The recovery of the old DeFi protocol leads the market, is it a flash in the pan or an ascendant?

Original Author: Ignas

Original compilation: Luffy, Foresight News

DeFi 1.0 is having a revival. Even though it never really went away, the protocol was working as planned, but this was not always reflected in the token price.

Now, the prices of established DeFi protocol tokens are leading the crypto market.

So, why are DeFi tokens so hot?

The Pump 1.0

The performance of DeFi 1.0 in the past two weeks has been impressive:

• COMP+ 117%
• AAVE + 48.5%
• ZRX + 35.1%
• MSEK + 33.6
• UNI + 23.8%
• DPI + 20.1%

However, this snapshot does not capture the full story of the DeFi 1.0 revival, and not all DeFi 1.0 tokens are doing well.

In fact, all DeFi 1.0 tokens have performed solidly in the last two weeks, with FXS and BAL being the two exceptions that failed to outperform ETH.

However, only a few (i.e. COMP, MKR, AAVE, ZRX, and UNI) performed very well from the 30-day data analysis. More than half of DeFi 1.0 tokens failed to outperform ETH.

Nonetheless, I believe the DeFi 1.0 rally will continue for several reasons.

low starting point

While the top DeFi 1.0 tokens have performed well over the past month, they have lagged behind ETH overall over the year.

ETH has risen by 68%, and DeFi 1.0 tokens need to catch up quickly.

So, is the bear market over?

Maybe it's just a simple cycle rotation. Memecoin has had a blast, and now with the market relatively quiet, traders and long-term investors are looking for undervalued assets, and I am one of them.

In my opinion, DeFi 1.0 tokens offer a unique value proposition.

Stands the test of time

DeFi 1.0 protocols may have excellent teams, investors, and products, not to mention audits from top companies.

I know that Aave, Compound, Maker, or Instadapp (disclaimer: I'm an ambassador) offer lower yields than some flashy new project, but I'm happy to accept lower yields because they give me a more restful night's sleep.

DeFi 1.0 protocols exist in 2020 or earlier.

Compound Finance, Instadapp, and Aave all debuted in 2018 (Aave was rebranded from ETHLend in 2020). MakerDAO even launched a DAI stablecoin in late 2017, although development on DAI began as early as 2014.

All of these platforms survived the Corona crash in 2020 and most recently, the CeFi crash in 2022, despite some issues.

This resilience manifests itself over time. When I interviewed Polygon's Sanket about the state of Polygon development, he shared the following:

The only real audit is one that stands the test of time. - Sanket, Head of Growth, Polygon

Even today, eight of the top ten protocols with the most locked assets launched before 2021. Moreover, four of these ten agreements were launched before 2019.

But this is only one of the reasons why DeFi 1.0 is here to stay.

Good financial condition

According to a survey of nearly 500 founders, two-thirds of the reasons startups fail are due to financial distress.

Lack of financing will account for 47% of startup failures in 2022, nearly double the rate in 2021, according to CB Insight research. Additionally, 44% of failures are often behind a lack of cash due to poor financial planning or lack of funds.

The study was for non-crypto companies, but applies equally to DeFi startups. For example, Friktion Labs on Solana shut down earlier this year, citing "not making ends meet."

That's why it's crucial to invest in projects with sound financials.

The best-performing companies in DeFi 1.0 recently are all sitting on a lot of assets. Uniswap has $2.3 billion, while Compound, Maker, and Aave have $135-152 million (including their own tokens) to fund their development.

DeFi 1.0 is also strong in terms of daily revenue, although Compound only earns $5,500 a day, far less than Aave ($72,000) or Curve ($25,000).

Maker DAO is particularly strong. According to Makerburn.com, Maker is expected to make a profit of 69 million DAI.

Maker's revenue has been growing, largely due to Real World Assets (RWA), reaching $100 million per year.

Thanks to the "smart burn engine", this value is eventually returned to MKR.

The smart burn engine is designed to increase the value of MKR tokens. By using the remaining Dai to purchase MKR tokens and put them back into the market as Uni v2 LP tokens. This process increases the on-chain liquidity of MKR, potentially increasing the value of MKR token holders.

Continuous development and iteration

DeFi 1.0 protocols have evolved significantly since their inception.

Despite numerous upgrades and changes, it seems the market is only just beginning to appreciate the extent of these improvements.

Take Aave and Compound for example. Both have successfully launched their respective third iterations and have charted unique development paths for new releases.

When Aave v3 emphasized capital efficiency, Compound III abandoned the fund pool risk model and adopted a model that only allowed one "base asset" and supported other encrypted assets as collateral.

What's more, Aave and Curve are developing their respective stablecoins GHO and crvUSD. These stablecoins would further improve capital efficiency, reduce reliance on native token issuance to attract liquidity, and increase the governance value of native tokens.

Let's not forget the massive incremental advance of Synthetix V3, which introduced multi-collateral liquidity, permissionless pools, and cross-chain liquidity.

0x (ZRX) has also performed extremely well over the past two weeks. This is partly due to the use of the 0x API by the newly upgraded Matcha DEX aggregator.

Instadapp has a $2.1 billion TVL and recently launched Avocado, a top-notch multi-chain wallet that also functions as a blockchain aggregator. The team is also preparing to launch a next-generation multi-chain multi-signature wallet soon, with features such as single-gas transactions, same-address wallets, and account abstraction.

Of course, there is also Uniswap V4 in development. But when it comes to upcoming changes, I'm most bullish on Maker.

Maker is in the final stages of making Dai the fair world currency. The DAO architecture has been modified to include smaller subDAO units for more efficient governance. Each subDAO will also have its own token which will be launched in a fair launch through liquidity mining of MKR/DAI.

Maker even launched a fork of Aave with Dai at its core: the Spark protocol. Thanks to DSR, Dai holders can earn a yield of 3.49%.

Finally, if you're wondering why Compound's COMP has been going up, check out my Twitter post.

Old, boring vs new, exciting

I am optimistic about the DeFi 1.0 protocols mentioned above. They have a first-mover advantage, but they are still evolving.

A large number of new protocols will be launched every month, which are expected to surpass the "old and boring" DeFi 1.0 protocol and become the leading liquidity layer of DeFi.

However, it is challenging to move beyond protocols that have stood the test of time, locking billions of dollars into smart contracts in an industry riddled with fraud.

That said, I'm also optimistic about new and exciting protocols, like the top 5 new DEXs I discussed last week.

What I see in these emerging protocols is a unique niche that either builds on top of or complements existing DeFi 1.0 protocols.

Protocols like Liquity, Morpho, Maverick, GNS, PENDLE, and GMX are newer and exciting protocols that I follow closely.

I also track VCs to discover innovative protocols, as I believe those that successfully raise funds during bear markets will thrive in bull markets.