The crypto market has been stable in October relative to the broader macro environment. As a result, we are seeing a convergence in volatility of ETH and equities which may point to a decoupling of crypto and traditional markets.
TVL remained at ~$70B throughout the month despite a series of high-profile hacks (Binance and Mango Markets) and SBF’s controversial proposal for DeFi regulation.
Activity on DEXs continued to decline but predominantly affected Uniswap, putting a dent in its dominance. Lending protocols are seeing a fall in outstanding debt, along with a fall in stablecoins in circulation.
The price of ETH has hovered around $1300 for the majority of the month following a post-Merge dip. Prices have since increased to ~$1600 in line with a broader market recovery ahead of the November meeting of the Federal Open Market Committee (FOMC). A notable trend is the decline in 30-day realized volatility of ETH and BTC over the month, while similar volatility in equities has increased amidst poor quarterly earnings. This could indicate a potential decoupling between crypto and equities markets.
In decentralized finance (DeFi), market caps of the top 100 tokens increased relative to ETH, before reverting at the end of the month. The reason is that ETH has seen more amplified price swings in the Merge period, which is causing similar swings in the market cap of DeFi tokens relative to ETH. As we analyze in the following sections, DeFi activity has not fundamentally changed in the past month but there are signs of stability.
DeFi/ETH Market Cap Ratio
Total value locked (TVL) in DeFi has remained relatively stable over the past month at around $70B. This is below 2021 highs of $230B but nevertheless represents an 11% increase from the summer months. TVL seemed to be unaffected by a series of adverse events this month including high profile exploits and uncertainty around regulation. A possible reason is that the majority of users that would have left the ecosystem during the downturn have been washed out, leaving a remaining portion of power users in DeFi that are stickier and less affected by macro conditions.
Among the exploits was the manipulation of Solana-based Mango Markets. $114M was lost through a smart contract protocol loophole which saw malicious actors manipulate the native MNGO token. Meanwhile, Binance’s cross-chain bridge was attacked for a whopping $570M after a vulnerability enabled the hacker to withdraw 2M BNB tokens. Binance was able to limit 80-90% of the losses by pausing the network and coordinating with validators; a result of Binance Smart Chain being more centralized which has historically been viewed as controversial by the crypto community.
On the regulatory side, Sam Bankman-Fried (SBF), founder of centralized exchange FTX and trading firm Alameda Research, came under fire for his proposals on DeFi regulation. SBF suggested that front-end DeFi interfaces should follow know-your-customer (KYC) obligations, which would require many popular protocols to, at the very least, link to centralized entities to perform the checks.
Volume on decentralized exchanges (DEXs) fell 10% over the past month to $51B, but predominantly affected the leading exchange Uniswap. Share of volumes on Uniswap grew from 36% to 61% between May and August as users rapidly left smaller exchanges during the downturn. Activity in October, however, saw volume shares picking up on exchanges like Dodo and Curve, with Uniswap dropping to 57%. This could be a sign of confidence among DeFi users who are sticking to more specialized exchanges.
A similar observation can be made when comparing DEXs to their centralized counterparts. DEX to CEX volume saw an uplift in October to about 12%. This indicates that volume on centralized exchanges fell more than that on DEXs, which reiterates the notion of remaining users in DeFi more likely sticking with the ecosystem.
In line with Uniswap dominating exchange volumes, it also leads monthly protocol revenue, at $33.5M in October. This represents 69% of the total $44.5M across protocols, up from 64% in September. Interestingly, Uniswap grew its share of revenue despite losing share in volume, which indicates that smaller exchanges struggled to translate their growing share of volumes into revenue for users and token holders. This is most likely a result of a difference in fee structures, e.g. Curve charges as little as 0.04% on pool fees vs. Uniswap’s 0.3%.
Net added liquidities in DEX liquidity pools have been rather muted in the last month with a few exceptions of liquidity leaving the ecosystem around mid-October. These outflows were consistent with a price drop in ETH at the time. Similarly, inflows picked up at the end of the month ahead of the FMOC November meeting. Overall, net added liquidities have been more stable than in previous months alongside stability in ETH prices.
The amount of DAI outstanding on the leading DeFi lending protocol MakerDAO has decreased from $6.4B to $5.8B over the month of October. Lending activity is largely a function of idle capital and interest rates, which makes it strongly related to broader monetary policy. Tightening throughout 2022 has spurred a large outflow of capital towards government treasuries, where yields on short-term debt reached 3.7%. Meanwhile yields on stablecoins in leading DeFi protocols range between 0.7-1.5%, which is driving investors out of DeFi and into traditional financial markets. As such, we have seen a decrease in the amount stablecoins in circulation, including DAI. Theoretically, the difference in yields should be arbitraged away, but high friction between crypto and fiat is likely making the process less worthwhile for investors. Especially as uncertainty still exists around future monetary policy decisions.
1-Month Treasury Rate
Overall, activity across DeFi is showing signs of stabilizing. A large portion of capital has been washed out as a result of the broader macro environment, and remaining users appear to be less sensitive to adverse events. Despite total trade volumes falling, activity on smaller exchanges has picked up slightly and liquidity is entering pools on the back of an uptick in ETH prices. Looking forward, the question remains whether the further increase in rates announced at the November FMOC will put a larger dent in the ecosystem.
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