Bear Attack: Investors Lick Their Wounds After Grim 2022

Don’t fight the Fed.

That was the incontrovertible truth of a 12-month period that erased 65% of the market value of cryptocurrencies.

A year ago, the U.S. central bank informed investors that the era of easy money was ending and that tough steps would need to be taken to combat rising price inflation.

Few investors heeded that warning, however, as fresh memories of all-time highs for crypto and stock markets continued to drive the action and Bitcoin and Ether opened 2022 at $46,000 and $3,600, respectively. Those levels are now a distant memory.

Twelve months and seven rate hikes later, the capital markets have been taken to the woodshed. Long-dated US government bonds are having their worst year since 1788, stock markets are down 20% or more, and Bitcoin and Ether plunged almost 70%.

DeFi TVL

Back in the first quarter, decentralized finance was chugging along, with total value locked (TVL) peaking above $230B. The multi-chain thesis was alive and well, spawning burgeoning DeFi ecosystems on Layer 1 networks like Polygon, Avalanche, Solana and Binance Smart Chain.

The collapse of Terra and its UST stablecoin in May wiped out a $60B ecosystem almost overnight, and the resulting contagion took down many centralized crypto entities, including hedge fund Three Arrows Capital.

The sector was also plagued by exploits, with a record $760M stolen in October alone and nearly $3B of digital assets lost in 2022.

DeFi TVL stands at just $50B as of Dec. 29, down nearly 80% for the year.

DeFi Tokens

Ether enjoyed a summer rally in the run-up to The Merge but the bottom line is that DeFi tokens were decimated this year.

MakerDAO, Lido, Aave, Curve and Uniswap – the five largest DeFi protocols by TVL – lost more than two-thirds of their value.

Tokens issued by Layer 1 blockchains Polkadot, Avalanche, Fantom, Algorand, Near and Aurora are down 85% or more, while Solana is back to trading in single digits.

Metaverse plays didn’t fare much better. Play-to-earn pioneer Axie Infinity’s AXS token crashed 94%, and Decentraland’s MANA dropped 91% this year.

Of the top 100 digital assets listed by Coingecko, only one DeFi protocol, GMX, managed to post gains in 2022.

Bright Spots

DeFi’s true potential shined through as the bear market took down most of crypto’s large centralized players this year. Crypto lender Celsius rushed to pay off its DeFi loans even as it stalled other creditors and its own customers, showcasing the value of the transparency inherent to DeFi.

Ethereum’s transition to proof-of-stake consensus went off without a hitch, and the network’s Layer 2 ecosystem is thriving on Arbitrum and Optimism. More efficient scaling solutions powered by zero-knowledge proofs are expected to launch in 2023.

Real-world adoption continues to rise, with stablecoins’ total settlement volume hitting a record $7.4T in 2022, beating out every major credit card provider except for Visa.

So, despite the carnage in terms of price action, we’re sure to see some exciting DeFi developments in 2023.