A little over a year ago Compound launched its COMP liquidity mining program and changed DeFi forever. With a new mechanism for bootstrapping liquidity in DeFi protocols, the sector has grown orders of magnitude across nearly every metric since. In the process it has not only captured the attention of investors, users, and regulators alike, but also demonstrated to the world clear signs of product market fit.

Q2 2021 was a continuation of this momentum with most metrics reaching new all-time highs mid-way through the quarter. However, as broader crypto markets turned, DeFi was not immune. In many cases DeFi protocols saw activity decrease in the second half of the quarter as speculation in markets died down.

In this report, we walk you through sector by sector, diving into key performance indicators, market developments, and key things to look out for in the quarters ahead. It was yet again a jam-packed quarter in the world of DeFi, and while asset prices may be depressed, DeFi fundamentals march on, providing the seeds of DeFi’s next leg of growth.

"DeFi is Mankind's Tower of Babel. We have rebuilt money as a language... a computer language that all cultures across all lands can speak. And now that all of our brilliance, greed, and ideals can be unified into one system, the system's growth will be unparalleled. The next 1-2 years will reverberate for decades and possibly centuries'' - Redphonecrypto

DEX volumes continued their explosive growth in Q2 reaching $405 billion in the quarter – good for a 117x increase year-over-year and 83% increase since Q1. May alone accounted for over half the volume in the quarter, which unsurprisingly also marked the local top of the market.

Since May, DEX volumes have halved, with June volumes falling to $95 billion. Still despite the decrease, the month was still the third highest all-time.

Zooming in on how the competitive landscape evolved throughout the quarter we see a pretty dramatic shift in PancakeSwap’s standing. While for a brief moment in April the breakfast themed DEX flipped Uniswap in volumes, since then its market share has plummeted due to the rise of Uniswap V3 and the fizzling out of the Binance Smart Chain Ecosystem following the May crash. By the end of the quarter Uniswap reached a 54% share of weekly volume, its highest level since November 2020.

The rise of Polygon also played a significant role in eating away Binance Smart Chain’s (BSC) share of decentralized exchange volumes. As the party shifted towards Polygon, with its new set of tokens to speculate on and farms to harvest, BSC was squeezed out of the picture. The activity provided a great glimpse into the developing liquidity wars between blockchains, showing that when token incentives are the primary reason why capital enters a blockchain ecosystem, it will also be the primary reason capital leaves when incentives fall or incentives are more attractive elsewhere.

Finally, zooming out on the larger picture for DEXs, volumes as a percentage of centralized exchange (CEX) volumes surpassed 10% for the first time since October 2020. The data continues to show DEXs eating their centralized counterparts as time passes.

In May Uniswap finally launched its highly anticipated Uniswap V3 protocol, with its crown feature of concentrated liquidity - the ability for liquidity providers (LPs) to make markets within customized price ranges, creating individual price curves in the process. The design promised to increase capital efficiency for LPs by as much as 4,000x by enabling LPs to provide the same liquidity depth as V2 within specified price ranges while leaving far less capital sitting idly. Within just weeks it became the top DEX in the industry and in June it facilitated nearly $28 billion in volume.

Uniswap V3 now accounts for more than 40% of all DEX volume and continues to eat the DEX market, showing no signs of slowing down.