The Defiant

DeFi Wrap for 2023: 
Time For Bears to Go Into Hibernation

DeFi TVL and number of protocols at scale grew this year, signaling the ecosystem's increased maturity.

By: Chris Bradbury Loading...

DeFi Wrap for 2023: 
Time For Bears to Go Into Hibernation

As we look back across 2023, we see a DeFi landscape that has undergone a transformation, shaking off a difficult prior year and a lingering bear market.

This retrospective delves into key aspects of the space, encapsulating the trends, challenges, and triumphs that shaped a year marked by significant milestones and intriguing developments.

2023 DeFi TVL

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Total DeFi TVL grew 110%, with Mainnet TVL reaching $46.768 billion. TVL for the main Layer-2 chains (Optimism, Arbitrum, Base) was $3.30 billion. (Data source: Defi Llama)

In 2023, the Total Value Locked (TVL) in DeFi experienced significant growth, particularly on Ethereum, which remains DeFi’s primary blockchain. This surge in TVL can be attributed to the continued adoption of DeFi protocols and the expansion of the ecosystem.

The surge in TVL for Layer-2 solutions continued through the year, aided by the arrival of Base in August. These Layer-2 solutions contribute to alleviating congestion on Ethereum, by processing transactions off-chain and settling them on the Ethereum mainnet. They offer faster and more cost-effective transactions, further enhancing DeFi’s overall scalability.

2023 DeFi Lending Markets

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The three lending market giants (Aave, Maker, Compound) continued to perform well. Aave strengthened its position as users migrated from v2 to v3. New entrant Spark enjoyed a momentous first few months. (Data source: Defi Llama)

In 2023, the DeFi lending market witnessed some notable developments among major players and the emergence of new protocols. The landscape demonstrated ongoing innovation, regulatory considerations, and increased adoption. The migration to Layer-2 solutions and the introduction of new lending protocols added further diversity to the market.

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Maker remains a force in DeFi lending with a TVL of $8.387 billion. It also launched the Spark Protocol in May, a fork of Aave v3, and positioned as a potential rival to Aave. Spark’s TVL rocketed through the year to a substantial $1.491 billion.

Despite challenges, Aave maintained a strong position in 2023, experiencing a resilient growth trajectory. Aave’s TVL of $6.183 billion was driven in part by users migrating from Aave v2 to v3.

2023 Bulls vs Bears

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For Summer.fi, August was the most bearish month. This was proceeded by the most bullish part of the year, peaking in December. (Source: Summer.fi inhouse data.)

At Summer.fi, we saw the bulls winning out against the bears in all but two months (May and August). Bullish activity is denoted by increases to long positions and bearish activity by decreases to long positions.

It’s a winter bull season at Summer.fi, with the bears being left behind in August, the most bearish month of the year. December has proven the most bullish, with 65% of actions represented by increases to long positions, against 35% decreases.

2023 DeFi Bluechips

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This year saw tremendous rise in most of the bluechip DeFi tokens, as the crypto market as a whole went up. Ethereum has seen a year to date increase of 93%, AAVE of 81%, MKR 139.4%, COMP 57.3%, and UNI of 16.3% in dollar terms.

The entire crypto market cap rose from $840B to $1700B, according to Coingecko. So from that perspective, just MKR beat the market.

For 2024, DeFi is the place to be. What is better to keep your eyes on? According to Tastycrypto, the largest DeFi segments are DEXs with 31% of the TVL and lending protocols with 17%.

  • Some examples of DeFi tokens:
    DEX coins: Uniswap (UNI), Curve (CRV), PancakeSwap (CAKE), Balancer (BAL)
  • Staking coins: Lido (Lido) & Rocket Pool (RPL)
  • Lending/borrowing Coins: Aave (AAVE), Compound (COMP), Just (JST)
  • Derivative Coins: GMX (GMX) & dYdX (DYDX)

2023 DeFi Protocols

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Building in the bear market: we end the year with four extra DeFi protocols at scale.

Defi protocols with over $250m TVL:

  • Maker
  • Aave
  • Compound
  • Uniswap
  • Convex Finance
  • Curve Finance
  • Spark (new 2023)
  • Frax finance
  • Liquity
  • Balancer
  • Morpho (new 2023)
  • Synthetix (new)
  • Prisma Finance (new 2023)
  • dYdX
  • Lybra Finance (new 2023)
  • Sushi
  • Yearn
  • Aura
  • EigenLayer (new 2023)

In 2023, the DeFi landscape witnessed notable growth. Along with TVL expansion, the year also saw an increase in the number of protocols at scale. At the beginning of the year, there were 15 protocols considered significant (with a TVL of $250 million or more, excluding liquid staking). By the end of the year, this number had expanded to 19 protocols.

The increase in protocols indicates a rapid expansion in the DeFi ecosystem. Their addition suggests a diversification of offerings within the space, as different protocols often cater to specific functionalities or financial services. Investors, developers, and users appear to be increasingly confident in the capabilities and potential of decentralized financial solutions.

Looking Ahead

It is clear that the DeFi sector has taken another step in its development during 2023 and, exiting the year, the sector’s growth looks set to continue.

The year was marked by remarkable TVL growth, Ethereum's sustained dominance, and the significant role of Layer-2 solutions in addressing scalability concerns. Regulatory considerations, innovation, and increased adoption characterized a dynamic lending market, demonstrating a growing diversity with new protocols and an expansion of functionalities and offerings.

Market sentiments depicted a clear shift from bearish to bullish. The DeFi landscape expanded, ending the year with five more significant protocols than at the beginning. As 2023 concludes, DeFi's increasing maturity has set the stage for a dynamic future, looking set to fundamentally challenge traditional financial services.

This research report was contributed to The Defiant by Summer.fi CEO Chris Bradbury.

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