• The total cryptocurrency market cap is back above the $1T mark, driven by a broader macro recovery, but still remains far below the record ~$3T level seen at the end of 2021.

  • Liquid staking providers have seen large upticks in their native tokens ahead of the upcoming Ethereum Shanghai upgrade in March; it will enable the unlocking of staked ETH.

  • Volume on decentralized exchanges (DEXs) in January was up 27% from a month earlier, at $56B. This marks the first increase in monthly volume since May 2022 (excl. November).

  • On-chain volume of stablecoins has increased over the past 12 months, with USDC in particular growing by 15% YoY. USDC issuer Circle has announced the upcoming launch of CCTP, a cross-chain transfer protocol that will compete against existing bridges to move assets between blockchains.

Global crypto markets experienced a recovery at the start of 2023 alongside the broader macro environment, which has rebounded on the back of easing inflation, China re-opening, and resilient demand. The total cryptocurrency market cap is back above the $1T mark but still remains far below the record ~$3T level seen at the end of 2021. Decentralized finance (DeFi) has seen a similar recovery, and we lay out some of the key developments over the past month (beyond macro) that are contributing to the growth. 

The price of ETH has rebounded to ~$1,600, regaining levels recorded pre-FTX fallout and remaining within the range-bound price movement seen since last summer. DeFi tokens, however, have experienced more amplified price swings. DeFi dominance, a measure of DeFi token market caps relative to the global crypto market cap, increased to 1.2% indicating a larger uptick in prices relative to the broader industry. The higher volatility in DeFi tokens is generally attributed to investors viewing tokens as a leveraged bet on their underlying Layer 1s, but another notable development is the upcoming Ethereum Shanghai upgrade. Expected to take place in March, the Shanghai upgrade will allow validators to unlock their staked ETH tokens. This reduces the liquidity risk of staking ETH. As a result,  liquid staking providers such as Lido Finance, who facilitate staking by individuals who do not meet the validator minimum of 32 ETH, have seen large upswings in their native tokens this month. Lido’s LDO token is up 118% in the last 30 days.

Volume on DEXs in January was up 27% from a month earlier, at $56B. This marks the first increase in monthly volume since May 2022,excluding the spike in November following the FTX fallout. But volume did not increase evenly across all DEXs, and the market is becoming increasingly concentrated in a handful of exchanges. The share of volume commanded by the top five exchanges on Ethereum made up 91% of total activity; compared to 73% a year ago. One reason for this could be lower volumes overall in the past 12 months, but we note that trend was consistent during the November spike.

Uniswap in particular contributed to 58% of activity in January, up from 50% in December. One reason for Uniswap’s increased dominance in the ecosystem is its ambitious expansion plan, which it has continued to execute on in recent months. Uniswap has rolled out its DEX on several Layer 2 (L2) chains including Arbitrum, Optimism, and Polygon, and has managed to capture close to 50% of market share on the latter. Uniswap also recently launched its NFT marketplace in an attempt to bridge the gap between DeFi and NFT users. Investors doubled down on the marketplace with a $165M investment in October 2022, which valued Uniswap’s parent company, Uniswap Labs, at $1.7B.

Increased volume on DEXs is likely also a result of the failures of centralized crypto exchanges (CEXs), which have come under growing scrutiny and pressure to prove their ability to separate and protect customer funds. DEXs share of volume relative to CEXs has grown significantly since September 2022, from 8% then to 14% in January 2023. As user experience (UX) and features in DeFi increase and regulatory guidelines become more clear, it is likely that DEXs will capture a larger share of volume in future market cycles.

There have already been some notable developments in UX and regulation in recent months. Circle, the issuer of USDC stablecoins, has announced it will soon launch its Cross-Chain Transfer Protocol, a permissionless protocol to allow users to transfer USDC across blockchains. USDC has grown its on-chain volume on Ethereum by 15% over the past 12 months and leads over both USDT and BUSD. The new protocol will allow for more features and possibly enhanced security than typical cross-chain bridges. Stablecoins play an important role in onboarding traditional financial activity into DeFi and Circle’s CCTP is likely to offer a more capital-efficient way of moving value across different facets of the crypto ecosystem. On the regulatory side, EU policymakers have set out a comprehensive framework for regulating digital assets, named Markets in Crypto-Assets (MiCA), which awaits a final vote in April. The framework is deemed as one of the most comprehensive guidelines to date, and hopes to attract a large portion of the crypto market to the EU. Especially as regulatory clarity represents a large roadblock for traditional institutions entering the ecosystem.

Finally, there has also been increased activity in DeFi lending in January. Data on daily borrowing shows Aave in particular increased its share of activity, and is consistently capturing more market share than competitors MakerDAO and Compound. One reason for Aave’s growth is its much anticipated deployment of Aave v3 on Ethereum, which took place on January 27th. Aave v3 introduces several new features to reduce costs and increase capital efficiency, and was previously available only on certain L2 networks and Avalanche.

Overall, DeFi activity has had a strong start to 2023, driven by a broader market recovery. Simultaneously, the prospect of clearer regulation, execution on Ethereum’s roadmap with the Shanghai upgrade, and continued innovation by leading players across the ecosystem are enhancing the value proposition of DeFi. While overall activity is likely to remain largely tied to macroeconomic conditions, there are signs that market structure is changing and we may be moving past a bottom in activity. As we move forward into the year, we will continue to follow the key trends laid out in this analysis.

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