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DeFi ecosystem sees shift as liquid staking outperforms lending

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According to CoinGecko’s recent study, DEXs and oracles have been fundamental components of DeFi since the beginning of 2021, but their market shares have steadily decreased over the last two years. 

In contrast, the liquid staking category has nearly doubled its market share during Q1 of 2023 and has surpassed the lending category.

A dominant force in the DeFi ecosystem 

The DEX token category, which includes decentralized exchanges (DEXs), emerged as a dominant force in the DeFi ecosystem in Q1 2021. Experts liken this to the increasing popularity of decentralized finance as a whole, as well as the growing demand for decentralized trading platforms.

However, according to ongoing data reports DEXs began to lose their grip on the DeFi market in 2022, and in 2023 Q1, they reported the largest quarterly decrease in market share, despite a 44.3% increase in market cap. Other categories experienced more significant growth, leading to DEXs losing their lead position.

In a similar vein, oracles had a 19.0% market share in DeFi in Q1 2021, but they fell to third place from Q4 2021 to Q1 2022 after the lending category overtook it. Oracles regained market share in subsequent quarters, but in Q1 2023, they experienced a 2.8% point quarterly decrease.

The emergence of liquid staking

Unlike the DEX token category, which had been dominant in the DeFi ecosystem since the start of 2021, the liquid staking category is a relatively new addition to the sector. 

The concept of staking involves holding cryptocurrency in a wallet for a set amount of time help validate transactions on the blockchain and earn rewards in return.

However, staked tokens are typically illiquid. Liquid staking, in comparison, allows users to deposit their staked tokens into a liquidity pool, where they receive liquidity pool tokens that represent their share of the pool.

These tokens can be traded or used for other purposes.

The liquid staking category emerged in the DeFi sector in Q3 2022, when Ethereum began its upgrades to proof-of-stake (PoS), which allowed users to stake their ETH tokens and earn rewards.

Liquid staking governance tokens, which represent users’ voting power in governance decisions related to the liquidity pools, quickly gained popularity and captured 6.3% of the DeFi ecosystem market share in the same quarter.

The outperformance of liquid staking over lending may signal a shift in investor sentiment and preference.

Lending has traditionally been a dominant category in DeFi, but the rise of liquid staking suggests that investors are increasingly interested in staking tokens to earn rewards instead of lending them out for interest.

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