Advisory
This document is not financial advice and is for education purposes only. Always do your own research before investing or trading cryptocurrencies.
Introduction
Welcome to volume four of the Step Finance Newsletter. In this volume, we will take a dive into current DeFi trends, and shifts we have seen in the DeFi market over recent months, while addressing the reasons against the drain of confidence some believe is present in the Solana DeFi market.
Reasons for Concern
User Base
Since February 2021, we have seen the amount of fee paying active users on Solana sky rocket, with fee paying active users up approximately 2,200% since February 2021.
However, as we can see in the chart above, there has been a noticeable drop off in Solana active fee paying users since June 2022. This has seen the active users almost half from 420k to approximately 225k users in just over one month.
At first glance, this major drop appears to be due to the overall poor performance of the Solana DeFi market. We can see that this drop in active users has occurred in line with a prolonged period of TVL decrease across multiple major Solana DeFi platforms, as demonstrated below with Raydium (which offers farming pools of varying risk).
USD TVL Changes Across Solana DeFi
These TVL drops have not occurred only on Raydium. Rather, we have witnessed significant TVL drops across varying categories of Solana DeFi protocols since 01/02/2022. Since this date, Solana DeFi has suffered an average TVL loss of −64.71% (average % change) across a wide range of commonly used protocols, equating to an overall loss of $2.42bn USD.
Protocols analysed demand 38.1% of all Solana program instructions across the network, displaying the scale of this somewhat alarming trend.
Counteracting Negative Sentiment
Once we pull back from the USD charts and flip to the SOL charts, we can see that the losses are not as great as some analysts and media sources suggest. The USD charts look atrocious due to the poor performance of SOL since 01/02/2022, down from $111.26 USD to $41.21 USD with an overall loss of -62.96%, in line with the vast majority of cryptocurrencies.
When adjusting SOL token performance into the chart, we can see a shift currently occurring across Solana DeFi, with some protocols increasing in SOL TVL, with others lower.
What is Changing?
Since 01/02/2022, we can see that the selected Solana DeFi protocols have on average lost -3.04% of their SOL TVL. Considering the overall market performance, this displays an impressive rate of user retention. However, some protocols have lost a significant percentage of their TVL, as displayed noticeably with Orca (TVL down -53.54%).
What we can derive from the data above is that there has been a seismic shift from DEX’s (often high risk pools) to CDP and lending protocols (low risk).
So is this TVL shift towards low risk protocols with minor overall TVL losses the norm? Or is this just occurring with Solana? In order to address this, comparisons against the Ethereum DeFi market will be made.
Comparisons Against the Ethereum DeFi Market
Trends
Firstly, the negative TVL (USD) action is currently the norm across the DeFi space. This is demonstrated upon analysis of the Ethereum DeFi giants displayed in figure 9, all of which have a negative TVL differential between 01/02/2022 to present, with $27.473bn (−48.46%) USD evaporated during this time period.
Again like Solana, this major negative TVL loss is somewhat mitigated when evaluating against ETH, rather than the USD, as displayed in the figure below.
Larger Losses
However, upon closer evaluation, the Ethereum DeFi market displays an alternative trend to the Solana DeFi market. While Solana DeFi has shown shifts towards low risk protocols such as Solend and Parrot Protocol; Ethereum DeFi is displaying losses across the board. The only DeFi application to increase its TVL differential is Uniswap at +59.39%. This cannot be classed as a shift towards DEX’s due to the negative TVL differentials of both Sushi Swap and Balancer. Therefore, Uniswap should be considered an outlier.
TVL Adjustments Compared
When comparing the Ethereum and Solana DeFi markets, we can see that there is a lack of correlation between the two (in regards to the shift of TVL). This is displayed by the significant differences in TVL percentages.
The main takeaway from the table below is the exceptional performance of the Solana DeFi market in comparison to Ethereum. On average the Solana DeFi market sectors are maintaining their TVL more effectively, with a +40.49% average over Ethereum DeFi, while outperforming ¾ identified sectors.
Conclusion
It is no secret that numerous DeFi protocols are struggling in the current bear market. We only recently saw the expiration of the Fabric Synthetics Protocol. However, as displayed in this week's analysis, Solana DeFi applications overall are performing admirably, holding TVL effectively, while outperforming the Ethereum staple DeFi protocols of the market. The slowdown of users is natural in a retracting market and should not be over evaluated during this period of negative worldwide economic activity. Overall, hope in the Solana DeFi market is not lost. Rather, the Solana DeFi market has displayed significant strength in comparison to the behedgemons of the DeFi space.
Author: @page_analyst