DeFi tokens are soaring in price. But is their on-chain activity up to par?

In case you haven’t noticed, we’re in a full-blown, your-grandma-googling-how-to-buy-BTC bull market. Everything is pumping: and I mean everything.

At this stage of the market cycle, most speculators usually start to ignore any and all token fundamentals, and instead focus on guessing which meme-coin Elon will pump next.

Sadly, we at Santiment are still suckers for fundamentals. For instance, just this morning we posted a great overview of YFI’s recent growth using a combination of on-chain, social and price-related data, and what it says about the coin’s short-term potential.

The YFI writeup also got me thinking about the current fundamentals of the entire DeFi market segment, which continues to surge in 2021.

Since the start of the year, the market cap dominance of all DeFi coins (in our database) has grown from 1.2 percent to a whopping 2.7 percent. DeFi blue chips like UNI and AAVE - coins that didn’t even exist a year ago - now sit comfortably among the top 20 biggest coins by market cap, while new yield farming options and swap protocols get launched on a daily basis.

And while the price of popular DeFi coins has mushroomed since the start of the year, what we want to know is - did their on-chain activity keep pace? Or has it started to lag behind, suggesting a potential (bearish) divergence between their market cap(s) and daily value accretion?

To try and answer the above, let’s take a closer look at top 12 DeFi-related coins at the time of writing, and their wholesale on-chain activity since the start of the year.

Let’s start with daily active addresses, or the number of unique addresses sending or receiving these tokens on a daily basis. Since their valuations continue to soar, it would make sense that these coins would also show increased address activity, suggesting growing network adoption and scaling speculative interest.

Below is the combined amount of daily active addresses for the top 12 DeFi-related coins:

For the most part, address activity does indeed seem to mirror the price action of DeFi blue chips. At the start of the year, there were roughly 20,000 addresses (in total) interacting with top DeFi coins. Today, that number has vaulted to 35,000, marking a 75% growth since the start of the year.

In fact, DeFi’s address activity peaked around February 5th, with more than 42,000 addresses sending or receiving above coins in a single day.

That said, not everyone seems to be pulling their weight. While coins like SNX nad REN continue to show great strides, tokens like MKR and YFI have contributed less to the total tally, having largely plateaued in addresses activity since the start of the year (minus a few price-related bumps):

Next up, let’s take a look at network growth, or the amount of new addresses interacting with these tokens for the first time since the start of the year. If DeFi is to continue its upward trajectory, it will need to continually onboard new blood. So how’s it doing so far this year?

Overall, pretty good! On January 1st, there were ~8,000 new addresses interacting with top DeFi coins daily. The amount has doubled in the past 43 days, up to ~16,000 new daily addresses at the time of writing. The network growth peak - similar to daily addresses - was recorded on February 5th, with almost 22,000 new addresses sending or receiving DeFi blue chips.

For a closer comparison, here’s the average amount of daily and new addresses, respectively, using the above coins since the start of the year:

As the price of top DeFi coins skyrocketed in 2021, so has the overall interest in these assets by new and established users alike. Needless to say, it is paramount for their future growth that the pattern continues to hold true, and it will be very interesting to revisit these numbers once we (inevitably) see a market-wide correction.

Another positive sign for the future of decentralized finance is the amount of top DeFi coins currently located in known exchange wallets. Since the start of the year, we’ve seen a more-less consistent decline in both the median and mean supply of top DeFi coins on exchanges, suggesting a lack of sell-side pressure as well as a potential pivot toward HODLing for the time being:

We often see this type of inverse correlation between the price of an asset and its availability on exchange platforms. For instance, a pretty clear example can be found in our YFI insight from earlier today:

Finally, while the address activity of top DeFi coins continues to grow with their valuations and the sell-side pressure seems to be waning, there is one concerning indicator that warrants a mention.

Since the start of the year, both the 30-day and 365-day MVRV ratios for top DeFi coins have continue to surge, pointing to potentially overvalued conditions for a number of these assets.

MVRV ratio is an on-chain indicator that tracks the average profit (or loss) of a certain group of token holders. For example, a 30-day MVRV ratio tracks the average P or L of all addresses that acquired coins in the past 30 days.

As a rule of thumb, the higher the MVRV ratio (i.e. the higher the average profits), the more likely it is that holders will begin to reduce exposure and exit their positions. Unsurprisingly, the average profits of both short-term and long-term holders of top DeFi coins has been on a clear uptick since the start of the year, signaling increased risk of sell-offs should market sentiment begin to sour:

However, while an inflated MVRV may lead to short-term price corrections, the feel-good takeaway is that the on-chain activity of top DeFi coins seems to be keeping up to par with their (kiiinda crazy) market valuations - at least for the time being.

Stay safe out there!