Strong Possibility of DeFi Shakeout In 2022 Amid Crypto User Exodus

The decentralized finance (DeFi) market witnessed very strong growth since the DeFi summer of 2020 and over the last year. We have seen several Ethereum Layer-1 competitors like Solana and Fantom coming to fame.

However, the recent crash in the crypto space has particularly hit the DeFi space very hard. Although Bitcoin witnessed a 50% correction since November 2021, some of the most popular DeFi protocols like Compound, AAVE and MakerDAO faced deeper corrections.

Apart from strong liquidations, the DeFi sector has also recently witnessed developer departures and user exodus. Pedro Herrera, senior data analyst at tracker DappRadar said that if the crypto bear market last for a year, we can probably see 80% of the DeFi apps flushed out of the market. In a word with Bloomberg, Herrera said:

“As far as crypto winter, DeFi dapps have never gone through it. They have experienced crashes, but this feels like a prologued one. Probably 20% of the apps that hold 80% of the industry value will survive. And we could see protocols that are not widely used fade away.”

As per DappRadar, currently there are 150 DeFi apps in the market that collectively hold a total of $107 billion in user funds. Amid the crypto market rout, there’s a $30 billion decline since the beginning of 2022.

Strong Loan Liquidations in DeFi

As some of the top DeFi tokens have plummeted recently, it has resulted into a cascading effect of loan liquidations. As per Dune Analytics, $300 million worth of assets in DeFi protocols have been liquidated in the last week.

Just between Jan 22 to Jan 24, more than 1,000 positions were liquidated across platforms like Compound, Aave, and MakerDAO. Spencer Bogart, general partner at Blockchain Capital said that amid the crypto market rout last week, a roughly $600 million collateralized debt position on MakerDAO was on the verge of getting liquidated.

Besides, the user activity across DeFi apps is also on the decline. Some of the active user wallets interacting with popular DApps dropped by 20-30% in the last two weeks. Also, a majority of the DeFi apps pay developers in theior own tokens. Thus, the plunging token value has forced developers to move to other protocols. Jeff Dorman, chief investment officer at Arca, said the survivors said that the survivors will emerge more stronger. Dorman said:

DeFi hasn’t had even a little bit of a blip. None of the protocols stopped working. There were no issues of users getting money out. That validates why a lot of us think this is the future of finance.