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Altchains & DeFi
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Recovery or Dead Cat Bounce?

4.5 | by Shaun Paul Lee

Over the past couple of weeks, the market has been taking a sigh of relief after a brutal six months of bear market. As such, many cryptocurrencies have been seeing green. Whether it’s just a brief relief rally, or a ‘Merge’ play, it seems Ethereum, and its surrounding ecosystem, has outperformed Bitcoin and many of the major cryptocurrencies and alt-L1 chains in terms of price returns.

Source: CoinGecko

OP and MATIC tokens from Optimism and Polygon respectively led the way in terms of price returns since 1 July, while Ethereum was in 3rd place.

We’ll examine OP in the section below, but MATIC rose by 97% in July, and could have its price action attributed to the flood of bullish news for the network over the past few weeks. Some of which includes:

  • Polygon was one of the six companies chosen to develop non-fungible tokens (NFTs), augmented reality (AR), and artificial intelligence (AI) products for Disney. 

  • Announcement of Polygon zkEVM (zero-knowledge Ethereum Virtual Machine), which is set to allow developers to deploy any Ethereum smart contract on it. As a zero-knowledge EVM, it should grant protocols the scalability benefits of ZK proofs, while maintaining compatibility with Ethereum. 

  • Besides that, the creators of the Nothing Phone (1) will be working with Polygon to bring a web3 experience to users of its new phone. As part of the partnership, Nothing phone users will gain early access to Polygon ID, a user identity solution that utilizes zero-knowledge proofs for network payments.

 

Looking Deeper into TVL

Source: DeFiLlama

From a TVL perspective, the surrounding Ethereum ecosystem, i.e. Optimism, Arbitrum and Polygon, have also continued to grow their TVL, with Optimism the largest gainer, though their collective share of total TVL remains small in comparison (~5% of total TVL). The literal elephant in the room remains Ethereum with ~60% share of total TVL.

Top 10 chains TVL percentage & absolute change (1 Jul - 1 Aug) Source: CoinGecko

Similar to its spike in price, Optimism led the way in terms of TVL growth in percentage terms in the past month, seeing its TVL more than double with a +118.5% increase. However, in absolute terms, Ethereum, Tron and BNB Chain dwarfed the other chains in growth. Meanwhile, Fantom posted the least TVL gains, both in absolute and percentage terms.

Optimistic for Optimism

For top gainer Optimism, most of the TVL increase was from VelodromeFi, a relative newcomer and Solidly fork which has quickly gained traction to become the largest DEX on Optimism in terms of trading volume and TVL. It has surpassed even Uniswap, which until recently was the main hub for trading. Part of the reason why liquidity has been flocking to Velodrome could be attributed to the 3 million OP grant it received from the Optimism Foundation. In turn, Velodrome is using 750 thousand OP to reward users who lock up their VELO on the protocol.  

Velodrome is not the only protocol that has received an OP grant though. The Optimism Foundation has been rather generous with rewards, with plans to distribute 5.4% of the entire OP supply to projects over the next few months in efforts to encourage projects to build on Optimism. Projects which have received / will be receiving grants include Synthetix, Thales, Qi Dao, Lyra Finance, and others. For the exhaustive list of protocols eligible for the grant, check it out here.

With incentives comes users, which explains the recent flurry of activity in the ecosystem. New capital has streamed into the ecosystem in order to capture increased yields resulting from the additional OP rewards. Optimism has steadily climbed DeFi Llama’s TVL rankings, and at the time of writing ranks at 10th position. Meanwhile, the OP token has seen its value increase by over 200%, with the majority of the run-up occurring in the past two weeks. However, with lots of tokens set to be granted to projects over the next few months, there could be more selling activity in the coming days / weeks as yield farmers seek to realize profits. 

Daily transacting addresses on Arbitrum vs Optimism. Source: @msilb7, Dune Analytics.

Though Optimism has recently seen a spike in various metrics, an interesting point to note is that daily transacting addresses have still fallen short of Arbitrum on most days. Time will tell if Optimism is truly closing the gap on its optimistic roll-up sibling, or if this is just a temporary spike in interest. However, It’s worth noting that TVL on Optimism is closing in on Arbitrum's (currently standing at $570M vs $830M on Arbitrum), where at its peak last November stood 8 times higher than Optimism’s TVL at that time. While the gap in TVL between the two chains is fast closing, Optimism is also being aided by the downtrend in TVL faced by Arbitrum since its November peak.

