Messari: Defi warming needs to pay attention to three indicators

Defi's Way! If the bull market is still in force, DeFi token prices will bounce back based on these 3 indicators!

Original source: Babbitt

This article was written by Mira Christanto, a researcher at Messari

The screen

While Defi has only just boomed in the past year, fundamental investors have increasingly shifted from pure Meme-driven to on-chain data analysis. However, while the data paint a picture of the state of the industry, it is not clear which indicators affect price movements. This article examines some data to figure out whether fundamentals matter and, if so, which DEFI tokens could lead the price rally.

Our assumption is that fundamentals do matter and that the agreement and investors need to get some value. Perhaps tokens with more usage scenarios than pure governance functions will outperform tokens that perform well in operational metrics.

The counterargument is that the rebound in prices has nothing to do with fundamentals and more to do with external factors, such as correlations with bitcoin and social media activity. Perhaps governance is sufficient as the only usage scenario, and token holders are concerned about other factors, such as the team's ability to drive growth with large resources. This paper tests our hypothesis against different metrics for decentralized exchanges (DEXs), loan agreements, and asset management programs. We use weekly data to smooth out daily outliers for each indicator, including:

• 活跃用户的数量

• 去中心化交易所的交易量 

• TVL（锁定的总价值）

• 借贷协议的年利率

• 存放在借贷协议中的金额和未偿还贷款的金额 

Defi price performance review

The table below shows the price performance over the past 60 days. Most tokens reached their local high (LHS) (the average of the group) in the days around May 5.Sushi, Rune, Aave  andSNXIs the exception, they hit a high after the sell-off started around May 14. The main DeFi token below is down -72% on average, with the 60-day low date being particularly synchronized -- May 23. Within 60 days,PancakeSwap And 1INCH underperforms while  Synthetix And & have spentBancorDo a good job.

As you can see from the right side of the table, since the May 23 low, regardless of the size of the market cap, the tokens that experienced the heaviest losses prior to May 23 have achieved the fastest recoveries (such as CRV), while those that corrected mildly (fell less heavily in the crash) continue to face selling pressure (such as SNX).

Number of active users

First, let's look at the number of active users, which is a measure of activity for a common protocol. The following table shows the change in weekly active users for April and May, with the number level set at index 100 for the week of April 5. During these two months, AVE's active users grew by more than 100%, thanks to their liquidity mining incentive program, which went to the polls on April 25 and will end on July 15, 2021. They also work with Layer2 extension solutions  Polygon Consolidation has taken place, which has boosted adoption. On the other hand,KyberThe number of users dropped by -9%. The table below is ranked by the retention rate of active users during this period.

The chart below, ranked by growth in active users, shows the average price change over the same period. There seems to be a strong correlation between active users and price performance. Due to the new operational dynamics,Aave, Uniswap andSushiSwapPerform well in terms of active users and price changes.AaveandSushiDeployed inPolygonWhile Uniswap deployed their V3. The Curve, Balancer  And Kyber are at the bottom of the range, which is reflected in the underperformance of their token prices. Although the rankings are not completely correlated (CRV prices dropped -47% during this period, whileKNCDespite losing more active users, prices fell less, -43%,) but the overall trend was intact:

Conclusion: Fundamentals and operating statistics have an important impact on the price of tokens. The active user metric is a valuable price-related signal because it shows a meaningful correlation.

DEX volume

Historical performance is usually related to factors such as adoption rates, daily transaction volume, and potential fees incurred. This is because transaction volume is often an indicator of the accumulation of value for the holder of the agreement or token.

In the first quarter of 21, Uniswap and Pancakeswap gained the largest market share. Their price action is a direct reflection of user adoption, with Uniswap delivering a quarterly return of 444% and Pancakeswap outperforming the rest of the industry with a whopping return of 3031% in 1Q21.

Despite its rapid growth, Sushiswap lost market share, underperforming UNI in price growth, which was 31% lower than UNI.

The chart below shows weekly Dex volume for May, reflecting the recent sell-off. In the chart below, ranked by volume, Synthetix and Curve have done relatively well in maintaining volume, even though all Dex volumes have contracted. Volume fell in late May, with Balancer seeing the worst of the decline, losing about 80% since the beginning of May. Therefore, BAL is less transaction sticky than SNX and CRV.

