August saw return of the alts but BTC may not escape September’s shadow
Top DeFi tokens are beginning to show potential beyond speculation
DeFi blue chips have shown excellent fundamentals and are on their way to compete against traditional assets and opportunities.
The cryptocurrency market has experienced a sharp correction over the past two months, with BTC losing half of its value at one point. The NUPL ratio — i.e., the net unrealized profit and loss — has hit the lowest point of 0.41 since late September 2020, per data from Glassnode. In other words, about 60% of investors left the market with a loss despite the more than tenfold rise in BTC prices since mid-March last year.
The huge retracement has clearly dampened market confidence, but as always, the community emphasizes the need to "hodl" through downturns such as this in order to reap rewards down the road.
While there is always the potential for long-term gains with Bitcoin, the market trend is shifting now, and participants could benefit from exploring assets other than BTC — especially those that have shown utility and resilience during market ups and downs.
In this market commentary, we explore DeFi on Ethereum, one of the most prominent niches in the space and one that has grown tremendously since 2020. We discuss how DeFi protocols have gone through various market cycles and are now emerging as assets that have value beyond mere speculation.
DeFi protocols outperformed BTC
Major DeFi protocols on Ethereum performed reliably during the latest market sell-off and have shown more resilience and reliability than before. Comparing returns during the market downturn, the majority of the leading DeFi tokens outperformed BTC since April 14 (when the first and foremost cryptocurrency set its all-time high) to last Wednesday. Additionally, when comparing year-to-date returns, major DeFi tokens extended their advantages due to their rapid price growth at the beginning of May.
Looking specifically at total value locked figures, DeFi shows phases of rapid growth followed by relative stability, even during downturns. From 2020 onward, DeFi protocols have managed to grow by leaps and bounds as the TVL, in USD terms, surged from $692 million to May 12's high of $86 billion — a whopping 123x appreciation.
During the May crash, the same TVL dropped around 44%, which was generally in line with the price of ETH, but the quantity of ETH locked in DeFi protocols dropped only 17% from May 1's high of 10.47 million ETH to a low of 8.68 million ETH.
Moreover, during the same period, there was no decline in terms of BTC locked in DeFi, according to data from DeFi Pulse.
This stability indicates market confidence in these protocols, which is in stark contrast to the initial coin offering boom of 2017 and 2018. With fundamentals such as the number of traders over the last seven days remaining high, at over 200,000, it is clear that DeFi has established itself as a sustainable niche for the long term.
If you're interested in reading more about DeFi's performance, take a look at our market commentary on DeFi's resilience last month.
DeFi fundamentals remain strong
Looking back at the history of major DeFi tokens, we can see that they have solid fundamentals and have actually endured numerous market cycles and development iterations. For instance, Maker, one of today's leading DeFi lending protocols, was founded in 2015 and launched its mainnet in December 2017. Aave, another top lending platform, finished its ICO during the 2017 boom and launched its first iteration in early 2020. Similarly, Uniswap, the most popular decentralized exchange, deployed to the Ethereum mainnet in 2018 and is still going strong with massive daily volumes.
With their decent track record, steady growth and actual utility as relatively viable counterparts to traditional financial services, it would not be wrong to say that some of the top DeFi assets are no longer merely speculative in nature. In fact, some DeFi protocols have fundamentals and financial multiples that are rare to come by in traditional finance, as highlighted by the three examples below.
SUSHI appears to be the most undervalued DeFi asset
Decentralized exchanges have shown remarkable growth over the last year or so, and as they grow in terms of volumes, their governance tokens also appreciate in price.
SushiSwap is one of the top three decentralized exchanges by volume, and the DEX doubled its monthly volume to touch $25 billion in May, as per data from Dune Analytics — and even though June's figures may not be as impressive following the market correction, SushiSwap has a lot going for it.
Firstly, the protocol has been employed on several Ethereum Virtual Machine-compatible chains, such as Polygon, Fantom, Avalanche and OKExChain, which allows it to collect trading fees from multiple venues.
Secondly, SushiSwap's deployment on EVM chains is likely to boost its trading volumes even higher. For instance, its daily volume on Polygon exceeded its volume on the Ethereum network on June 9, which is an indication that low fees have a positive effect on trading volume.
SushiSwap currently distributes one-sixth of its taker fees, or 0.05% of the total trading volume, to stakeholders of xSUSHI (i.e., the staking token for SushiSwap's SushiBar liquidity pool, obtained by staking SUSHI). This mechanism gives the exchange's native token, SUSHI, price support in the event of market corrections and higher valuations during rallies that see trading volumes grow.
Moreover, because SushiSwap has a hard-capped SUSHI supply, at 250 million tokens, it has the best price-to-sales ratio in its class. This P/S ratio — calculated by dividing a project’s fully diluted market cap by its annualized revenues — serves as a relative valuation metric. The higher this ratio, the more premium a buyer pays for the corresponding sales figures. As a rule, lower ratios reflect relatively undervalued assets.
