Is The Next DeFi Summer Around The Corner? 5 Key Metrics To Watch

As the crypto markets continue to show signs of recovery and growth in recent months, there is a palpable sense of anticipation for the return of a DeFi Summer.

In this deep dive, we explore five strong signals that suggest the summer of 2023 could be a hot one for decentralized finance, even despite the current regulatory environment in the US and much of the Western world, which seems bearish. We’ll delve into historical patterns, the current global banking crisis, the rise of decentralized exchanges, innovative developments in DeFi platforms, and the upcoming Bitcoin halving to show that the negative narrative may not be all it’s cracked up to be.

1) 2023: A Pre-Election Year Bull Run

Historically, pre-election years have been the best performers within any four-year presidential cycle. Of the last 84 years, only one pre-election year posted a loss. In 2015 and 2019, pre-election years saw significant gains in the markets. The current presidential race, marked by contentious debates and high stakes, may further drive market movement in 2023.

Examples from history include the stock market’s performance in 1991 and 2007, which saw strong gains in anticipation of the upcoming elections. The heated political climate often leads to increased investor confidence, as governments tend to boost economic growth through policies and stimulus measures. This bullish pattern could spill over into the cryptocurrency market, fueling a resurgence in DeFi interest and activity.

2) The 2023 Global Banking Crisis

The 2023 global banking crisis has been one of the most significant financial events since the 2008 financial crisis. Within just ten days, two U.S. lenders collapsed, Credit Suisse sought a government lifeline, and America’s top banks agreed to a $30 billion rescue deal. The turmoil prompted action from the U.S. Federal Reserve, the U.S. Treasury, and the private sector, causing widespread fear of a contagion that could have far-reaching consequences.

In the midst of this financial chaos, the S&P 500 bank index tumbled, and bank stocks, such as Silicon Valley Bank (SVB), experienced significant losses. This chain of events is reminiscent of the 2008 financial crisis, where the collapse of major financial institutions triggered a global recession. Except this time there are just two bank failures so far, yet significantly more lost deposits and slightly fewer assets.

Historically, crises have often paved the way for new technologies and innovative solutions. For example, the 2008 financial crisis contributed to the creation and rise of Bitcoin and blockchain technology. Similarly, the 2023 global banking crisis could serve as a catalyst for the growth and adoption of DeFi, as people search for better financial systems and investments.

The collapse of major financial institutions such as SVB and Credit Suisse, and the subsequent interventions by governments and central banks, highlights the inherent risks of centralized financial systems. These events may push people to explore DeFi solutions, which offer greater security, transparency, and control over their assets. As the traditional financial system struggles to recover from the 2023 crisis, DeFi could emerge as a more robust and attractive alternative.

Don’t just take my word for it either..

3) DEXes Flipping CEXes and Whatnot

In an unprecedented recent development, decentralized exchange Uniswap surpassed Coinbase in trading volume for the second consecutive month. Note the DEX volume rising steadily each month so far this year, with March being the first time it surpassed $100 billion since May 2022.

Uniswap’s spot market volume reached $71.6 billion in March, a staggering 45% higher than Coinbase’s, according to data from The Block Research. This achievement marked Uniswap’s best performance since January 2022, and it managed to outperform Coinbase even as the latter’s volume improved month-on-month.

Coinbase’s spot market volume stood at $49.4 billion in March, a 23% increase from approximately $40 billion in February. However, the exchange’s volume fell during the last week of March. In its weekly market commentary, Coinbase attributed this decline to investors shifting their focus towards tokens with larger market caps and stablecoins. Furthermore, the exchange noted that recent regulatory developments involving the SEC and CFTC had exacerbated uncertainty surrounding ether and other altcoins.

The surge in Uniswap’s trading volume comes at a time when centralized crypto businesses in the U.S. face increasing regulatory scrutiny, particularly during February and March. In February, the SEC charged centralized exchange Kraken with a $30 million fine for failing to register its staking-as-a-service program’s offer and sale. Subsequently, the SEC issued a Wells notice to Coinbase, placing the company under investigation for potential sales of unregistered securities related to its staking service, Coinbase Earn, and Coinbase Wallet.

