What happened behind the massive influx of funds into DeFi?

With the funding rates of a large number of altcoins soaring to the highest level in nearly three years, this round of sentiment-driven altcoin market finally ushered in a violent shock after the climax. On December 9, without any obvious negative factors, altcoins collectively plummeted, resulting in the forced liquidation of about $1.6 billion in positions in the futures market, and leveraged bulls were bleeding. According to CoinmarketCap data, on December 9, the median decline of the top 100 currencies by market value was 22.3%, and many currencies had their gains in this round of bull market wiped out by half. Why did the market suddenly plummet?

Usually, sharp rises frequently occur in bear markets, while sharp falls are common in bull markets. The purpose of the sharp fall is to carry out a precise decapitation operation on leveraged bulls with lightning speed. At the same time, through the "terrorist drop", the bulls in the market are cleaned up and potential bulls outside the market are deterred. Conversely, the sharp rise is also true.

When a sharp drop occurs, many investors who were originally confident in the bull market will evacuate in panic, while those who originally planned to buy at the bottom believe that the market has not yet bottomed out, thus terminating their plans to buy at the bottom. Therefore, in the bull market, once there is a wash-out technique that squeezes leveraged longs through a rapid decline, the market adjustment is often in place in one step. The signal of the bottoming out of the adjustment is the appearance of a huge amount of liquidation. On the contrary, if the decline unfolds in a slow form, giving investors ample time to think and judge, then the "bottom" you think is most likely not the real bottom.

The decline on December 9th not only released panic emotions, but also met the conditions for a huge amount of liquidation, so the nature of the adjustment is still a technical adjustment in the bull market process.

From the perspective of trading, it is too early to talk about the peak of the altcoin market. First of all, in the past week, regardless of whether the market rises or falls, the daily transaction share of altcoins has always remained above 40%. The focus of capital game has obviously shifted to altcoins, and this trend will not change easily once it is formed. At the same time, the market is almost never short of hot spots with money-making effects. Even though the market fell sharply on December 9, 5% of the top 150 currencies by market value still rose against the trend. This shows that the market risk appetite has always remained at a high level.

Secondly, the current bullish sentiment and trading congestion of altcoins are far from the level when they peaked in 2021. For example, in March 2021, the daily trading volume of altcoins once reached 70%, and the trading volume of FIL exceeded BTC for many consecutive days. The current altcoin market is still in an orderly rotation state, and there is still no phenomenon that a certain sector or currency continues to siphon market liquidity with a high valuation premium.

However, it should be emphasized that with the end of the indiscriminate sweep of funds and the elimination of the low-lying stage, the differentiation of the altcoin market will be inevitable. Although the new main line of the market is still in the making, from past experience, adhering to the fundamental logic is still the best strategy for defensive counterattack.

According to the division of tracks, fundamental-type currencies can be divided into deep value and fast-growing types. Deep value currencies usually belong to projects with a stable competitive landscape and a solid industry position. These projects have a certain hematopoietic capacity, and their internal system reforms and optimization of market operation strategies are also being continuously promoted. Once the industry enters a boom cycle, they are most likely to have the opportunity of Davis double-click. The most typical example is the old leading DeFi projects such as UNI, AAVE, and LINK that I have repeatedly mentioned. Taking UNI and AAVE as examples, according to DeFiance Captial data, the former has a market share of 60% in the mainstream asset trading field, and the latter has a market share of 65% in the active loan field, which are the overlords in the DEX and LEND fields respectively. Since August 5, with the continued fermentation of the bull market, the TVL of these DeFi projects has generally increased by 3-5 times, and the daily trading volume has also increased by 5-10 times. As the leaders in the subdivided fields, the hematopoietic capacity of UNI and AAVE has been unprecedentedly improved.

In addition, with the gradual stabilization of the market size, only the leading companies have the ability to improve corporate profits through price increases. Because with the establishment of brand advantages, scale effects and customer stickiness, users' acceptance of price increases for products or services will also increase accordingly. For example, Uniswap began charging a 0.15% exchange fee for certain tokens in its web application and wallet in October 2023, and raised the exchange fee from 0.15% to 0.25% in April 2024. So far, front-end fees have brought more than $100 million in revenue to Uniswap Labs, which means that even if the treasury funds are exhausted, Uniswap still has a source of funds to maintain operations and research and development.

As the industry enters its mature stage, the head companies (projects) will have more income to improve shareholders' investment returns, such as increasing dividends or repurchases. In February of this year, the Uniswap Foundation issued a proposal to allocate part of the protocol fees to UNI pledgers; in July, the Aave governance team proposed to use part of the protocol fees to repurchase the governance token AAVE. Although the interests of all parties are still in the game, it is only a matter of time before these proposals are implemented. In contrast, small DeFi protocols have even become a problem of survival, and there is obviously no excess liquidity to improve shareholder returns.

On December 12, the Trump family's DeFi protocol (World Liberty, Financial) purchased a large amount of ETH, LINK, and AAVE tokens, with the purchase amounts being $10 million, $1 million, and $1 million, respectively. It is worth noting that three days before the Trump family's DeFi protocol purchased tokens, Trump announced that crypto czar David Sacks would serve as the new government's crypto chief. Sacks is a supporter of asset tokenization. And CRV, which has performed well recently, is the partner of BlackRock's asset tokenization. According to Bitwise's forecast, with the gradual entry of Wall Street, the scale of RWA assets is expected to grow from $13.7 billion in 2024 to more than $50 billion in 2025, which also means that DeFI will usher in new growth points in the future.

In short, the leaders in each sub-segment of DeFi are still the clearer main line in the altcoin market. For investors who pursue certainty, it is also a good choice to appropriately allocate some DeFi assets. As for how to choose fast-growing currencies, we will focus on this in the next issue.

In terms of operation, during the market shift period, adhering to the principle of "the strong will always be strong" is the best way to select the leaders of the next stage. In terms of target selection, there are two main criteria for reference: one is that the currency price has taken the lead in breaking through the pressure zone in March this year; the other is that the currency price has the smallest drop in the callback and the largest increase in the rebound.