Last week, both BTC and ETH surged, hitting nearly two-year highs and dominating market discussions. Bitcoin reached $15,985 on November 6, approaching the $16,000 mark. ETH outperformed Bitcoin with three consecutive days of gains, climbing to a peak of $468.
While major cryptocurrencies thrived, DeFi suffered significant losses. In contrast to the upward trend of BTC and ETH, most DeFi tokens experienced sharp declines, with many falling over 20% within 24 hours. Yearn.finance became a symbolic casualty of this downturn, with its YFI token dropping below $8,000 on November 5.
However, as BTC and ETH's momentum slowed after November 6, DeFi began recovering. Data from Coingecko shows several projects rebounding strongly over seven days, with gains exceeding 50%. YFI notably recovered to its early October price levels.
This revival raises questions: Is DeFi entering a second growth phase? Current data suggests shifting market dynamics favoring quality projects.
Market Recovery Favors Leading DeFi Projects
The inverse relationship between BTC/ETH performance and DeFi tokens sparked extensive discussion last week. As major cryptocurrencies advanced, DeFi faced increasing skepticism on social platforms.
Steven, co-founder of Qianfeng Capital and head of Alpha strategy, explains that BTC and DeFi don't share an absolute negative correlation. "During Bitcoin's recent rally from $10,000 to $15,000, total market capitalization didn't reach the $500 billion level seen when BTC was at similar prices in late 2017. We've been consolidating at current levels too long within a limited capital environment, creating this seesaw effect. Historically, BTC and other tokens show positive correlation, though this relationship has recently weakened."
Beginning November 6, several leading DeFi projects started recovering. YFI's reversal attracted particular attention after hitting a historic low below $8,000 on November 5, which wiped out half its market value within 30 days. The token then rebounded nearly 100% within 24 hours. Uniswap, the dominant DEX platform, followed a similar pattern, bouncing back with 50% gains after hitting its historic low.
Zhou Zhiqiang, partner at UZhengtong, notes that the strongest recoveries occurred among established projects: "Leading projects with solid fundamentals showed the most significant rebounds. These projects typically have market capitalizations between $1-8 billion, with strong products, substantial user bases, and leading positions in their respective sectors based on metrics like TVL."
Steven emphasizes that DeFi fundamentals remain stronger than market sentiment suggests: "Technically, most DeFi projects were oversold, making this recovery a natural market correction. Fundamental metrics remain strong - MakerDao continues growing with TVL exceeding $2 billion, Aave maintains stable lending rates and volumes, and Uniswap's trading volume rivals centralized exchanges like Coinbase. The market is maturing, with quality projects like UNI, AAVE, SNX, and REN attracting concentrated capital."
Will this preference for established projects continue? Steven remains optimistic, while Zhou believes broader cryptocurrency market sentiment will play a crucial role in determining DeFi's trajectory.
Evaluating Projects: TVL Remains Relevant Amid Evolving Metrics
The recovery of major DeFi projects has lifted the sector's total market capitalization. Interestingly, while token prices experienced significant volatility, Total Value Locked (TVL) continued steady growth throughout this period. This divergence between TVL and market cap led some to question TVL's effectiveness as a fundamental metric.
Steven clarifies that TVL doesn't directly determine a project's profitability or market value: "TVL reflects short-term popularity rather than long-term value. When SushiSwap launched, it captured nearly 70% of Uniswap's TVL, but not its fundamental value. Ultimately, innovation and genuine user retention determine success."
Zhou suggests TVL remains valuable for宏观 analysis but requires contextual interpretation at the micro level: "TVL's significance varies across DeFi sectors. For lending protocols, TVL doesn't necessarily reflect business profitability since high borrowing rates can create value without massive locked amounts. For insurance products, higher TVL indicates greater underwriting capacity. For DEXs, TVL represents trading depth rather than profit potential.宏观看, TVL remains a valuable indicator when combined with other metrics."
The disconnect between TVL and trading volumes actually helps investors distinguish genuine demand from speculative activity, according to Steven: "Projects like CRV and BAL experienced 80-90% volume drops because they depended heavily on other DeFi initiatives. In contrast, Uniswap maintains stable volumes of $200-300 million daily with consistent user activity, demonstrating real utility as a decentralized trading solution."
ETH 2.0: Potential Implications for DeFi Ecosystem
Market consensus suggests Ethereum's upgrade to Proof-of-Stake will ultimately benefit DeFi, though the path forward contains both opportunities and challenges.
The Ethereum Foundation launched the deposit contract on November 5 and published ETH 2.0 specifications v1.0, targeting December 1 for genesis block creation. This progress contributed to ETH's price surge, with DeFi tokens following upward.
Zhou notes that ETH's influence within DeFi is evolving as the ecosystem diversifies: "DeFi's composition is becoming increasingly complex. While ETH 2.0's improved performance will benefit the overall industry, effects will vary across sectors. Reduced transaction fees may challenge existing yield aggregation projects that currently pool users to share mining costs. Better technology might also enable new DeFi innovations that challenge current market leaders."
Steven maintains cautious optimism regarding ETH 2.0's timeline, noting current progress falls short of requirements: "The network needs 16,000 validators staking over 500,000 ETH by December 2, while after six years of PoW operation, Ethereum has only 4,478 nodes. I believe Phase 0 will likely launch by first half 2021. Lower gas fees could attract more users to DeFi and enable new real-time applications. The challenge will be ensuring projects can scale effectively to meet growing demand, which will intensify competition and highlight weaknesses in less robust projects."
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Frequently Asked Questions
What caused the recent DeFi market downturn?
The decline primarily resulted from capital rotation into Bitcoin and Ethereum as they reached new highs. This created temporary selling pressure on DeFi tokens as investors reallocated funds to leading cryptocurrencies showing strong momentum.
How can investors identify quality DeFi projects?
Focus on projects with sustainable tokenomics, real user adoption, and clear value propositions beyond speculation. Evaluate transaction volumes, user retention, and protocol revenues rather than solely relying on price action or social media hype.
Why did TVL continue growing during the price decline?
TVL measures assets locked in protocols rather than token prices. Many users continued providing liquidity and participating in protocols despite token volatility, indicating ongoing utility beyond speculative trading.
Will ETH 2.0 immediately solve DeFi's scalability issues?
The upgrade will occur in phases, with initial improvements focusing on consensus mechanism changes. Significant scalability enhancements through sharding will come in later phases, meaning current congestion issues may persist through 2021.
How does Bitcoin's performance affect DeFi projects?
While some inverse correlation occasionally appears, both ultimately benefit from growing cryptocurrency adoption. Bitcoin's strength often brings new users and capital into the ecosystem, which eventually circulates to other sectors including DeFi.
What risks should DeFi investors monitor currently?
Regulatory developments, smart contract vulnerabilities, and composability risks remain key concerns. Additionally, monitor how projects adapt to evolving market conditions and technological changes like ETH 2.0's implementation.