The decentralized finance (DeFi) market has been one of the most exciting and volatile areas in cryptocurrencies outside of Bitcoin (BTC). In 2020, the DeFi space experienced a bull run, with the total value locked (TVL) of decentralized finance protocols soaring from $1 billion to over $100 billion. However, the DeFi market is also prone to sharp corrections. In 2021, the DeFi market experienced an adjustment, with TVL falling from US$100 billion to US$40 billion.
Despite the volatility in the DeFi market, there are still ways for traders to seize opportunities when the niche cryptocurrency industry begins to show sustained bullish momentum. The three most important metrics to watch are TVL, the platform’s fee income, and the number of non-zero wallets holding tokens.
Let’s take a deeper look at how these metrics can be used to measure the health of the DeFi industry.
Total value locked increases
TVL is one of the most widely used metrics to measure the overall health of the DeFi ecosystem. TVL represents the total amount of cryptocurrency assets locked in the DeFi protocol. When TVL rises, it indicates increased demand and usage of DeFi services, which may signal a bull market.
While the current TVL is slightly below the 2023 peak of $52.9 billion set on April 15, it has increased since the beginning of the year. Since January 1, the TVL of the entire cryptocurrency market has increased by $7 billion to over $45 billion.
Increased fee income means increased usage and interest
Protocol fees measure the amount of fee revenue received by the blockchain for completing transactions. Layer-1 blockchains are a key part of the DeFi ecosystem because they allow the creation of decentralized applications (DApps) that users can interact with without centralized intermediaries.
When Layer-1 fees rise, it shows growing interest in DeFi, and traders are leveraging DApps to interact with the blockchain. Over the past 30 days, the top 16 first-tier blockchains by market capitalization have all seen positive fee growth. On an annualized basis, the total 30-day fees collected by Ethereum (ETH) exceed $2.2 billion.
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Non-zero DeFi wallet addresses increase
The number of non-zero addresses is a good indicator of the number of people actively involved in cryptocurrency. When the number of non-zero addresses increases, it indicates increased demand, which can be a sign of a bull market.
Non-zero addresses are generally a reliable indicator of demand, as users are only likely to hold crypto tokens if they believe they will appreciate in value or are actively exploiting the protocol. Isolating the statistics for the entire crypto market and focusing on DeFi tokens, the number of non-zero addresses hit an all-time high on November 8, reaching 1.1 million addresses. As of November 8, 2020, there were only 267,180 non-coin wallet addresses.
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The DeFi market has recovered and grown since the Terra Luna implosion, but it is also volatile, so it is important to carefully consider on-chain indicators and other macro factors that can help identify a bull market.
By observing these indicators, traders can better understand the overall health of the DeFi market and potentially get early signals of the emergence of a new bull market.
This article does not contain investment advice or recommendations. Every investment and trading activity involves risks, and readers should do their own research when making decisions.
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