The decentralized finance (DeFi) market has long been known for its exhilarating highs and devastating lows. It has emerged as one of the most thrilling and volatile sectors in the realm of cryptocurrencies, second only to Bitcoin (BTC). In the year 2020, the DeFi sector experienced a remarkable bull market, propelling the total value locked (TVL) in decentralized finance protocols from a mere $1 billion to an astounding $100 billion. However, in 2021, the DeFi market encountered a major correction that caused the TVL to plummet from $100 billion to $40 billion. Such fluctuations exemplify the unpredictable nature of the DeFi space and the risks associated with investing in it.
Despite the inherent volatility of the DeFi market, there are pivotal indicators that traders can leverage to identify sustained bullish momentum within this niche crypto sector. By carefully monitoring three essential metrics namely TVL, platform fee revenue, and the number of non-zero wallets holding tokens, traders can attain valuable insights into the health of the DeFi ecosystem.
TVL stands out as one of the most prevalent metrics used to gauge the overall health of the DeFi ecosystem. Essentially, TVL represents the aggregate value of cryptocurrency assets locked in DeFi protocols. When the TVL demonstrates an upward trajectory, it implies an escalating demand for and usage of DeFi services, which generally indicates a bullish market. Despite the current TVL slightly lagging behind its peak of $52.9 billion set on April 15, 2023, it has experienced growth since the beginning of this year. Since January 1st, the TVL across the crypto market has climbed by $7 billion, surpassing the $45 billion mark.
The measurement of platform fees provides insight into the revenue generated by blockchains for facilitating transactions. Layer-1 blockchains play a critical role in the DeFi ecosystem since they allow for the development of decentralized applications (DApps), enabling users to engage with blockchains without a centralized intermediary. A rise in layer-1 fees suggests an increasing interest in DeFi and a greater utilization of DApps for blockchain interactions. Over the past 30 days, all of the top 16 layer-1 blockchains by market capitalization have witnessed a positive surge in fees. Notably, Ether (ETH) has accrued a staggering 30-day fee of over $2.2 billion when annualized.
The number of non-zero wallet addresses serves as a reliable indicator of active participation in the world of cryptocurrencies. When this figure demonstrates an upward trend, it indicates a growing demand, potentially heralding a bull market. Non-zero addresses indicate users who hold a crypto token with the belief that it will appreciate in value or actively utilize a protocol. For DeFi tokens specifically, the number of non-zero addresses reached an all-time high of 1.1 million addresses on November 8th. Comparatively, on November 8th, 2020, there were only 267,180 non-zero wallet addresses. This surge in non-zero addresses underscores the ever-increasing interest and participation in the DeFi market.
The DeFi space has exhibited both resilience and volatility, overcoming setbacks such as the Terra Luna implosion. However, it is crucial for market participants to exercise caution and consider a range of on-chain metrics and macro factors that can assist in identifying potential bull markets. By diligently monitoring these metrics, traders can gain a comprehensive understanding of the DeFi market’s overall health and potentially detect early signs of a new bull market.
