2022 Review: Kamino Finance DeFi Data Report

The final Kamino Data Report of the year covers DeFi and the Solana ecosystem for the whole of 2022.

2022 Review: Kamino Finance DeFi Data Report

Note: This article is not financial advice. Kamino Finance does not endorse any tokens or platforms mentioned in this article.

This report will analyze decentralized finance (DeFi) data for 2022. Overall, DeFi experienced its first serious economic downturn this year after continuously reaching new all-time highs from the middle of 2020 (DeFi Summer) to the end of 2021, but analyzing technical data shows that DeFi is not going away.

In addition, a closer analysis in this report will focus on the Solana DeFi ecosystem, where the total value locked (TVL) in DeFi has decreased disproportionately to the rest of the market. Despite lackluster TVL, several metrics will highlight the strength of Solana DeFi during the bear market.

The End of Market Euphoria and a Contracting DeFi TVL

Volatility can currently be found in most global markets, and a risk-off sentiment has prevailed against nascent and growing sectors of tech. The crypto market, led by bitcoin since 2009, has not decoupled from traditional markets as previously predicted, and traditional market cycles continue to prevail in crypto and DeFi.

Total TVL for DeFi minus staking, borrowing, and other double counts on DeFi Llama

Zooming out of the overall TVL chart for DeFi, it’s possible to see the beginning and end of the industry’s first bull cycle. Following the chart for mapping the psychology of market cycles, 2022 was a year of contraction after a period of prosperity and euphoria.

Image depicting the usual cycle of markets

Additionally, the crypto market has been affected by multiple black swan events in 2022. The following data has been rounded from DeFi Llama statistics on TVL lost in DeFi after each major event:

  • Sifugate: (January): $25 billion lost (regained through May)
  • Terra Collapse (May): $60 billion lost
  • Cascading Liquidation Event (June): $25 billion lost
  • FTX Bankruptcy (November): $10 billion lost

TVL Remains a Problematic Indicator of Growth

If an observer looks solely at DeFi’s total value locked (TVL), 2022 has been a down year for every blockchain. From January to December, there was a roughly 80% drop in the value of assets held in DeFi smart contracts as reported by DeFi Llama.

2022 TVL for DeFi minus staking, borrowing, and other double counts on DeFi Llama.

For those paying attention, this drop was exacerbated in August when the site revised how it measured TVL. Staking, borrows, and other forms of double counting were removed from DeFi Llama’s TVL measurements, reducing the advertised overall DeFi TVL by nearly half.  

The chart below shows DeFi’s total TVL today as it would have been measured from January to August. Notice a difference of roughly $30 billion for the end of 2022.

Current DeFi TVL including staking, borrowing, and other double counts on DeFi Llama.

The following table further illustrates the differences in reporting TVL over the year. As the current reporting may better reflect actual TVL, the difference between April and September shows that sentiments at the start of the year may have been overly optimistic.

For some additional perspective, in August 2020 Cointelegraph reported on an adjustment to DappRadar’s listings that cut the most recent TVL gains in half with a 90-day moving average, which essentially ignored TVL increasing from price action:

Total value locked is often considered a measure of the popularity of a DeFi protocol and the sector as a whole. However, measuring it in U.S. dollars means that any token price increase will also drive TVL up — even though no new assets were committed to the protocol. Researchers noted that while this may inflate the metric in bull markets, it would also underestimate it unfairly during bear cycles.

For those who remember seeing DeFi’s TVL hitting $300 billion at the start of 2022, $42 billion in December might seem like a dramatic fall; however, this point only just reaches the ATH for DeFi TVL from February 2021, as reported in 5 Metrics that Prove DeFi is at an All-Time High Demand.

Screenshot from "5 Metrics that Prove DeFi is at an All-Time High Demand."

Unlike in February 2021, DeFi tokens are not increasing in value. In fact, most have fallen by at least 90% from their all-time highs, and this should also be taken into account when discussing the state of DeFi heading into 2023.

