The DeFi sector, one of the oldest in the crypto space, has underperformed in the current bull market. Over the past year, the entire DeFi category gained just 41.3%, significantly lagging behind the broader market average of 91% and even trailing Ethereum's 75.8% increase.
Looking solely at 2024 data, the picture doesn't improve—the DeFi sector has declined by 11.2% year-to-date. However, as Bitcoin reached new all-time highs while many alternative cryptocurrencies declined simultaneously, this might represent the best opportunity to focus on DeFi projects, particularly established leaders.
This article explores why now presents an optimal moment to reconsider DeFi's value proposition and highlights several noteworthy projects worth monitoring.
Understanding the Altcoin Underperformance
Several key factors explain why alternative cryptocurrencies have underperformed Bitcoin and Ethereum:
Demand-Side Growth Deficiency: The current cycle lacks compelling new business models and narratives comparable to previous cycles. Many sectors struggle to achieve product-market fit, dampening investor enthusiasm and limiting capital inflow.
Supply-Side Overexpansion: Improved infrastructure has lowered development barriers, resulting in excessive new project launches and token emissions that outpace genuine demand.
Continuous Unlocking Pressure: Tokens from projects with low circulating supplies and high fully diluted valuations continue unlocking, creating persistent selling pressure.
These factors represent a unique convergence in crypto market history. While projects attempted to maintain valuations by reducing initial circulating supplies, the combination of weak demand narratives and excessive supply ultimately compressed valuations across most crypto sectors.
This valuation correction represents a healthy market cleansing process—capital voting with its feet to eliminate overhyped projects and restore reasonable valuations. Most venture-backed tokens aren't worthless; they were simply overpriced and are now finding their appropriate market levels.
The Case for DeFi Now: Proven Products Emerging From the Bubble
Since 2020, DeFi has established itself as a distinct cryptocurrency category. The 2021 bull market saw DeFi dominate the top 100 crypto projects, with initiatives attempting to recreate every traditional financial service on blockchain.
Today, the landscape has changed significantly. Many DeFi projects that survived the subsequent market contraction now demonstrate compelling characteristics:
Business Foundation: Established business models with clear revenue generation through trading fees, lending spreads, stability fees, and staking services. Leading projects have moved beyond token subsidies to achieve organic, sustainable operations.
Supply Dynamics: Most established DeFi projects have passed their high emission phases with significant token distribution already completed. This results in lower future selling pressure compared to newer projects.
Valuation Opportunity: Despite strong fundamental metrics including trading volume, lending activity, and profitability, DeFi tokens trade at historically low valuations relative to their earnings and revenue.
Regulatory Clarity: The FIT21 Act provides a clearer regulatory framework for digital assets that could facilitate traditional financial institution participation in DeFi through investments and potential acquisitions.
These factors combine to create a compelling opportunity to reevaluate established DeFi projects that have weathered market cycles and demonstrated operational resilience.
Notable DeFi Projects Worth Monitoring
1. Lending: Aave
Aave stands as one of the oldest DeFi protocols, evolving from peer-to-peer lending to its current pooled lending model. It has surpassed previous sector leader Compound to become the dominant lending platform by both market share and valuation.
Business Performance: Aave's active loan portfolio has consistently grown, currently commanding approximately 61% market share. The protocol has demonstrated strong profitability with earnings significantly exceeding competitors.
Competitive Advantages:
- Accumulated security credibility through years of flawless smart contract operation
- Strong network effects from its lending/borrowing marketplace dynamics
- Sophisticated DAO governance with diverse, active participation
- Multi-chain deployment across most EVM-compatible networks
Valuation: Aave's price-to-sales ratio has reached historical lows at approximately 17.4x, presenting attractive valuation relative to its growing revenue base.
Challenges: Emerging competitors like Morpho Blue offer modular lending infrastructure that could fragment the lending market over time.
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2. Decentralized Exchanges: Uniswap & Raydium
These platforms represent leading exchange infrastructure on Ethereum and Solana ecosystems respectively.
Uniswap maintains dominant market share across EVM networks despite minimal token incentives. Its upcoming fee switch implementation could finally provide value capture for UNI token holders. The protocol benefits from strong user habits, network effects, and multi-chain presence, though it faces regulatory challenges and evolving competitive positioning within the DeFi stack.
Raydium has capitalized on Solana's meme token ecosystem growth, capturing significant market share through its standard AMM pools that appeal to token launch projects. The protocol generates substantial revenue through trading fees and pool creation charges, though it faces challenges from aggregators and potential market sentiment shifts.
3. Staking: Lido
As Ethereum's leading liquid staking provider, Lido enables ETH holders to participate in network validation while maintaining liquidity through stETH tokens.
Business Position: Lido commands approximately 30% of Ethereum's staking market, maintaining leadership despite increased competition. The protocol benefits from established credibility among institutional participants and widespread stETH integration across DeFi applications.
Valuation: Lido's valuation metrics have reached historical lows while maintaining strong profitability, though regulatory concerns regarding staking tokens classification present ongoing challenges.
4. Perpetual Exchanges: GMX
This derivatives platform operates on Arbitrum and Avalanche, offering leveraged trading with a unique liquidity provider model.
Market Position: GMX maintains competitive total value locked despite intense competition in the perpetual trading space. The protocol benefits from Arbitrum ecosystem support and established brand recognition, though it faces continuous challenges from new entrants offering aggressive token incentives.
Valuation: GMX trades at attractive multiples relative to sector peers, with full token distribution eliminating future emission overhangs.
Frequently Asked Questions
Why has DeFi underperformed in this bull market?
DeFi lacks the novel narratives that typically drive crypto bull markets. Investors have preferred newer sectors like AI and memecoins, while established DeFi projects faced selling pressure from token unlocks and increased competition.
What makes DeFi projects fundamentally valuable?
Established DeFi protocols generate real revenue through transaction fees, interest spreads, and service charges. Many have achieved sustainable profitability without relying on token emissions, creating tangible value accrual mechanisms.
How do regulatory developments affect DeFi?
The FIT21 Act provides clearer regulatory guidelines that could encourage traditional financial institutions to engage with DeFi protocols. This might lead to investment, partnerships, or acquisition activity that would benefit established projects.
What risks do DeFi projects still face?
Regulatory uncertainty remains a primary concern, particularly regarding token classification. Technical risks including smart contract vulnerabilities and oracle manipulations persist, along with competitive pressures from newer protocols with larger token emission budgets.
How should investors evaluate DeFi projects?
Focus on protocols with sustainable revenue models, reasonable tokenomics with high circulating supplies, established competitive advantages, and reasonable valuations relative to their fundamental metrics.
Are newer DeFi projects better investments than established ones?
Newer projects often offer higher potential returns but carry greater risks. Established protocols provide more predictable returns based on actual business performance rather than speculative narratives.
Conclusion
The DeFi sector has progressed through the typical technology adoption cycle: initial excitement, speculative excess, disillusionment, and now gradual maturation. With proven product-market fit and sustainable business models, established DeFi protocols represent compelling opportunities at current valuations.
As one of crypto's few sectors with demonstrated revenue generation and continued growth potential, DeFi warrants serious attention from investors seeking exposure to blockchain's practical applications rather than purely speculative assets.
The market's repricing of venture-backed tokens has created attractive entry points for projects with genuine utility and sustainable economics. While risks remain, particularly regarding regulation and competition, the fundamental value proposition of decentralized financial infrastructure continues to strengthen.