VYSYN Ventures Weekly Insights #48 – We analyze the recent growth in the DeFi ecosystem and highlight its impact on Ethereum
Recent market conditions highlight that Ethereum has become increasingly disconnected from Bitcoin. While Bitcoin shed a significant portion of its gains during the week, Ethereum achieved new all-time highs.
Bitcoin is the bellwether of the cryptocurrency industry and has historically been tied to the remainder of the market. However, as Ethereum underpins the majority of the growing decentralized finance (DeFi) ecosystem, it appears that it is becoming increasingly distinct from the market leader.
In the latest VYSYN release, we show how the correlation between Bitcoin and Ethereum and highlight how the two assets are becoming more disconnected. We also detail developments in DeFi and consider its role in Ethereum’s recent price performance.
Bitcoin and Ethereum Disconnect
Bitcoin has historically been the leader of the broader cryptocurrency market. It’s performance is closely tied to the movements of the overall market. However, Ethereum is becoming increasingly disconnected as an ecosystem surrounding DeFi and Dapps burgeons on the biggest altcoin network.
Nonetheless, the correlation between the two assets mostly remains moderately to strongly positive. However, events like the recent Bitcoin price drop not being reciprocated in Ethereum highlights that the two networks are being supported by increasingly distinct investors and market participants. The 30-day correlation between the two assets even entered negative territory amid Bitcoin’s depreciation.
DeFi Drives Disconnect?
The widening disconnect between Ethereum and Bitcoin is not surprising, given the vast expansion of the DeFi ecosystem since 2020. The ecosystem continues to grow and onboard new users. More solutions are being created and greater possibilities are surfacing. Recently, DeFi protocol Opium unveiled a new product that will allow users to increase their returns on Ethereum through leveraged exposure. The new product, “Turbo ETH” targets DeFi investors willing to take higher risks with the potential of earning higher returns within a short time.
Investor returns, service accessibility, elimination of the need to trust, and reduced cost are some of the factors that are behind an influx of new users into DeFi. This influx is expected to continue as more products emerge within the ecosystem. The data highlights that new users have been entering the DeFi ecosystem. The unique addresses associated with the Ethereum DeFi ecosystem has reached over 2 million.
The ecosystem is also becoming more liquid. The Total Value Locked (TVL) in DeFi has grown to over $64 billion.
DeFi companies are naturally benefitting from the growth in interest, users, and capital. In its Q1 report, DeFi bluechip Yearn declared a $4.8 million return in adjusted EBITDA. Yearn Finance is one of the biggest DeFi protocols on the Ethereum blockchain. The protocol provides a suite of DeFi features including lending aggregation, yield generation, and insurance. Yearn Finance currently ranks in the top 100 cryptocurrency projects by market capitalization with a valuation of over $1.7 billion.
More users are being onboarded, greater liquidity is locked in, and DeFi-native projects are recording lucrative returns. However, the marketplace for DeFi-related assets remains extremely volatile. There is an abundance of yield opportunities but speculators need to be highly skilled to assess price movements. The DeFi Pulse Index, a basket of DeFi-related is trading close to record highs but recently recorded a retracement of roughly 30%.
ETH Dominance on the Rise
Partly as a result of this proliferation of Ethereum-based DeFi activity, Ethereum is eating into the cryptocurrency market cap dominance of Bitcoin. At the beginning of 2021, Bitcoin’s dominance was ~70%, while Ethereum represented roughly 10% of the cryptocurrency market. At the time of writing, Ethereum’s dominance has risen to almost 15, while Bitcoin dominance has dropped to just below 50%.
DeFi solutions are serving a pressing need and that is partly propelling the DeFi growth. Another major driver of the growth is simply speculative activities. Nonetheless, The traditional financial ecosystem is extremely repressive and restrictive and DeFi represents an alternative. It has positioned itself to onboard the latest wave of mainstream adoption.
As DeFi continues to grow and proliferate, it is likely we will experience an increased disconnect between Bitcoin and Ethereum. Both Bitcoin and Ethereum serve very different use cases. Users who enter from a speculative viewpoint will likely take positions in both Bitcoin and Ethereum as both have merits in a portfolio. However, some netizens will seek to solely hold Bitcoin and others will only be interested in DeFi. These distinct investors will drive the disconnect between the two biggest cryptocurrency networks.