Market Action: Terra Jumps 7% to Lead Rebound in DeFi Names

The DeFi markets have surged to post an emphatic recovery from January’s lows despite lingering concerns about heavy-handed regulation. 

The combined capitalization of DeFi tokens sits at $121B, having bounced 16.7% since posing a local low of $103.7B on Feb. 3 according to CoinGecko

Just two of the top 100 non-stablecoin DeFi assets have shed value since the beginning of January, while one-third of tokens rallied by more than 30%.

Terra (LUNA) jumped 7% in the last seven days and is the sector’s top token with a market cap of $23.5B. It represents almost a fifth of the entire DeFi capitalization.

Top Gainers

Idex (IDEX) + 70.2%

bZx Protocol (BZRX) + 64.2%

Benqi (QI) +52.8%

STP Network (STPT) + 39.7%

Just (JST) + 38.6%

Biggest Losers

Orion Protocol (ORN) – 5.9%

Bonfida (FIDA) – 1.3%

The total value locked (TVL) in DeFi protocols has also enjoyed a resurgence this week. The sector’s combined TVL is up 11.5% since February began according to DeFi Llama, currently sitting at $221B. 

Cross-chain TVL. Source: CoinGecko

Curve remains the largest protocol by cross-chain TVL with $19.4B despite its locked value remaining down by 15.4% over the past 30 days. MakerDAO ranks second with $17.6B and is up 9% for the month, while Convex Finance is third with $13.6B after losing more than a quarter of its value  in 30 days. Aave closely follows with $13.5B, and Wrapped Bitcoin is fifth with $11.5B.

Growth was consistent across most networks, although Avalanche bounced back stronger with 20.5% while Solana underperformed with roughly 2.7%.

The TVL of Ethereum L2s is at $6.36B after bouncing 12.4% in seven days according to L2beat. Arbitrum represents 53% of TVL for $3.4B after gaining 17.3% since the month began.

Metis Andromeda was the segment’s top gainer with 38%, again overtaking rival Optimistic rollup network Optimism to rank third among L2s. Optimism is fourth with $504M after growing by 6.3%.

DeFi TVL share by network. Source: The Defiant

Burn Rate Slows

Despite the market rebound, network activity has continued to slow for Ethereum according to Ultrasound Money. The weekly burn rate dropped to roughly 7 ETH every minute from 8.34 ETH, and is down nearly 42% in the past month. Roughly 70,150 ETH were destroyed in seven days, bringing the total number of ETH burnt to more than 1.79 million since EIP-1559 went live.

OpenSea was the largest source of burnt Ether with 12,384 ETH wiped from circulation during February so far, followed by ETH transfers with 6,313 ETH, Uniswap v3 with 4,618 ETH, and Tether with 2,045 ETH.

Analysts Tip DeFi Resurgence in 2022

DeFi’s bounce back into contention comes as an increasing number of analysts are tipping that the sector will again take crypto’s center stage during 2022.

In a Feb. 7 interview with Stockhead, Gunnar Jaerv, the COO of digital asset services firm First Digital Trust, predicted that traditional financial institutions will drive growth for the sector this year. 

“There is a lot of appetite,” said Jaerv, adding that the sector has matured “since its early anarchistic days. If you look at what’s happening around up today. It’s actually largely commercial. It’s Enterprise.”

A Feb. 1 report from ConsenSys noted that the total number of unique DeFi addresses had produced steady growth amid the market downturn. They described the metric as “a worthy pulse on the overall health of the DeFi ecosystem, suggesting price action would begin to recover should unique addresses continue to grow.

On Jan. 21, Huobi published a report offering their own take on the prediction that institutions will drive the next growth phase for DeFi. The analysis predicts institutions will converge on protocols offering undercollateralized lending solutions, noting that TrueFi has issued $1B worth of credit within its first year of operating. $4.35M unique addresses have currently interacted with DeFi protocols.

Huobi also anticipates the recent growth in the low-cost Layer 1 and cross-chain dapps will accelerate during 2022.

Regulatory Worries Return

However, other onlookers believe DeFi may be in store for new challenges in 2022, including a crackdown from regulators.

A Feb. 3 report from JP Morgan predicts DeFi will soon face a regulatory reckoning. The report claims the governance tokens of leading protocols including Uniswap, Synthetic, and Compound constitute unregulated “pseudo-equities” that “provide token holders with claims on future cash flows generated on DeFi protocols.” 

“These are not registered as securities even though they sure act like them,” Cembalest added.

The report’s author, Michael Cembalest — JP Morgan’s chairman of market and investment strategy — also took aim at the frequent “rehypothecation” of capital within the DeFi sector, suggesting the practice is synonymous with “financial crisis.”