Beyond TVL: Metrics Showing DeFi Adoption Across Chains

Exploring several metrics besides DeFi TVL depicts a tech sector that grew in user base and transactions across 2022. This year surpassed all others for the number of users who took custody of their assets from CEXs to participate in DeFi.

Additionally, according to Chainalysis, a rising number of institutional participants (moving >$100,000) have begun withdrawing from CEXs to self-custody assets post-FTX. Arguably, examining the number of wallets interacting with blockchains to participate in DeFi demonstrates a far healthier financial ecosystem than observing TVL.

Daily Active Users Between EVM and Non-EVM Chains

Since the end of 2020, DeFi has expanded from one chain to dozens of competitors. From hosting 95% of the daily active user (DAU) count, Ethereum now hosts similar numbers of users to other chains that are Ethereum Virtual Machine (EVM) compatible.

Daily active addresses for 2022 on Solana vs. EVM chains on Artemis.

As depicted in the chart, Solana is the only non-EVM chain to attract a similar number of DAU as BSC, Polygon, and Ethereum. Other non-EVM chains, such as NEAR, Aptos, Osmosis, and Cardano rank with Ethereum Layer 2 solutions and Avalanche for DAU, with Solana hosting at least 3x the number of addresses daily.

Daily active addresses for 2022 on Solana vs. non-EVM chains on Artemis.

Comparing Daily Transactions Between DeFi Chains

Examining the number of transactions executed on each network, a similar pattern can be found to match the DAU, with the exception of Solana regularly outperforming both EVM and non-EVM chains for throughput.

Daily transactions for 2022 on Solana vs. EVM chains on Artemis.

It should be noted that the transaction counts depicted in these charts omit vote transactions and oracle transactions. According to a Nansen Q2 report on Solana, including these transactions means the network was regularly approaching 250 million transactions per day at the time of the report.

Daily transactions for 2022 on Solana vs. non-EVM chains on Artemis.

Taking a Closer Look at Solana DeFi Activity (TVL)

As mentioned in Kamino’s November Data Report, the DeFi community on Solana was heavily affected by the collapse of FTX at the beginning of that month. Previously, the DeFi TVL on Solana had fallen in October from around $1.2 billion to $900 billion after the $100 million exploit of Mango Markets, and it recovered slightly until FTX.

Liquidity disappeared overnight, users withdrew from protocols en masse, and several projects incurred some bad debt or could not continue operating as usual due to their reliance on Project Serum. Solana’s TVL decreased from $1 billion to around $300 billion as the price of SOL more than halved from around $35 to less than $15.

The effects of FTX contagion on SOL price in late 2022 per CoinGecko.

Prior to FTX’s bankruptcy, the de-pegging of Terra’s UST in May had a similar effect on Solana DeFi. Then, between these two events, it was revealed that one pair of DeFi developers had inflated Solana’s TVL by double counting tokens across multiple protocols of their own design, prompting revisions for all chains from DeFi Llama.

According to CoinDesk, the height of double counting on Solana may have accounted for $7.5 billion of Solana’s $10.5 billion TVL (with an ATH of $15 billion). Again, it should be taken into consideration that DeFi TVLs across the board had been over-exaggerated at the beginning of the year, and many of the non-stable assets held in DeFi or down by over 90%.

Taking a Closer Look at Solana DeFi Activity (Users)

Taking a more granular approach to DeFi on Solana, it’s possible to see that counts for DAU and new DAUs for the Top 20 protocols are holding strong when compared to TVL. Accordingly, there has been a steady influx of new wallets using the network for decentralized trading, borrowing, and yield.

Daily New Users on Top 20 Solana protocols as recorded by Hello Moon.

Zooming in on the biggest spikes in the spring and summer, it’s possible to find two anomalies in growth that could be accounted for by the success of STEPN, a move-to-earn game. As reported, STEPN has grown to over 4.7 million users participating in DeFi on Solana—many unaware of their phone app’s connection to the blockchain.