How did the rest fare?

Ethereum drew in the largest share of TVL, with a $12.3B increase since the start of July, though this could probably be mostly attributed to the broader recovery of crypto prices across the market. Five protocols - MakerDAO, Lido, Uniswap, Curve, and Convex made up ~60% of these TVL gains on Ethereum.

BSC also saw considerable TVL gains in absolute terms with an increase of ~$820M. ~25% of the gains can be attributed to BSC’s top DEX and DeFi protocol, PancakeSwap. The next 7 largest protocols by TVL - Venus, Alpaca Finance, BiSwap, PinkSale, CoinWind, UniCrypt, and Tranchess - made up another ~45% of TVL gains. The rest of the TVL gains are spread out over a plethora of DeFi protocols in the BSC ecosystem. 

On Tron, it was the JustLend protocol that accounts for essentially all of its TVL gains, having increased its TVL by 126%, or $1.86B in absolute terms. As USDD did not see much of an increase in its market capitalization from the last time we covered it (~$725M), the vast majority of TVL gains can likely be attributed to USDD having restored its peg earlier in July, after de-pegging earlier since mid-June. With the algo-stable recovering its peg, users and investors seem to have regained confidence to continue farming USDD on protocols like JustLend.

 

Some Thoughts

  1. Zooming out, the DeFi market had taken a rather brutal turn into the bear market. While TVL largely held up in Q1 thanks to UST, it took an equally hard tumble once Terra collapsed. While many are quick to attribute reasons for the recent rally e.g. the Merge, recent price action can simply be an overdue relief, without necessarily needing any particular catalyst for its occurrence. Along with token prices increasing, TVL also naturally follows to a certain extent without needing any additional capital inflows.

  2. From a TVL perspective, most chains have fared worse than Ethereum (the same can be said about their native tokens’ price action) since the start of the bear market. While Ethereum’s current TVL is only ~30% of its peak value, TVL on other chains has fallen considerably more, with BNB Chain (-79%), Avax (-80%), Solana (-83%), Polygon (-83%), and Fantom (-95%) all recording major losses. Cronos has held up about the same as Ethereum, while Tron is an exception with its TVL being quite resilient, down only ~13% from ATH. Outside of the top 10, TVL on chains like Near and Algorand are actually still on a long-term uptrend, although they start from a relatively small base. Performance of L2s within the top 10 chains by TVL (Optimism and Arbitrum) was mixed, with Arbitrum’s peak TVL also about 3x higher than current levels, but Optimism having remained relatively resilient before the recent spike up.

  3. It is unsurprising that alts beyond Ethereum perform worse than ‘bluechips’ such as BTC and ETH during bear markets, given that the prices of these assets have also underperformed BTC and ETH.  While this July run-up may just be a temporary respite from the bear market, it remains to be seen if these alt-chains have formed enough of their own communities to grant them staying power into future cycles. Meanwhile, altchains such as BSC and Tron have shown that they seem to have sustained traction in maintaining liquidity in their respective ecosystems even with the downturn. BSC has staying power seeing that it’s backed by Binance (the world's largest crypto exchange) and was one of the first places which retail flocked to at the start of the bull run due to fast and cheap transactions. Tron on the other hand is widely used thanks in part to native USDT on it. Many use it for USDT transactions as it's cheap and fast compared to transacting on Ethereum. Besides that, they both have prominent cult personalities at the helm with CZ and Justin Sun respectively, both being strong attractions for the masses. 

  4. The crypto market seems to be recovering in line with the broader equity market. However, this showcases that both markets are still highly correlated with each other. Therefore, any macro factors affecting the equity market in the near future will likely have an impact on the crypto market, be it positive or negative.

  5. Having FOMO (fear-of-missing-out) during a bear market can be dangerous. While markets may seem to be recovering, it doesn’t necessarily mean we are out of the woods. It is okay to stay on the sidelines instead of rushing into every pump. Remember, just because it’s a bear market, it doesn’t necessarily mean it is devoid of pumps. 


This article was produced in collaboration with Weng Dee. You can follow her on Twitter here.

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Shaun Paul Lee
Shaun Paul Lee

Shaun is a Research Associate at CoinGecko with a fondness for memes and farming on the blockchain. Follow the author on Twitter @ShaunPaulLee

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