Of all the various services under the DeFi ecosystem, liquid staking had the highest growth in Q1 2023 based on a recent research released by Coingecko.
DeFi, Decentralized Finance, is a financial system that’s created to remove any central entity between the two bodies or individuals involved in a financial transaction. DeFi as a sector in crypto has several financial services, such as lending, borrowing, trading, insurance, and more.
These services are launched on decentralized protocols that run on a blockchain such as Ethereum, which hosts the highest number of DeFi projects.
Coingecko in its report noted that the 65.2% increase in the market cap of the DeFi sector in Q1 2023 which also attracted $29.6 billion was driven more by liquid staking governance token performance that pushed liquid staking above lending and derivatives in the ranking of DeFi sectors with highest trading liquidity.
Liquid staking is the process of staking cryptocurrency assets to earn rewards while still maintaining control and ownership. This is achieved through the creation of a tokenized representation of the staked asset, known as a “staking token”.
For example, this is seen with the Rocket Pool which allows users to stake Ethereum for the Ethereum 2.0 network while receiving a tokenized representation of their staked Ethereum, called rETH.
Ethereum Shapella upgrade
Coingecko added that one of the key factors behind the success of DeFi tokens was the implementation of the Ethereum Shapella upgrade which took place on 12 April 2023.
The Shapella upgrade is one of the proposals on the roadmap of Ethereum that allowed users who staked their Ether asset to willfully unstake whenever they want to without restrictions. The success of Ethereum Shapella pushed liquid staking up by 209%.
Also for TVL, the research revealed that while the TVL on Ethereum grew by 33.6% from $31.5B to $42.1B between January to March 2023, Arbitrum had a TVL increase of 83.4% from $31.9B to $58.5B in Q1 of 2023.
A major reason behind the success recorded by Arbitrum was the announcement of its airdrop that occurred in March 2023.
CEXs, DeFi and USDC
Coingecko also said that while the caution towards CEXs has been high because of industry regulators, the value of the tokens of DEXs, that’s expected to have increased, fell by 5% in Q1 of 2023.
Then other sectors such as derivatives, insurance, and fixed interest protocols multiplied their market caps by two at the same time. Crypto users are migrating to hedging their assets because of more uncertainties in the market.
Another factor mentioned by Coingecko that affected DEXs is the attack on USDC, the most used stablecoin in DeFi. USDC got depegged from the US dollar for a while after which it was restored.