull market.