- DeFi lost some of its shine toward the end of 2021 as the metaverse garnered more attention.
- Nine crypto experts share their bull and bear cases for DeFi tokens in 2022.
- They also highlight the nine tokens with the most potential for the new year.
Last year, crypto investors looking to gain double-digit, sometimes triple-digit returns, just needed to turn to the decentralized finance (DeFi) market.
DeFi technology enables parties to carry out financial transactions directly with each other by removing intermediaries and using blockchain technology for the transaction.
Investors can trade crypto tokens on decentralized exchanges, like Uniswap, whose native uni token posted 260% returns in 2021.
Or they could look to the burgeoning DeFi sector of yield farming, where investors lock in their crypto asset for a period of time and receive interest in return.
DeFi attracted investors because of both its ability to challenge the traditional finance ecosystem, as well as the high returns it can offer.
However, in recent months, DeFi lost some of its momentum as investors flocked to metaverse-exposed cryptocurrencies. DeFi altcoins like uniswap and aave that soared last year, logging eye-watering gains, are in the red so far this month, as investors have cashed in on 2021’s profits.
The metaverse, a computer-generated series of virtual worlds, is already tapping into and visualizing tangible concepts from our day-to-day life, whether it’s gaming, asset ownership or social networking, and presenting them in a decentralized form. It’s part of Web 3.0 vision, which is a decentralized version of the current internet ecosystem with a focus on community ownership and better management of personal data.
In August, 2021, blockchain game Axie Infinity showed the world how it could capture the attention of a nation by paying more than some real-world jobs.
Then when Facebook then changed its name to Meta in October, the concept of the metaverse was propelled into the mainstream creating a broad appetite for understanding how the Web 3.0 vision could work.
Venture capitalists and consumers have jumped head first back into Web 3.0 this year with a focus on NFTs, crypto gaming and virtual worlds.
But what does this mean for DeFi protocols? Will it send many of their already struggling tokens into a
DeFi outlook
For Chen Li, a crypto venture capitalist at Youbi Capital who invests in blockchain gaming and DeFi, there is very little difference between the two crypto worlds.
“DeFi and games are very similar,” Li said. “A lot of games are just DeFi wrapped in a game package.”
Stephen Ehrlich of crypto broker Voyager Digital agrees. He expects the metaverse and play-to-earn games to naturally merge with DeFi to enable better utility and usability for users.
“GameFi and DeFi NFTs are definitely trends to watch,” said Ehrlich over email. “I expect DeFi will have its growing pains, but will establish and prove itself in 2022.”
He highlights that it’s easy to look at the price action of DeFi tokens and assume the worst. DeFi, in fact, had an “explosive year” based on total value locked with the value rocketing from around $26 billion to over $100 billion, he said.
One example of this differential is Curve (CRV), an exchange
liquidity
pool. The company grew its assets by 1,562% last year, while the token traded down 90% from its all-time high, according to Eliézer Ndinga, research lead at digital asset firm 21Shares.
“At 21Shares, we look beyond price actions as they do not tend to always reflect innovation, but in the long run, if a DeFi project keeps executing across core fundamental areas, the value will eventually be reflected in its price action,” Ndinga said over email.
Some of what happened in the price action toward the end of year was profit taking after a tremendous run, Li said.
“All these major Defi 1.0 tokens, got hit pretty hard,” Li said. ” … But I think they’re still competitive, I think a lot of them are at a bargain price, and are definitely discounted.”
Li is concerned about the long term value capture of DeFi protocols.
“There might be some challenges for these major DeFi protocols to capture value if we truly solve the scalability issue,” Li said. “But I think for now, I think in terms of volume, and users, I think a lot of these defi protocols are undervalued.”
Looking at only the technicals, DeFi tokens have been in a bear market since late spring, said JC Parets, the founder of AllStarCharts.com, over email.
Investors, however, should be cautious about categorizing DeFi as in either a bull or bear market because the concept of decentralized finance didn’t even exist five years ago, said Bill Barhydt, CEO of crypto investing app, Abra.
“Developer activity in the DeFi space has never been higher,” Barhydt said. “I’m extremely bullish on DeFi, as the future back-end of the banking system, with bitcoin as the best monetary store of value.”
There’s also an evolution taking place from DeFI 1.0 to DeFi 2.0. Investors should trace this to evaluate the DeFi market into 2022, according to venture associate Tyler Matses and venture analyst Aric Chang at digital asset manager Wave Financial.
“DeFi 1.0, the protocols that were first to market and most popular in 2020, saw a bit of a bear market over the past nine months,” said Seth Ginns, managing partner at venture capital firm Coinfund, over email. “More recently developed protocols from the 2021 vintage have been some of the best performers this year.”
Tokens to buy
For Ginns, he highlights the activity happening around Frog Nation (FROG).
Frog Nation is a DeFi system that aims to offer equal opportunity to build and provides access to several ecosystems, such as SushiSwap (SUSHI), Popsicle Finance (ICE) and Abracadabra (SPELL).
The activity surrounding the Curve (CRV) ecosystem is also catching Ginns’ attention, as well Wave Financial’s Matses and Chang.
“This growth has made its CRV governance token an increasingly important source of yield and a tool for protocols to maintain their assets’ pegs,” said Matses over email.
Investors could also look to Convex (CVX), which is important as Curve’s governance-powered inflation distribution rises, Matses said.
“Convex Finance is a protocol that simplifies the Curve boosting experience in order to maximize yields,” Matses said.
CRV also features Voyager’s Ehrlich’s list to reach the top 10 crypto assets, which also includes Uniswap (UNI), Aave (AAVE), Compound (COMP) and Yearn Finance (YFI).
“I’d say Uniswap, last year, the protocol’s network market makers or LPs made a total of $1.6b in revenue or trading fees,” 21Shares’ Ndinga said. “To put things in perspective, this was more than any DeFi applications, the largest NFT marketplace, Opensea, and Ethereum Competitors like Solana and Avalanche.”
For Marcus Sotiriou, an analyst at digital asset broker GlobalBlock, oracles are a category of DeFi tokens that are overlooked and could provide the most upside in 2022.
“Oracles are projects that integrate real life data into the blockchain in a decentralized way,” Sotiriou said. “The market leader for oracles is Chainlink (LINK), which secures over $75 billion of assets.”
Parets is bullish on Terra (LUNA) based on its relative strength.
