The decentralized finance (DeFi) market has been one of the most exciting and volatile sectors in the crypto space, outside of Bitcoin (BTC). In 2020, the DeFi sector experienced a bull market that saw the total value locked (TVL) in decentralized finance protocols surge from $1 billion to over $100 billion. However, the DeFi market has also been prone to significant corrections. In 2021, the DeFi market experienced a correction that saw the TVL fall from $100 billion to $40 billion.
Despite the volatility of the DeFi market, there are ways for traders to catch on to when the niche crypto sector begins to show sustained bullish momentum. Three of the most important metrics to watch are TVL, a platform’s fee revenue, and the number of non-zero wallets holding tokens.
Increases in the total value locked (TVL) are one of the most widely used metrics to measure the overall health of the DeFi ecosystem. TVL represents the total amount of cryptocurrency assets locked in DeFi protocols. When TVL rises, it suggests increasing demand and use of DeFi services, which can signify a bull market. While the current TVL is slightly below the 2023 peak set on April 15 of $52.9 billion, it has risen since the start of the year, eclipsing $45 billion. This increase in TVL is a positive indicator of the growing demand for decentralized finance services.
Another important metric is the fee revenue generated by DeFi protocols. Protocol fees measure the amount of fee revenue received by blockchains for completing transactions. Layer-1 blockchains are a key part of the DeFi ecosystem as they allow for the building of decentralized applications (DApps) in which users can interact without a centralized intermediary. When layer-1 fees are rising, it suggests that there is increasing interest in DeFi and that traders are utilizing DApps to interact with blockchains. In the past 30 days, the top 16 layer-1 blockchains by market cap all have shown a positive increase in fees, with Ether (ETH) collecting over $2.2 billion in the past 30 days.
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The number of non-zero addresses is a good indicator of the number of people who are actively participating in crypto. When the number of non-zero addresses increases, it suggests that there is increasing demand, which can be a sign of a bull market. Isolating statistics from the entire crypto market to focus on DeFi tokens, the number of non-zero addresses hit an all-time high on Nov. 8 of 1.1 million addresses, compared to only 267,180 addresses on the same date in 2020. This surge in non-zero addresses indicates a significant increase in interest and participation in the DeFi sector.
The DeFi market has recovered and evolved since the Terra Luna implosion, but it is also volatile, so it is important to carefully consider on-chain metrics and other macro factors that can help identify bull markets. By watching these metrics, traders can better understand the DeFi market’s overall health and possibly get early signals on the emergence of a new bull market.
In conclusion, the DeFi market is a dynamic and rapidly evolving sector of the cryptocurrency space. While it is prone to volatility, there are key metrics that can help traders gauge the health of the DeFi sector and identify potential bullish trends. As with any investment, it is important for traders to conduct their own research and consider the inherent risks involved in trading and investing in the DeFi market.
