HomeDeFiLiquidity in the DeFi sector recovering in 2023

Liquidity in the DeFi sector recovering in 2023

The DeFi sector, as well as its liquidity, is recovering following a 2022 that was nothing short of disastrous in every respect.

TVL, or Total Value Locked, in decentralized finance protocols is up modestly in 2023, boding well for the coming months.

Moreover, future projections of revenues and the number of users in the industry are distinctly optimistic.

Let’s explore them together.

Liquidity and TVL of DeFi protocols is on the upswing in 2023

Although the DeFi sector has been completely abandoned on the liquidity front by most investors in 2022, since the beginning of the year there seem to be signs for a slight recovery.

Specifically, from 1 January to 31 December 2022, the “Total Value Locked” (TVL) of decentralized finance protocols fell from $163.6 billion to $38.57 billion, a decrease of about 76.5%.

The capital flight is due to the fact that with the onset of the crypto bear market and the start of a monetary policy made up of interest rate hikes by the US Federal Reserve, investors preferred to switch to risk-off financial products, discarding the highly speculative options of the DeFi world.

Chart of DeFi’s TVL trend in 2022

With the beginning of 2023, things seem to have taken a turn for the better, with an increase, albeit slight, in the amount of capital allocated to DeFi protocols by Web3 users.

In detail from 1 January 2023 to date, TVL has increased from $38.11 to the current $45.41 billion, an increase of about 19%.

The most dominant protocols at the moment are Lido, which enjoys a 29.34% dominance over the rest of the market, MakerDao, Aave, Curve Finance, and Uniswap.

Another interesting detail to note is the fact that decentralized exchanges (DEX) have increased their market share relative to centralized counterparties (CEX).

Since the beginning of the year, the percentage of trading volume recorded on DEXs compared to CEXs has more than doubled, according to data from ARK Investment.

The figure indicates that DeFi’s crypto exchanges, devoid of any financial intermediation, are increasingly emerging over platforms such as Binance, Coinbase, Okx Bybit, etc.

The majority of the market share is still in the hands of the centralized exchanges, but we are starting to see less pronounced unevenness than in previous years.

Future projections of revenues and number of users in the DeFi world

Turning now to another level of analysis, we observe how future projections for revenues and number of users in the DeFi industry are decidedly optimistic, according to data presented by BitcoinCasinos.com.

Going more specifically, revenues from the world of decentralized finance, despite being down during the crypto winter of 2022, are expected to pick up in 2023.

Forecasts speak of triple-digit percentage growth with a target of $16.9 billion as of 31 December 2023 and a gradual increase year after year.

This is not surprising to those in the industry, who have seen with their own eyes the evolution of this sector since 2019, when it represented only a bet while today it is consolidating as a financial reality.

There is still a long way to go to reach the numbers of regulated marketplaces.

However, all the conditions are in place for strong development in the coming years.

In terms of users, the data is also extremely positive: the number of individuals using DeFi had a very good start in 2023 with a recovery of the 2021 bull market levels.

In 2019, when the sector began to spread among the niches of crypto enthusiasts decentralized finance recorded only 160,000 users of the technology until it boomed in 2021 with 8.54 million users.

Forecasts tell us that by 2027 the figure is expected to rise to 9.33 million, likely due to the future growth of the cryptocurrency market and the allure of the decentralization industry.

As time passes, individuals are increasingly considering the importance of a P2P exchange economy that eliminates any kind of intermediary between parties.

The concept of privacy has also become more widely known, given the scandals that have followed with the explosion of social media activity and the advent of Web2 in general.

Now that web3 culture is spreading across the globe in a big way, we just have to wait for time to run its course and for simple and intuitive applications to be developed for the new audience to use.

User experience, if mass adoption is to be achieved, must be put first, sacrificing the technicalities and complexities so beloved of DeFi degens.

Projection of the number of users in DeFi by 2027

A look at the evolution of liquidity in DeFi and blockchain networks

The world of blockchain has evolved with impressive speed over the past 3 years, leading the DeFi industry to diversify among dozens of decentralized networks and protocols.

Just think that as of August 2020, Ethereum‘s blockchain held almost all of the industry’s market share with a 94.41% share and protocol liquidity of $3.4 billion

Now Ethereum still remains the leading infrastructure with $26.4 billion in blockchain value, having however reduced its dominance to 58.29%.

Indeed, in parallel, a variety of decentralized networks have emerged that have had a decidedly positive impact on the decentralized finance industry.

Blockchains such as Tron, BSC, Avalanche, Fantom, and Polygon have introduced the possibility in early 2021 of being able to take advantage of DeFi in a cost-effective manner, avoiding the large fees present on Vitalik Buterin’s expensive network.

The industry’s increased scalability continued throughout 2021 with the emergence of Solana, which introduced itself to the world as the ‘”Ethereum Killer,” and Terra, which quickly won the trust of investors (alas) and a large chunk of cash in DeFi.

Late 2021 and early 2022 saw the emergence of the layer2 trend, which became increasingly disruptive in the narratives of crypto communities, with the introduction of the Optimism and Arbitrum networks.

In May 2022, the collapse of Tron, which at the time boasted a TVL of nearly 15% relative to the rest of the market, upset the balance of the industry, causing investors to lose billions of dollars and redistributing the market share of the various chains.

Ethereum, Tron, and BSC are the entities that have benefited most from the disaster, though leading to a decrease in the DeFi liquidity present in the protocols.

The Terra debacle was a game changer for the fortunes of the industry, which regained some of the trust lost only with the FTX crash, which demonstrated the inefficiency and danger not only of algorithmic stablecoins but also and especially of centralized platforms.

As of today, infrastructures incorporating zk rollup technology such as zkSync, Starknet, and Polygon Zk EVM are emerging and are the main bets of investors in DeFi for the next 2 years.

We look forward with much interest to see how the DeFi landscape will further evolve and how liquidity will be distributed between the Ethereum ecosystem and other decentralized networks.

Alessandro Adami
Alessandro Adami
Graduated in "Information, Media and Advertising", for over 4 years interested in the cryptocurrency and blockchain space. Co-Founder of Tokenparty, community active in spreading crypto-enthusiasm. Co-founder of Legal Hackers Civitanova marche. Information technology consultant. Ethereum Fan Boy and supporter of Chainlink oracles, strongly believes that smart contracts will be central in the development of society.