DeFi Sector Rebounds As Crypto Winter Fades

The crypto dominoes are falling, sending shockwaves across the landscape, including in decentralized finance, according to a senior European Central Bank official speaking at a conference on Wednesday.

The statement from executive board member and crypto skeptic Fabio Panetta, especially in the context of decentralized finance (DeFi), only tells half the story.

While it is clear that crypto has seen a number of painful bankruptcies that have highlighted how interconnected major firms have become, activity across competing protocols promoting DeFi applications has yet to fall completely off a cliff.

According to Jehan Chu, founder of Hong Kong-based trading and investment firm Kenetic, DeFi has surfaced as a silent hero as users lose faith in the endless fraud and breakdowns among centralized crypto institutions.

"Though regulation looms...increasing mindshare is providing DeFi with an opportunity to shine and demonstrate its long-term benefits over centralized systems," Chu said.

When looking across the sector, one could be forgiven for thinking that most projects or protocols in the emerging sector were lifeless.

Monthly trading volume on decentralized exchanges has been declining since the middle of the year. That was before volume skyrocketed in November as a result of an industry-wide panic, courtesy of FTX.

According to Dune Analytics, the total decentralized exchange volume was around $95 million in June. Before the November spike, this figure had dropped to around $44 million.

The data for December is approximately $8 million, indicating a weaker-than-average showing of user trading activity for the month thus far.

Nonetheless, DeFiLlama data show that the total value locked (TVL) in DeFi protocols is hovering around February 2021 highs — a period when DeFi was just getting started.

DeFi's protocols were worth around $54 billion at the time, before skyrocketing to an all-time peak of around $244 billion just 10 months later. It is still down 77% from its peak, standing at around $55 billion TVL at the time of writing.

Meanwhile, activity on Ethereum layer-2s Optimism and Arbitrum — the two most popular in terms of adoption to date — shows that total transactions per day and active addresses have been trending upward since the end of August, albeit in a shaky fashion.

On August 28, the active addresses for Arbitrum and Optimism were approximately 27,000 and 10,000, respectively. According to data, those figures have more than doubled to 56,000 and 36,000, respectively.

Arbitrum daily transactions have increased by more than 480% since the July 10 lows of around 58,800 to 338,400. Over the same time period, optimism increased by more than 546%, from 55,600 to 349,800.

Contracts distributed, which show how several users are participating and executing tasks on both networks, show that Optimism's data has outperformed most other weekly periods in the last 90 days, while Arbitrum is still performing admirably.

Individuals are likely to be more engaged in free money included in airdrops during crypto winter, so there's a focus on Arbitrum, which has yet to introduce a token, according to a spokesperson for on-chain data analytics firm CryptoQuant.

"As alternatives to layer-1s, and with success in protocols such as GMX and Magic," they explained.

As the year comes to a close, interest in DeFi remains high, bucking trends in metrics such as capital flows out of crypto-focused funds from traditional institutions.

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