In this case, as of June 9, SushiSwap reaped a total of $836 million in annualized revenue, according to data from Token Terminal, and has a $2.48 billion fully diluted market cap, resulting in a roughly 3x P/S ratio. As shown in the chart below, SushiSwap's P/S is the lowest compared to other protocols, which puts it at an attractive valuation.
Synthetix benefits from the expansion of trading assets
Synthetix is a derivatives liquidity protocol providing the backbone for derivatives trading across the DeFi sector. Investors can trade dozens of assets using Synthetix, including cryptocurrencies, equities, foreign currencies, commodities and more. Now, as the macro trend switches toward allowing traditional instruments to be traded with crypto stablecoins, Synthetix appears to be in a strong position to benefit.
The development of trading assets in this manner will provide global investors with the opportunity to gain exposure to top-rated stocks, such as Apple and Google — an investment that otherwise might not be possible for them, due to regulatory concerns and currency controls.
Under the Synthetix protocol, "Synths" are derivative tokens that provide exposure to a range of assets. Trades between Synths generate a fee that is distributed to SNX collateral providers. A transaction fee of 0.3% is accumulated and ultimately distributed to holders that have locked SNX in the form of sUSD — that is, Synthetix's native stablecoin.
The current total value locked in Synthetix is $1.64 billion, with a fully diluted value of $2.4 billion, per data from CoinGecko. The protocol's official website shows that a total of over 58,000 trades have been made, generating $6.1 billion in volume — and over the last month, the total trading fees have exceeded $22 million.
Because all of the protocol's revenue is distributed to SNX owners, its P/E ratio (i.e., the price-to-earnings ratio, derived by dividing its fully diluted cap by the total earnings) is equal to the P/S ratio.
While the current P/E and P/S ratios stand at around 47x — which is not exactly a low figure — it is at its lowest level over the past year, according to data from Token Terminal. Moreover, this valuation appears more attractive when compared to the recently Nasdaq-listed exchange Coinbase, which has a trailing P/E ratio of 182x.
In addition, Synthetix has been one of the first among DeFi blue chips to embrace Layer-2 scaling. The first phase, which opened a one-way SNX bridge from Layer 1 to Layer 2 has been completed. Full Layer-2 deployment will take time, but the reduced gas fees will likewise boost derivatives trading volumes in the long run. The protocol now provides a 33% annual percentage yield from staking SNX alone, which is likely to attract investors.
Aave saw great potential toward NFT integration and institutional interest
Aave is one of the leading decentralized liquidity protocols in DeFi and currently holds over $13 billion on its balance sheet, of which $3.6 billion is locked in the Polygon network. The protocol allows anyone to deposit funds in exchange for interest, as well as borrow on an over-collateralized basis. According to data from DeFi Pulse, Aave flipped Compound as DeFi's biggest protocol in TVL terms around two weeks ago.
Over the past year, as interest rates in traditional finance have gradually fallen to 0%, Aave has continued to offer decent returns, especially for stablecoins. The strong demand for borrowed funds is the backbone of its ability to keep interest rates high — and Aave has shown strong usage, even during market corrections.
For instance, during the recent sell-off, Aave's outstanding debt fell to $4.4 billion on May 26 but then rebounded quickly to a new high of $5.8 billion, as per data from The Block.
Moreover, Aave has a lot of positive developments on the horizon. Firstly, Stani Kulechov, founder of Aave, recently tweeted that "NFT as collateral is coming to Aave." The integration between nonfungible tokens and DeFi has a lot of potential for growth. For instance, now that Uniswap V3 is minting liquidity certificates as NFTs, Aave could support these NFT-based certificates as collateral against loans.
Meanwhile, Aave has also been attracting attention from institutional investors and has built a private pool for institutions to test out. If the protocol can successfully bridge with traditional finance, it will have a more stable market and a large degree of independence from cryptocurrency volatility.
In terms of valuations, Token Terminal data shows that Aave has an annualized revenue of $408 million and a $5 billion fully diluted market capitalization. This translates to a P/S ratio of 13x, which is close to third-ranked lending protocol Compound (at 11x) and is better than second-ranked protocol Maker (at 22x).
DeFi has everyone's attention
The development of DeFi protocols has not paused with the latest price correction. Instead, as the global economy adapts to changes brought upon by the pandemic, policymakers and institutions seeking financial innovations are now closely monitoring DeFi.
Recently, the Geneva-based World Economic Forum released a "DeFi Policy-Maker Toolkit." This 40-page white paper is another sign that DeFi has the attention of influential think tanks and of policymaking bodies at the highest levels.
All of this means that the DeFi space is quickly approaching the point where we could see a bridge between decentralized and traditional finance. And as technology stands today, it is the latter that appears most likely to need the former to carry it into the future.
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