Moreover, the CFTC recently filed a case against Binance and its CEO, Changpeng Zhao, alleging that the exchange violated federal laws and failed to register in the U.S. These regulatory actions have cast a shadow over centralized exchanges, potentially driving traders towards decentralized alternatives like Uniswap.

In addition to the rise of decentralized exchanges, leading crypto analytics firm Santiment reports that traders are increasingly holding Ethereum (ETH) in self-custody at record rates. This trend indicates growing confidence among HODLers, as the all-time low ratio of ETH held on exchanges (10.31%) suggests a preference for decentralized, self-custody solutions over centralized platforms.

With the increasing preference for decentralized finance solutions, the consistent growth of Uniswap and other decentralized exchanges, and the challenges faced by centralized exchanges, it’s clear that DeFi is well-positioned to play a more significant role in the future of the crypto landscape. The shift towards decentralized platforms and self-custody solutions signals a potential tipping point, paving the way for DeFi Summer 2023.

4) Innovation and Competition Within DeFi

The DEX space is witnessing an intense competition as PancakeSwap just introduced its V3 version this week, which brings several improvements aimed at making it more user-friendly and efficient. With PancakeSwap V3 being a fork of Uniswap V3 (which became legal as of April 1st), it seeks to address some of the complexities that have been associated with the latter.

Uniswap V3’s concentrated liquidity feature, while beneficial for efficiency, demands liquidity providers (LPs) to actively manage their positions. To tackle this issue, PancakeSwap is set to launch an Automatic Position Manager. This feature will allow users to deposit liquidity with just one click and maintain their liquidity within the necessary range to earn fees and farming rewards effortlessly.

In addition to the Automatic Position Manager, PancakeSwap V3 also enhances other aspects of Uniswap V3:

1. Automatic APR Display: V3 LPs will have access to real-time APR figures based on liquidity, historical volume, and position configurations, without relying on third-party tools.
2. Improved ROI Calculator: This upgrade enables V3 LPs to estimate yields and impermanent loss, facilitating easy position adjustments without the need for complex calculations.

We can see in the chart below that PancakeSwap is eating up a lot of market share, but it has a long way to go before it can think about flipping Uniswap.

Regardless, this competition drives innovation which encourages widespread adoption. And it’s barely the tip of the iceberg. If you think PancakeSwap’s Automatic Position Manager is cool, wait until you see what we’re building at One Click Crypto.

5) Bitcoin Halving Approaches

Bitcoin halving events have historically coincided with significant price action and increased interest in the cryptocurrency market. The next halving, slated for 2024, could contribute to a DeFi summer in 2023 as anticipation builds in the months leading up to the event. During previous halving cycles, such as those in 2012 and 2016, Bitcoin prices surged, attracting more investors to the crypto space.

While I realize we’re not quite there yet, it’s clear that 2024’s halving isn’t priced in by the markets as we remain near the ATH of 2 cycles back. Being that Bitcoin’s 4-year cycle is more common knowledge today along with the rest of the signals on this list, I don’t expect investors to wait around for 2024 before they start reaccumulating their bags — both BTC and altcoins for DeFi, web3, metaverse, etc.

I think this could be a catalyst for a DeFi summer, and I’m not the only one.

Final Thoughts

The convergence of these five signals — the pre-election year, the global banking crisis, the rise of decentralized exchanges, DeFi innovation, and the upcoming Bitcoin halving — sets the stage for a DeFi summer in 2023. As historical patterns repeat, the global financial landscape shifts, and technological advancements continue to reshape the DeFi landscape, we may very well witness the thawing of the crypto winter and the beginning of a sizzling DeFi season.

Be wise. Do your own research. And always dig deeper.

Disclaimer: This article is not intended to serve as financial advice. The sole objective is to provide an educational perspective on the current state of DeFi and the cryptocurrency markets, as well as to identify trends that are gaining momentum. Investing in products, tokens, or company shares associated with these trends will not necessarily result in financial gain. Always conduct your own research and seek the advice of a financial professional.