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DeFi Shined in a Mad, Mad, Mad, Mad Year in Crypto Markets

DeFi was a steady story in a mad year in the crypto markets.

DeFi Shined in a Mad, Mad, Mad, Mad Year in Crypto Markets

This article is part of our Year in Review series.

Well that was insane. 

The crypto markets in 2021 set a new standard for volatility, wealth creation, and outright wackiness. We watched agog as the market cap for crypto topped $3T. We were equally astounded to see doggie tokens and joke tokens and gaming tokens capture the imagination of investors. And then there was Elon Musk creating and vaporizing billions of dollars in value at the drop of his latest whimsical tweet.

Yet underneath the madness an orderly narrative unfolded, and it was all about DeFi. In a year when Ethereum and its ecosystem(s) demonstrated its utility and agility, the sector’s market value climbed more than 600%, to $163B, and total value locked (TVL) multiplied 12 times to $245B. 

Just look at some of the numbers from 12 months ago. On Jan. 1, 2021, ETH was trading at only $738 compared to its current price of $4,091. A year ago Uniswap’s market cap was a tidy $1B, and now it’s almost $9B. And Axie Infinity, a blockchain game, became a market darling this summer and its token, AXS, multiplied more than 170 times in value. It ushered in a whole new category in crypto — GameFi. 

Long-standing blue-chips Uniswap, Aave, Curve, MakerDAO, and Compound solidified their domination of DeFi, with the five protocols accounting for 29.4% of TVL and 10.4% of market cap. Meanwhile, newcomers such as Convex Finance, OlympusDAO, and Abracadabra also emerged as leading protocols.

And Layer 1’s embraced Ethereum Virtual Machine (EVM)-compatibility in a bid to attract DeFi TVL even as Ethereum’s skyrocketing fees and usage clouded the picture for some investors. Binance Smart Chain, Solana, Terra, and Avalanche captured significant market share while forging a cross-chain ecosystem and became a major storyline in the second half of the year.

DeFi tokens market cap Source: Coingecko

It didn’t have to go this way. The crypto markets entered 2021 with some serious overhang. The Covid-19 pandemic was roiling the global economy and the bitter U.S. presidential election injected even more volatility into the markets. 

However, institutional entities had begun accumulating BTC amid increasing interest in Bitcoin as a non-correlated store of value, plus there were expectations Bitcoin’s third block reward halving would significantly reduce the creation of new supply and usher a new market cycle. 

The launch of the Ethereum 2.0 beacon chain in early December also went off without a hitch, and ETH roughly doubled in a month amid a series of upgrades that will help complete the transition from proof-of-work to proof-of-stake consensus in the first half of 2022. 

Sure enough, the year kicked off with a bang. The Chicago Mercantile Exchange’s launched Ether futures contracts, which stoked demand from Wall Street. Then Tesla invested $1.5B in Bitcoin and announced it would accept the cryptocurrency as payment for its electric vehicles, sparking a flurry of institutional investment and further promoting crypto to mainstream investors. Then came Dogecoin and the tongue-in-cheek speculative frenzy that sent the token soaring 173% over two weeks in May.

The NFT boom coincided with the crypto markets surge to all-time highs in November. NFTs also dovetailed with the rise of Axie Infinity, GameFi, and other blockchain games that utilized the innovations in their tokenomics.

Dogecoin was rapidly eclipsed by NFT mania. Dapper Labs’ NBA Top Shot proved the use-case for blockchain-powered collectibles, and in March digital artist Beeple stunned the art world by selling his work, Everydays, for a staggering $69M at Christie’s, the venerable auction house. It was the third most expensive work ever sold by a living artist. For all the scorn it triggered from the cognoscenti it also sparked fascination from budding artists and collectors. And celebrities piled in, ranging from Snoop Dogg to Katy Perry to Melania Trump and Ice Cube, who spoke with The Defiant’s Robin Schmidt about his experience with the medium. 

The NFT boom coincided with the crypto market’s surge to all-time highs in November. NFTs also dovetailed with the rise of Axie Infinity, play-to-earn, and other blockchain games that utilized the innovations in their tokenomics. That, in turn, fed hype about the metaverse and contributed to the sense that a cultural moment was driving the market, albeit one infused with as much hype as innovation. 

Surging activity on Ethereum was a blessing and a curse. Binance Smart Chain (BSC), for instance, won significant DeFi market share and a $31B TVL in the second quarter by offering EMV-compatibility and low fees. But this came at the expense of security and centralization, with its delegated proof-of-stake consensus placing network validation in the hands of a small group and BSC-based protocols becoming the regular target of organized hackers. 

Binance Smart Chain TVL Source: DeFi Llama

Following a market swoon in May, advances in the efficiency of decentralized liquidity provisions went live with Uniswap’s v3 iteration. Plus the yield tokenization sector was kickstarted by Pendle and Element Finance. The algorithmic stablecoin sector was also revived with the popularity of OlympusDAO’s five-figure APYs and growing reserve of protocol-controlled assets, later giving rise to a slew of forks, including Wonderland on Avalanche and KIimaDAO on Polygon.

Ethereum’s unwavering fees saw EVM-compatible chains emerge among the first crypto assets to post bullish recoveries from the down-trend. Polygon led the way, with its PoS sidechain amassing a TVL of more than $10B in June after attracting top DeFi protocols including Aave, SushiSwap, and Curve.

Polygon TVL Source: DeFi Llama

However, the Polygon network lost market share after peaking in July. In the third quarter, Solana, Terra, and Avalanche emerged as significant threats to Binance Smart Chain’s position title of the second-largest chain by DeFi TVL as traders speculated on low-cost scalable Layer 1s supporting EVM compatibility. 

Solana, Terra, and Avalanche all boasted TVL of more than $10B each in recent months after starting the third quarter with just $631M, $3.34B, and $189M respectively.

Leading chains by share of DeFi TVL. Source: DeFi Llama

By October, many top cryptocurrencies erased their mid-year losses, with Bitcoin, Ethereum, Solana, and Polkadot all trading at new all-time highs heading into November.

The NFT sector also roared back into vogue during the third quarter, with verifiably scarce avatar jpegs trading for hundreds of thousands each, the governance tokens of hotly anticipated play-to-earn titles like Illuvium and Gods Unchained seeing four-figure percentage price gains as in half a year, and a steady stream of major mainstream businesses moving to embrace non-fungibility — including Disney, Universal, and Pepsi.

Search traffic for the keyword “NFT” beats out “Ethereum” and “blockchain” by a significant margin. 

Global search volume for ‘NFT’, ‘blockchain’, ‘ethereum’, ‘dogecoin’, and ‘defi’. Source: Google

In December, everything went sideways and Bitcoin and Ethereum fell more than 30% from their record highs.

Still, many traders believe the lull won’t last. Ethereum’s Eth2 chain-merge is coming and Polkadot’s forthcoming parachain ecosystem is also seen as a fundamental catalysts that could kick the markets back into high gear.

BTC/USD Source: CoinGecko
ETH/USD Source: CoinGecko

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