Will there be a new “DeFi summer” in the next bull market?

Will there be another "DeFi summer" in the next bull market?

Author: Terry

Publisher: Plain Language Blockchain (ID: hellobtc)

The world of cryptocurrency is never short on narratives. From the upgrade of Shanghai, BRC20, Meme, and even the repetitive halving narrative, each hype stirs up new market attention. The rotating evolution of some of these key narratives is also an opportunity worth paying attention to.

Among them, with the “DeFi Summer” that started in 2020 now fully three years old, some narratives worth paying attention to have emerged in many DeFi projects. The stablecoin market has also experienced a significant structural adjustment in the first half of this year, with interesting changes in both total quantity and structure.

01. Development and Changes in the Total Quantity and Structure of Stablecoins

As a relatively small, semi-closed market, the rise and fall cycles of the cryptocurrency industry are generally determined by changes in the volume of stablecoins in USD, and the total quantity and structure of stablecoins across the network have changed significantly this year, especially recently.

On the one hand, since mid-to-late February, affected by the overall market environment and the subsequent Silicon Valley Bank event, the total quantity of stablecoins across the network has entered a downward trend from $136.3 billion, and in about four and a half months, has decreased by about $7.5 billion.

Source: Coingecko

And the main changes during this period are mainly in three dimensions:

First, since the U.S. regulatory agency closed Silicon Valley Bank on March 10, the net outflow of USDC tokens has exceeded $15.7 billion, and the total circulation has dropped to about $27.7 billion, a decrease of about 36%, at an alarming rate.

This has also led to a series of chain reactions, including DAI and FRAX, which use USDC as their main reserve asset, being severely affected, especially DAI, whose circulation has dropped from about $5 billion to about $3 billion at the time of writing, a decrease of nearly 40%.

BUSD has also been restricted by regulatory pressures and has been continuously destroyed, with a decrease of more than $4.5 billion from March to now, and now has decreased to about $4 billion, already halved.

Secondly, USDT’s position as the “king of stablecoins” has become more solidified, with its total supply skyrocketing from $70.9 billion to $83.4 billion at the time of writing, an increase of over $12.5 billion, while the circulation of USDC, BUSD, and DAI has been on a decline.

Lastly, TUSD, which is newly supported by Binance, hovered around $2 billion for several months after reaching the $2 billion mark in mid-March.

However, it is worth noting that since June (especially in mid-to-late June), there have been some small changes in the major stablecoins: the downward trend of USDC, BUSD, and DAI has temporarily paused, and the growth trend of USDT has also begun to pause (but it has undergone a transfer of liquidity from Tron to Ethereum, worth several billion dollars). Only TUSD started printing money for about half a month, and its market value increased by $1 billion, an increase of more than 50%. At that time, the total market value of stablecoins on the entire network remained at around $129.6 billion.

In other words, in June, when the market value of USDT did not change, TUSD’s $1 billion increase in circulation exactly offset the slight decline of USDC, BUSD, and DAI. In addition, in June, Binance began to delist a large number of related trading pairs of BUSD and BNB, further concentrating liquidity.

During this period, it coincided with the time when BNB stopped falling and when Bitcoin and other cryptocurrencies began to rise sharply. From the perspective of incremental funds, TUSD’s increase in circulation may have played a crucial role in supporting/pushing the market.

Whether the changes of USDT, USDC, BUSD, and TUSD in the second half of the year, especially whether USDT can maintain continuous growth and USDC will stop its downward trend, will likely have a significant impact on the market again.

02. DeFi Blue Chips Embrace RWA

In addition to stablecoins, the introduction of RWA is also a variable worth paying attention to. Recently, DeFi’s old blue chips, represented by MKR and COMP, seem to be gradually waking up and rising in the secondary market, with a close relationship with RWA.

First of all, MakerDAO, as a DeFi project that was the earliest to focus on real-world assets (RWA), began in 2022 to try to enable asset initiators to convert real-world assets into tokenized tokens for loan financing, and recently it has taken advantage of the enthusiasm for RWA.

Especially with the recent changes in the stablecoin market, this is also the key to further expanding the usage scenarios of DAI – whether it is DAI or other stablecoins, they have mostly relied on the significant growth of stablecoins linked to fiat currencies such as USDT and USDC before they have grown.