The following table shows the price changes over the corresponding period, ranked by the above DEX volume stickiness table. Balancer and Bancor saw the biggest price declines, while the stickier deals performed well in the sell-off. Synthetix is an exception, and while it performs well in terms of stickiness, its price performance is mediocre. One possible reason is that the volume growth during the week of May 17 stood out (+118%), leading to a heavily negative performance in the second half of May.

Conclusion: The price performance of DEX is correlated with volume, which is consistent with our assumption that fundamentals and operational indicators are important.

Fees available to token holders

Another factor to consider is the agreement's ability to pay dividend-like returns to its token holders. For example, Sushi token holders can pledge their tokens in return for a portion of the transaction fees for the agreement. The following is the price list of DEX agreement for the same period from the beginning of May:

Based on the price performance above, agreements that allow users to pledge their native tokens for earnings appear to have performed well during the May-June 2021 bear market:

• SNX、CRV、KNC、SUSHI 允许代币持有者将原生代币进行质押以获得部分费用。这些代币在抛售期间的表现相对较好 

• UNI：收费开关尚未打开（译者注：目前 Uniswap 上产生的交易费用尚未用于回购 UNI）

• BNT：Bancor 的单边流动性池允许代币持有者质押 BNT，而不需要质押池中另一边的代币。然而，流动性提供者的奖励与直接质押以获取的部分平台费用不同 

• BAL：Balancer V1 没有费用，但 V2 收取闪电贷费用。其交易和取款费用开关在成立之初就被关闭了。所有的协议费用都保存在金库中，由管理部门投票决定如何使用这些资金

However, the overall year-to-date performance (right side of the table) has no correlation to the fees that token holders are entitled to. This suggests that the market only cares about value accumulation in a bear market, and more about other factors in a bull market.

Bottom line: Tokens that share fees with token holders do better in bear markets. This could be because token holders are less likely to unwind their tokens and sell them, or perhaps tokens that pay dividends like earnings and have more use cases outside of governance are preferred by token holders. There could be a counter-argument based on the data that in a bull market, the agreement does not allocate funds to token holders and retains funds in order to drive (subsequent) growth. Perhaps, in a bull market, the agreement is to stock up on ammunition to provide an elastic cushion against subsequent growth.

TVL

The total value of the lock (TVL) is an important indicator of the ability of the tracking protocol to extract value. The table below shows weekly TVL data starting in April, ranked by growth in capital. Since the beginning of April, all deals have increased, with Yearn Finance showing the biggest increase, followed by AVE. Relatively speaking, Sushiswap has fared poorly. Its TVL has shrunk by -18%, from the bottom, in second place. Compound  The smallest increase at +16%.

Contrary to our assumption, the price is not related to TVL!

• 虽然 YFI 的 TVL 增长最多，但价格并没有反映这一点。自 4 月 4 日以来，YFI 的价格已经下跌了-15%，而子集的平均价格是+6%。这可能是因为，用户在这个观望期逃到 Yearn Finance 作为安全的避风港，但没有购买代币。

• 在同一时期，Curve 和 SushiSwap 的价格都表现得很好。然而，Sushiswap 的 TVL 收缩了-18%，而 Curve 则增加了+54%。

Conclusion: The data show that TVL is not a reliable indicator of price action because capital is temporary and employable due to factors such as liquidity mining incentives, attacks or deleveraging. Therefore, it is more important for the agreement to be able to retain liquidity, which is the basis of product market fit that forms user engagement. Moreover, with the introduction of Uniswap V3 and Curve V2, not all TVL's can be considered the same, as capital efficiency and the rewards generated for liquidity providers are different. Finally, since TVL tracks the maximum possible value that can be extracted, investors may not be interested in this metric because the upper limit is usually not reached. For example, we will see lower volumes in DEXs and less outstanding debt in loan agreements. Therefore, this data point is not related to price catalysis.

An annual interest rate

The annual interest is calculated by multiplying the current borrowing rate by the total outstanding debt and shows the accrued interest on the agreement. The following table shows the annual interest accrued on outstanding debt from April to May 2021, using the week of April 5 as an index of 100. The columns are arranged in order of growth over the two months. Maker DAO maintained the highest growth of +19% during the period, with AVE in second place with +6% growth during the period. In the first half of May, the AVE increased significantly, up +92% compared to the week ending April 5.

