DeFi and May’s bloodbath (Part I)

The Bitcoin (BTC) rally minted thousands of crypto millionaires in the first months of 2021, until the violent sell-off on May 19. BTC lost more than 20% of its value in the early morning trading hours, and the whole market followed suit. We are still in a deep correction since then, but DeFi is powering the comeback.

What we cover here:

  • Decentralized exchanges
  • Lending activities
  • Yield farming
  • Launchpad platforms (Part II)
  • Activities on BSC throughout May (Part II)

DEX Activities

The innovation of DEXs lies in its business model. Centralized exchanges act as an intermediary between buyers and sellers, therefore take custody of your assets. All trading activities on a decentralized exchange (DEX) are, in contrast, managed by smart contracts that run on blockchains such as Ethereum or Binance Smart Chain (BSC). The way DEXs operate makes them immune to disruptions that their centralized peers have to face.

High volatility in the last two weeks led to new records of DEX volume. This is truly the “DeFi Summer” 2.0 with volume tops $300B for the first time. This figure highlights a 96% month-over-month increase in DEX volume. Even during the sell-off of May 19, a new all-time high was set at $11.7B. Transactions on PancakeSwap accounts for more than half of May’s volume, while Uniswap maintains its dominating position in the second place.

 

Source: The Block

Yield farming for liquidity providers

Yield farming is actually an intrinsic part of decentralized exchanges. Users generate handsome rewards from transaction fees when they provide liquidity for DEXs. The most common metric in yield farming is the Annual Percentage Yield (APY).

The grandiose APY of DeFi protocols (sometimes up to 1,000,000%) has captured the attention of the crypto world. Unstaking doesn’t appear to be a wise choice when prices drop, hence this activity is not severely affected during these times of uncertainty in comparison to trading.

Two most notorious DEXs and yield farming service providers are Uniswap, which is Ethereum-based, and PancakeSwap on BSC. We can assume that activities on both DApps surged whenever there is a big move in the market, for example on May 12, May 19 and May 23. Certainly, these statistics cannot represent the total movement of yield farming activities, but they give us a glimpse of the users’ enthusiasm about farming.

 

Source: DappRadar

The trend for May is not as strong as in April when the momentum was high. However, the 1-year chart may imply a transition from Ethereum to Binance Smart Chain, with a lower level of activity on Uniswap in spite of the 8-month upward trend. Meanwhile, PancakeSwap’s pools currently occupy the first 19 positions on the list of top pools with the highest APYs.

 

Source: CoinMarketCap

 

Lending activities

Lending is the crème de la crème of the DeFi sector. Anyone can conveniently maintain full custody of their digital assets while securing regular loan yields. Again, smart contracts will do all the job and lenders have the opportunity to boost their passive income at an interest rate of up to 8%. Lending activities also allow both lenders and borrowers to perform arbitrage trading between a DEX and a CEX and earn arbitrage fees.

The allure of a continuous BTC bull run since last year is hard to resist. The outstanding debts of Aave and Compound, two leading DeFi lending platforms show that decentralized money market protocols have achieved phenomenal success in May 2021 despite the crypto collapse.

 

Source: The Block

However, price volatility in the market can have a powerful impact on the corresponding positions. A record-high of $614.19M in decentralized finance positions were wiped out on May 19, convergent to the crypto free fall that happened the same day. It is not surprising that May 2021 now holds a record for the highest liquidation volume monthly and another for the largest single day liquidations in DeFi.

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