Swaps for STEPN tokens were initially performed on Orca (spike in May), making it the most popular DEX on the network until STEPN launched its own DEX (spike in July). Removing these DEXs and the explosion of STEPN’s popularity from the new DAU chart makes it easier to see consistent adoption of DeFi protocols by new users.

NB: The absence of Orca, which is currently the highest-volume DEX on Solana, most likely attributes to some of the decline in new users depicted towards the year's end.

Daily New Users on Top 18 Solana protocols (minus Orca and STEPN) via Hello Moon.

When removing the same phenomena from the DAU counts of returning users for the Top 20 protocols, a less drastic pattern also emerges. Again, in the chart below, the two DEXs associated with STEPN dominate and inflate the chart.

Daily Active Users on Top 20 Solana protocols as reported by Hello Moon.

Here’s what DAU looks like without Orca or STEPN’s DEX. Even with the absence of Orca’s regular traffic (usually the highest traffic on the network), there appear to be tens of thousands of users returning to Solana DeFi’s Top 20 protocols on a daily basis during a bear market.

Daily Active Users on Top 18 Solana protocols (minus Orca and STEPN) via Hello Moon.

Assessing 2022 Solana Daily Transactions at Protocol Level

As mentioned before, Solana finalized more transactions per day than any other blockchain in 2022. In the chart below, one can see how much Serum, the on-chain central limit order book (CLOB) spearheaded by FTX dominated the demand for Solana block space throughout the year.

Daily number of transactions for Solana Top 20 protocols in 2022 via Hello Moon.

Serum was by far the most transaction-heavy DeFi protocol on the network, since a limit order book requires market makers to update and cancel their orders constantly. No other blockchain can handle the throughput demanded by a CLOB settling transactions entirely on-chain.

Daily number of transactions for Solana Top 20 protocols (minus Serum) in 2022 via Hello Moon.

The loss of Project Serum was a major blow to several protocols built on top of its liquidity layer. A major dropoff in transactions can be seen in November in the chart above with Serum removed. Many of these projects are currently rebuilding on OpenBook, a community fork of Serum.

Removing projects built on Serum, another picture emerges. In the chart below, it’s possible to see the additional strain placed on Solana during the crashes in May and November. In addition to the transactions pushed by Serum, the network was handling an enormous amount of requests from its users.

Daily number of transactions for top non-Serum-related protocols via Hello Moon.

Although these protocols cannot be strictly classified as DeFi, it’s interesting to add Magic Eden, the NFT market, and Pyth, the oracle, to the mix. First, notice how much NFT traffic Magic Eden has contributed over the year in making Solana the second biggest chain for NFTs, second only to Ethereum.

Magic Eden dominated non-Serum-related transactions in 2022 via Hello Moon.

Then, notice how Pyth’s oracle services dwarf everything else on Solana in terms of daily transactions. The chart below scales up to 50 million transactions per day with the addition of Pyth’s price oracles, another strong showing of consistent demand from a DeFi ecosystem that requires oracle infrastructure to operate.

Oracle transactions dominated non-vote transactions on Solana in 2022 per Hello Moon.

These images are each a testament to the strength of the technology supporting all of Solana DeFi. Although the DeFi TVL on Solana has dropped considerably since the beginning of the year, the network is handling millions upon millions of transactions from tens of thousands of users, and it is in no way comparable to a ghost chain.

Final Conclusions on DeFi 2022

Accounting for TVL, 2022 was an underperforming year for DeFi. After a period of extended growth, the sector was blindsided by several black swan events that contributed to the outflow of funds from smart contracts and the onset of DeFi's foray into crypto winter with the completion of its first major market cycle.

On the other hand, user and transaction data still show promising outlooks for the future of peer-to-peer finance powered by blockchains. Although demand for DeFi at the start of 2023 is nowhere near the peaks of 2021, data also shows there is nowhere near what some may call an exodus from DeFi.

Of all the blockchains where DeFi smart contracts are hosted, Solana remains the most performant of all. Solana has faced several setbacks at the protocol level, especially due to the loss of liquidity on Serum, but a core DeFi community remains active on the network, and 2023 should be a year poised for growth.