Recovery in prices usually follows agreement on the ability to generate interest on the underlying debt. Maker has rebounded strongly since the May 23 low, while Compound has suffered the most negative impact on prices due to the contraction of IPY. Compared with LH price, Compound is also the lowest. The exception in the data is Cream Finance, whose latest price is closest to its LH price. One possible reason is that, unlike other agreements that hit their 60-day low on May 23, Cream's low was more than a month ago on April 21. The price had underperformed before the sell-off.

Conclusion: The data show that IPY is a good indicator of price recovery, but not of price change, despite the small sample size of only four protocols. This means that, in a downturn, investors can confidently allocate capital to IPY's well-held agreements.

Deposits and outstanding loans

IPY is the total product of the interest rate of the tokens supported in the agreement and the outstanding debt. In this section, let's look more specifically at outstanding debt, as well as total deposits during the bear market in May 2021. One weakness of this indicator is its small sample size.

• 贷款存款：Aave 表现出色，而 Maker DAO 在此基础上表现不佳。

• 未偿还贷款：与贷款中的存款相反，Maker DAO 的贷款最多，而 Compound 的表现则较差。

Price performance shows that outstanding loans are an important indicator of price recovery, but deposits in loans are an irrelevant indicator. Maker performed well during the May sell-off, while Compound underperformed. Although deposits on AVE loans have fallen the least, price performance has been average. This suggests that, like TVL, the market does not consider deposits in loans to be very important.

Bottom line: Since IPY is a good indicator of price recovery, so are deposits in loans. The upper limit of the ability to extract value from the outstanding loan tracking agreement. Similar to TVL, in a bear market, investors ignore the importance of this ceiling value and focus instead on the cumulative value of the agreement to the level of outstanding debt.

The qualitative analysis

Quantitative analysis can only take fundamental investors so far. In terms of quality, there are several catalysts that can explain the price performance:

• 激励计划：Polygon 和 Aave 直到下个月都有流动性挖矿计划，这吸引了储户和贷款人，也有助于 AAVE 的代币价格。同样，Balancer 在 5 月 11 日 Announced ‌  Balancer V2 and a new incentive plan, though not as effective in maintaining the price of its tokens.

• 市场份额：Compound 也有一个正在进行的流动性挖矿计划，但由于他们的激励计划，市场份额已经被 AAVE 抢走了。虽然 Compound 在 4 月至 5 月的两个月里 TVL 有所增长，但其代币价格的表现却不如 AAVE，AAVE 获得了市场份额。

• 稳定币的避风港：Curve 专注于稳定币，在 5 月 23 日的低点反弹中表现相对出色。在抛售的时候，投资者可能涌向安全地带，将资金投入稳定币，而不受市场抛售的影响。

• 新推出的产品：Uniswap 于 5 月 6 日推出了 V3，以实现具有多个收费等级的集中流动性，允许 LPs 对其资金分配的价格范围进行细化控制。它还在 6 月 5 日于 Arbitrum 上部署了 V3。新产品的成功在推动基本面方面发挥了重要作用，可以作为强有力的价格催化剂。

• Layer2 的扩展解决方案：不同于 Aave，Sushi 的表现相对出色。它是鲸鱼的最爱（交易规模比 Uniswap 大），也与 Polygon 进行了整合。Polygon 上的 SushiSwap 的交易量已经超过了以太坊，主要是由于费用低，机器人能够更频繁地交易。

So while quantitative methods are important, qualitative analysis is just as important for understanding price movements in this nascent industry.

Final Thoughts

During the bull market, dramatic selloffs caught many investors off guard. Some investors will remember the bitcoin bear markets after 2017, 2013 and 2011. The data show that fundamentals matter, especially during bear markets. In a bull market, fundamentals matter less, as can be seen from the agreements that allocate fees to token holders. As a result, as DEFI matures, we can expect it to become less correlated with Bitcoin, moving out of a standalone market in a bear market based on its operating metrics. It is possible that we are in the middle of that worrying two-year bear market, but for DEFI investors who believe this is just a dip, the key metrics to watch are: active users, trading volumes and outstanding loans.

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