4th Quarter Market Outlook: The CoinDesk DeFi Index (DCF)
DeFi was a big winner and loser following FTX's collapse. The dYdX decentralized exchange was the best performer over the period.
The CoinDesk DeFi Index (DCF) is designed to measure the market capitalization weighted performance of computing protocols that are included in Digital Asset Classification Standard (DACS). Inclusion of a digital asset in CDF is subject to minimum trading and exchange eligibility requirements. DCF reflects the DACS as of the prior month, so the decentralized finance (DeFi) sector refers to digital assets that support financial products and services that are not facilitated or controlled by any central entity. These financial products and services are accessible without any barrier to entry or identification requirements. All DeFi tokens must be created on smart contract platforms and offer open-sourced liquidity with the ability for token holders to reserve governance rights.
If there was one crypto sector that had both winners and losers from the FTX debacle, it was decentralized finance (DeFi). As worries grew about the stability and future of centralized exchanges (CEX), tokens associated with decentralized exchanges (DEX) soared.
The industry contracted, and some large decentralized lending platforms took big hits from loan defaults. Total value locked (TVL) in the DeFi sector – a key barometer of overall interest – lost around 22% in value during the quarter, to $41 billion, data from DeFiLlama shows.
As of Dec 15, 2022, DCF lost 18.2% for the quarter to date (QTD), and included 45 digital assets assigned to 12 industries in seven industry groups according to the CoinDesk Digital Asset Classification Standard (DACS). Fully 38 constituents remained in DCF the entire fourth quarter with 31 or 81.6% losing and 7, or 18.4%, gaining.
- Best performer: dYdX (DYDX), gained 30% and is part of the DACS CLOB Industry assigned to the Exchanges Industry Group. The advanced decentralized exchange appeared to have been one of the few protocols to benefit from the FTX fiasco, as CEX trust eroded and funds were seen to be heavily moved back on-chain.
- Worst performer: Maple lost 79%, and is part of the DACS Lending/Borrowing Industry assigned to the Credit Platform Industry Group. The largest unsecured crypto lending platform has been grappling with a $54 million debt crisis while gearing up for a major system upgrade. As CoinDesk recently reported, Maple Finance was badly affected by the FTX collapse as borrowers were forced to default on their loans. Unlike traditional collateralized DeFi credit platforms that have a built-in auto-liquidation function to protect the protocol, Maple relies on a centralized group of individuals to approve uncollateralized loans. However, both dYdX and Maple are relatively small, with a combined total weight just over 1.0% of DCF at the end of the period.
- Other notable winners: Aragon (ANT), which supports decentralized autonomous organizations, gained 27%.
- Biggest asset: Uniswap, comprising 37.3% of the sector. While UNI lost 9% QTD, it ranked as the 10th best performing asset in the sector. According to DefiLlama, TVL across DeFi protocols is down 22% on the quarter, to just over $40 billion, the lowest since March of 2021, and down from a high of nearly $200 billion almost exactly a year ago.
Commentary and outlook
Despite the downturn, the DeFi’s options space likely will grow in the long run as the benefits of transparency and not needing custody become clearer, according to Greg Magadini, director of derivatives at crypto analytics firm Amberdata.
“We've seen an appetite for passive yield” throughout 2022, Magadini told CoinDesk in an interview. “This created the emergence of DOV, or DeFi options vaults, to create strategies of selling cover calls or cash-secured puts.”
In 2023, Magadini said, protocols using an order book model – meaning participants wait to have their limit orders fulfilled – rather than an automated market maker (AMM) that process all transactions automatically might face challenges as they face direct competition against centralized finance (CeFi), which “has a better mousetrap.”
Crypto-focused asset manager Hashdex said in a 2023 outlook report that blue chip DeFi protocols with strong revenue – such as Aave, Compound and Uniswap – will get stronger on the back of their well-designed tokenomics as they “seek out new business models.” That includes Uniswap and its “fee switch” initiative,” according to the report.
More from this report
(Fourth quarter performance as of Dec 15, 2022.)
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