DeFi dominance returns to levels not seen since the 2021 bull market

DeFi assets and value locked are showing bearish signals, despite the recent recovery of the crypto market. DeFi dominance, a metric of the performance of DeFi tokens, has fallen to levels not seen since before the 2021 bull market.

DeFi tokens are lagging in their performance, reaching the lowest dominance levels since early 2021. DeFi dominance is down to 3%, before the 2021 rally for DEX and lending projects. During this market cycle, DeFi dominance had a small increase, up to 3.71%, far from the values of around 5.9% during the 2021 bull cycle. In 2024, DeFi was widely used, but this was not immediately reflected in token prices.

DeFi dominance decreased to around 3%, a level not seen since before the 2021 bull market. | Source: TheBlock Data

Even top tokens like Uniswap (UNI) and Aave (AAVE) did not fulfill their expected rallies. The current low dominance may be seen as a buying opportunity, but the market remains stagnant, with no signs of a recovery after months of sideways trading.

The low performance of DeFi tokens tracks the overall weakness of all altcoins, as Bitcoin (BTC) has taken up most of the liquidity. DeFi tokens are also not as widely used for their utility or security, as the sector relies on stablecoins, BTC, and Ethereum (ETH) collaterals.

The total value locked in DeFi also decreased to $90B, levels not seen since 2021. Traders are noticing the downward shift in TVL, showing a general bearish trend. Lending has also taken a sharp downturn in value locked, down to $39B from a recent peak of $51B.

DeFi tokens trade near their lower range, though traders remain cautious in expecting a bounce. Interest in altcoins remains near all-time lows, and DeFi is no exception. Even leaders like AAVE traded weakly, at around $176.90. The expectations for AAVE were for a hike to $400 or higher, based on the recent growth in loans.

The sector mostly suffered from the lowered price of Ethereum (ETH), cutting into the value of collaterals. DeFi is seen as a proxy for the bull market, showing confidence in ongoing appreciation. Most protocols rely on a bull market to achieve the desired yields or resort to restructuring their loans and interest rates.

DeFi responds to market slowdown

DeFi has responded to multiple market cycles, reviving after the 2022-2023 bull market. However, TVL never recovered to the 2021 peak. Most of the liquidity moved into Aave and Sky Protocol, with similar apps on Solana and other networks. DeFi was one of the tools to tap the value of altcoins, which were sometimes accepted as collaterals.

Lending and yield farming remain risky, though it has been used to tap value and gain from holding stablecoins. Despite the record stablecoin supply of over 227B tokens, DeFi is showing signs of slowing down. Synthetic assets also decrease their supply as a response to bearish market conditions.

The current list of DeFi tokens includes several narratives. DEX tokens perform differently, compared to lending assets. As a whole, the sector’s valuation decreased to $88.5B, with over $6B in total 24-hour volume.

The bear market attitudes and the slowing down of ETH affect lending and yield farming the most. Supporting liquidity pairs remains risky, despite the high yields. Recently, liquidity providers on Hyperliquid market had a $4M loss after the liquidation of a large ETH short position.

Several tokens stand out for their utility or expectations for growth. RWA is also included as a subset of DeFi, with growth coming from Ondo Finance (ONDO) and Mantra (OM). Recently, Ethena (ENA) announced it would pivot to providing L1 services for a dedicated settlement chain for traditional finance.

The DeFi sector also added activity and liquidity from the newly joined Hyperliquid (HYPE). The decentralized perpetual futures market is widely used during periods of market turbulence, with whales taking up risky positions with up to 40X leverage.

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