Quarter 2, 2022 saw a decline in the value of the DeFi market, where an event in May sent a tidal wave of economic shock through the sector.
BanklessTimes analysis of the quarter-on-quarter performance of major decentralized finance (DeFi) sectors revealed a significant decline in the market capitalization of most sectors. The DeFi sector took a major hit in the second quarter of 2022, with market capitalization declining by $18.6 billion.
This represents a significant drop from the previous quarter, and it appears that the DeFi market is currently in crisis. In its entirety, the DeFi sector has lost 67 percent of its market value compared to the previous quarter.
Across the DeFi market capitalization decrease, Ethereum’s plunge from $3,300 to $1,100 is mainly responsible for the sector’s woes. The collapse of other prominent so-termed ‘stablecoins’ such as TerraUSD Classic (Terra USTC) has also contributed to this market condition. Stablecoins are cryptocurrencies the value of which is pegged, or tied, to that of another currency, commodity or financial instrument.
Terra is the blockchain that houses the LUNA coin and associated coins, including TerraUSD.
BanklessTimes CEO Jonathan Merry explains to Digital Journal: “The DeFi market faces a few pressing issues, the most serious of which is the abrupt increase in DeFi exploits. The crypto hacks by Inverse Finance and Rari have been valued at $1.2 million and $11 million, respectively. These hacks undermine investors’ confidence in some native protocols, which might be one of the reasons for the sector’s free fall.”
Despite the massive reduction in DeFi on-chain activity, the sector has retained most of its users. While the number of users engaged daily has decreased by more than 40 percent, from almost 50,000 to just under 30,000 in the second quarter, there were several occasions where DeFi activity increased.
The first of these increases was in early May 2022 when the Terra catastrophe occurred. Hundreds of thousands of DeFi users flocked to decentralized (DEXs) exchanges like Curve Finance and Uniswap to offload their LUNA and UST holdings as numerous centralized exchanges (CEXs) periodically halted trade for these assets. As a result, trading volumes on these DEXs increased dramatically.
The second occurrence was in June 2022 when the crypto lending, Celsius, imposed withdrawal limits on its customers. Traders flocked to DeFi protocols for permissionless transactions, resulting in a 24 percent increase in daily active users of DeFi protocols.
As well as a wobble for DeFi, trading volume for nonfungible tokens (NFTs) fell 26.2. percent from its peak in June 2021 to $7.6 billion in quarter 2 2022.This drop was led mainly by a decline in the trading volume of NFTs offered on the Ethereum network.
