ETH prices have turned bearish following the successful completion of the merger that upgraded the Ethereum network from PoW to PoS in September. This shifted the narrative back to other macroeconomic factors. This DeFi market report evaluates key performance metrics before and after the Ethereum merger on September 15th.
Cryptocurrency markets rebounded from the June downtrend along with global markets, with ETH showing a much-improved recovery compared to BTC. As traders ramped up spot buying amid potential airdrops (ETHPow) and the dynamic tokenomics that the PoS upgrade brought, ETH’s price peaked at $2,000 in August. ETH prices have since crashed to ~$1,350 as gains kicked in and the narrative shifted back to the macro environment.
Source: Coin Market Cap
DeFi tokens also followed general market trends, but with greater price volatility. DeFi dominance is a helpful metric that evaluates the market cap of the top DeFi protocols as a percentage of the overall crypto market. During the second quarter, which marks a bearish market, DeFi dominance declined and later improved on the market rally from 0.8% in June to ~1.2% in recent months. The reason for this could be that DeFi protocols rely on more prominent Layer 1 ecosystems and as such have similar leverage as the native Layer 1 tokens.
Source: The Block
Dynamic dominance notwithstanding, metrics show that users are generally cautious about DeFi. Its cross-chain TVL (Total Value Locked) falls below $55 billion, down -22% from its peak in August. The decline resulted from the government crackdown on Tornado Cash when it was under investigation by OFAC (the Office of Foreign Assets Control) in August.
A suspected developer of Tornado Cash was arrested in Amsterdam and smart contracts related to the protocol were sanctioned, leading to widespread repercussions. Those impacts include the banning of 38 wallet addresses associated with Tornado Cash by Circle (the organization behind USDC). Additionally, the MakerDAO community suggested reducing the centralized security levels of their DAI stablecoin.
Another recent event responsible for the DeFi market downtrend is Wintermute’s $160 million hack. The exploit focused on a vulnerability discovered in the Profanity-generated vanity address (a unique wallet address used by Wintermute to interact with third parties and avoid expensive gas fees on the Ethereum network). Although Wintermute claimed that its solid balance sheet would handle the damage inflicted, the hack weakened investor confidence in the market maker.
Source: The Block
The low trading event has been clearly visible on decentralized exchanges with low trading volumes over the past few months. This is because investors favor blue-chip digital assets over altcoins during times of greater uncertainty. This explains why DEXs keep losing their trading share to Centralized Exchanges (CEXes), as shown in DEX to CEX spot trading volume below.
Source: The Block
The chart below shows the DEX trading volume and how it has decreased.
Source: The Block
This trend could continue with the latest Consumer Price Index (CPI) data from August. The daily index of liquidity pools shows that users are re-staking their assets in DEXs after the merger. Weeks before the merger, DeFi users were withdrawing liquidity from the pools for two likely reasons:
1. To benefit from the potential Ethereum Airdrop (ETHPow) or
- Due to the loss of confidence caused by the Tornado Cash controversy.
However, recent data suggests that the trend is reversing and could bring staking levels back to the higher levels seen in July.
Source: The Block
Although trading volume on the DEXs plummeted, smaller exchanges like Curve were negatively impacted. Because of this, Uniswap increased its volume share, posting ~64% versus ~48% in July. One of the factors responsible for Uniswap’s resilience is its high liquidity (which reduces slippage) compared to its DEXs (and some centralized exchanges) today.
Source: The Block
DeFi lenders saw borrowing surge ahead of the merger, with daily net borrowing (represented as negative net borrowing) hitting a 3-month high across all lending logs in September. The possibility of an ETHPoW airdrop has fueled the increase in ETH borrowing on Aave. Investors have reportedly borrowed 100% of available ETH at rates up to 190% APY. However, lending has leveled off after the community pioneered efforts to stop it. Euler Finance and Hop Protocol both experienced similar credit events, while lenders like Compound have a limit on the amount that can be borrowed from their protocol.
Source: Dune Analytics
Source: Aave
To conclude, the monthly earnings of the DeFi protocol fell to a yearly low of $60 million in September due to the drop in TVL and trading volume on exchanges. Despite the overall decline, Aave benefited from increased activity on its platform in August, posting almost triple the revenue of the previous month (July).
Source: The Block
Conclusion
Weeks before the merger, some significant market trends related to user activity in DEXs and lending protocols emerged. The near-term impact of the merger on token prices has been observed to fade, shifting attention back to broader fiscal policy. Regardless, DeFi innovations have shown persistence and are already showing signs of liquidity returning to exchanges. With energy consumption down 99% and a deflationary native currency, the future impact of a successful merger on Ethereum cannot be overstated; The ecosystem is now entering a new phase of adoption.
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