July 7, 2022 · 5 min read

Ethereum Will Survive, But Are Users Now Scared of DeFi?

How has DeFi usage moved during the bear market?

DeFi platforms rely on sustained usage to survive. If users get cold feet, liquidity pools can dry up and functionality begins to decrease. With tumbling crypto prices putting strain on these platforms, let’s take a look at whether DeFi usage and how it compares to usage of the Ethereum network in general. Users may be beginning to question the integrity of DeFi. 

Ethereum - The Key to the Kingdom 

Before looking at DeFi usage levels, it’s important to take a look at how the Ethereum network has reacted to market turbulence over the last few months. At the time of writing, the price of ETH sits at $1,139 - almost 70% down from its price three months ago of $3519. Does this price change indicate dwindling network activity? The correlation is not particularly strong.

The average number of daily Ethereum transactions last month was somewhere in the region of 1.12M TPD (transactions per day). This figure is not too distant from the average of 1.35M TPD occurring on the network in November 2021, and certainly does not reflect the 75% decrease in ETH price since then. Despite price falls, Ethereum maintains a high level of usage.

When gas prices are considered however, it highlights DeFi’s current woes. Current average gas price sits at around 33 Gwei - down 80% from the average gas price of 167 Gwei around November 11th 2021 when ETH price was at its all-time high. A common misconception is that gas price is driven exclusively by network activity. While this is a determining factor of the price, it is also highly dependent on the kind of contract that is being interacted with and the amount of code to be executed in said contract. The Ethereum network charges for each transaction based on the length of code or ‘size’ of the contract. Therefore, complex transactions which involve multiple contracts will have higher gas fees for interacting with smart-contracts based dApps when compared to simple transfers. As a result, the drastic decrease in gas fees since November last year might indicate user-hesitation to engage with DeFi platforms (which utilise code-heavy smart contracts to operate). 

It’s also worth considering that many other layer-1 chains such as Solana, BSC(Binance Smart Chain, and Avalanche now offer DeFi functionality. Increased usership of alternative chains may also be contributing slightly to Ethereum’s decrease in gas price.  

Number of Ethereum Transactions Per Day Over Time

(Info from BitInfoCharts. (Updated 05/07/22)) 

As can be seen above, daily transaction levels on the Ethereum network have not moved drastically since its all-time price high (Nov 2021). It is likely that the majority of the sustained TPD mentioned above consists of moving funds between wallets and centralised exchanges (activities involving lower gas costs). This means people aren't leaving Ethereum, but its relationship with DeFi has changed. 

If Interaction is Low, Are People Leaving Funds on DeFi Platforms?

With network activity remaining relatively strong and interactivity with DeFi protocols low, it’s important to know whether funds are being removed from these protocols or simply left alone. Determining this might indicate whether DeFi’s troubles are being caused by dropping token prices or a lack of trust in the space. First let’s look at the TVL (total value locked) in USD. 

Below, we can see the change in TVL in top DeFi protocols since the collapse of Terra two months ago. All top protocols have suffered drops in TVL since May. Some, such as lending protocol Maker (DAI), have only suffered drops in the region of 34%. This was likely due to the nature of Maker as a competitor of Terra’s UST stablecoin. Others such as ETH staking solution Lido however have suffered TVL drops of as much as 70% - putting enormous strain on such protocols.  


(Info from DeFiPulse. (Updated 05/07/22)) 

This proves that DeFi protocols have indeed suffered due to price drops, but does not reveal whether users are pulling funds from the treasuries of these protocols. When the ETH TVLs of these platforms are analysed, it evidences an important fact.

TVL in ETH Over Time of Top DeFi Protocols

(Info from DeFiLlama. (Updated 05/07/22)) 

Above are the TVL in ETH for some of the top DeFi protocols. Despite TVL in USD dropping drastically for all of these platforms over the past two months, the ETH value of their treasuries have remained extremely stable. In fact, Maker and AAVE have actually grown their Ethereum treasuries over that period of time. 

What might be concluded from this is that users still have enough faith in DeFi to keep their funds on such protocols. USD TVLs are painting an incorrect image of these protocols being abandoned. In reality, those who had funds on such platforms before the recent ‘bear-market’ are largely keeping their deposits untouched. Stable ETH treasuries indicate that users have not lost faith in the integrity of these platforms, but perhaps are now more hesitant to deposit funds without thinking twice.      

Written by Rob Henderson for Novum Insights

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