Including USDC being “skinned” into DAI within MakerDAO, it is only after this that it can further meet the decentralized needs of some users without KYC, and promote its development only after having this anchor.

Nowadays, after the USDC incident, RWA can serve as one of DAI’s new anchors to some extent , and assets with no-risk yields that are currently higher than most DeFi yields, such as US government bonds, can be tokenized and introduced into DeFi to further broaden the income distribution sources for DAI and DeFi. It is equivalent to using the income from real-world assets such as US government bonds to support the development of DeFi.

At the same time, Compound is also beginning to double down on the RWA track: Jayson Hobby, former product manager of Compound Labs, took over as CEO of Compound Labs, while Compound founder Robert Leshner submitted documents to the US Securities and Exchange Commission (SEC) regarding the new company Superstate.

The new company reportedly will use Ethereum as an auxiliary record-keeping tool to create a short-term government bond fund that will invest in ultra-short-term government securities, including US government bonds, government agency securities, and other government-supported instruments.

In short, Superstate is committed to tokenizing US government bonds on Ethereum , for example, by purchasing short-term US government bonds and tokenizing them on the chain, using Ethereum as the ownership record to track the ownership share of the fund, and supporting direct trading circulation on the chain.

Of course, whether MakerDAO or Compound, the core reason for choosing to focus on the RWA track, especially targeting US government bond yields, is that the current risk-free US government bond yield has exceeded 5%, far higher than the returns that most DeFi products can provide.

However, such a high risk-free return is placed here, and it will certainly absorb some liquidity from the existing cryptocurrency market funds in the early stage (which is equivalent to providing a channel for on-chain funds to invest in traditional financial assets), so the vigorous development of RWA seems to be short-term bearish and long-term bullish for the market.

03、 New Progress in Decentralized Stablecoins

In addition, old DeFi projects such as Curve and Aave are focusing on stablecoins (see “DeFi Track Stagnation: Can Overvalued Blue Chips Come Up with New Ideas?”).

As of the time of writing (July 11, 2023), the top two decentralized stablecoins are still old faces, with DAI at $4.3 billion (third place) and FRAX at $1 billion (sixth place), where DAI has dropped from over $7 billion at the beginning of the year to its current level of $4.3 billion, while FRAX has remained relatively stable over the past year with no increase or decrease in circulation.

Source: Coingecko

Although DAI has surpassed BUSD in terms of market capitalization, it is actually shrinking overall, due to its being affected by the USDC anchor during the Silicon Valley Bank scandal in March.

FRAX, on the other hand, is related to the collapse of UST/Terra in May 2022, which caused a huge shock to the algorithmic stablecoin track, and FRAX’s volume quickly shrank, dropping from $1.5 billion to around $1 billion in just one month, and has remained stable for the past year.

Overall, it is highly likely that the trends of DAI and FRAX, these two decentralized stablecoins, will continue in the long term without any major surprises, while the performance of the new decentralized stablecoin crvUSD is quite impressive:

Since its launch on May 18, the amount of crvUSD minted has exceeded 55 million coins as of the time of writing, and it has successively supported the minting of sfrxETH, wstETH, WBTC, WETH, and ETH collateral, basically covering the optional market including mainstream LSD assets.

At the same time, Aave’s native stablecoin GHO should also be on the way to launch. As two top DeFi projects with currency market and lending scenarios respectively, the launch of their stablecoins means that there are enough scenario supports and it is likely to bring new variables to the decentralized stablecoin market and even the DeFi track.

04. Summary

Overall, the current hot topics and trends in the market are lacking, with direct investment and financing data dropping by 80% year-on-year. The rise of DeFi concepts such as RWA is also a new package of old wine, and it is only hanging by a thread relying on the ETF application of traditional institutions such as BlackRock based on news.

In this context, the liquidity of stablecoins such as USDT on the funding side has become a key observation indicator. As mentioned at the beginning, as a relatively small volume market that is semi-closed, the overall cycle of the cryptocurrency industry still depends on the changes in the volume of stablecoins denominated in US dollars.

Among them, the relative changes of the three stablecoins USDT, USDC, and TUSD outside the total amount of stablecoins will also have a magnified impact on the prices in the secondary market, which is worthy of our joint attention.