Cryptoverse: Crypto lenders face a DeFi drubbing

(Reuters) — Cryp­to lend­ing may not be down and out, but it’s cer­tain­ly on the ropes.

Cryp­to lenders have boomed over the past two years, attract­ing tens of bil­lions of dol­lars in bit­coin, ether and oth­er coins which they in turn lent out or invest­ed, often in decen­tral­ized finance (DeFi) projects with sky-high returns. 

But as cryp­to mar­kets tum­ble, DeFi activ­i­ty is being hit par­tic­u­lar­ly hard, rob­bing lenders of their most lucra­tive returns and threat­en­ing to squeeze the whole sec­tor — reach­ing far beyond Cel­sius Net­work, which grabbed the head­lines last week when it froze with­drawals and transfers. 

The total val­ue locked (TVL) on ethereum, a met­ric that attempts to track the val­ue of tokens deposit­ed in a vari­ety of DeFi pro­to­cols, has declined by $124 bil­lion or 60% over the last six weeks, accord­ing to data provider Glassnode. 

The crash has occurred in two large cryp­to slices, $94 bil­lion lost dur­ing the col­lapse of the LUNA project — involv­ing failed sta­ble­coin Ter­raUSD — and anoth­er $30 bil­lion in mid-June, said Glassnode, which attrib­uted the falls to dimin­ish­ing risk appetite. 

“The cur­rent mar­ket con­di­tions have put an enor­mous amount of pres­sure on oper­a­tors that inter­act with decen­tral­ized finance pro­to­cols to gen­er­ate their yield,” said Mauri­cio Di Bar­tolomeo, co-founder and chief strat­e­gy offi­cer of cryp­to lender Ledn. 

BITCOIN VS ETHER VS DOLLAR

Sim­i­lar­ly, an index track­ing cryp­to tokens linked to DeFi lending/borrowing pro­to­cols and exchanges, from research firm Macro­hive, plunged 35% last week as investors pulled mon­ey from the for­mer­ly high-fly­ing sector. 

Some DeFi pro­to­cols, or projects, are start­ing to offer low­er returns, with aver­age lend­ing and bor­row­ing rates at one plat­form, Com­pound, down on the week across all but one cryp­tocur­ren­cy, the sta­ble­coin Pax Dol­lar, Macro­hive found. 

In a fur­ther sign of the slow­down, ether — the token that under­pins the ethereum net­work on which many DeFi pro­to­cols oper­ate — last week dropped to its low­est lev­el against larg­er peer bit­coin in 14 months 

Ver­sus the dol­lar, bit­coin has fall­en 34% so far in June, while ether has lost over 40%. 

The tur­moil in this high­er yield­ing part of the cryp­to mar­ket rais­es ques­tions about the sus­tain­abil­i­ty of the high inter­est rates cryp­to lenders offer to their cus­tomers, often in dou­ble digits.

TOO GOOD TO BE TRUE?

Some mar­ket play­ers say cryp­to lenders should make clients aware of the risks of projects their mon­ey is pumped into. 

“I expect users to demand more trans­paren­cy if their assets are man­aged in DeFi space,” said Iakov Levin, CEO of cryp­to invest­ment plat­form Midas Invest­ments. “Cryp­to needs to find a more trans­par­ent mod­el of retail yields.”

New Jer­sey-based Cel­sius, with over $11 bil­lion of assets on its plat­form, cit­ed mar­ket volatil­i­ty when it sus­pend­ed redemp­tions last week. A data trawl shows that it was invest­ed in sev­er­al DeFi projects that ran into difficulties. 

“The DeFi mar­ket will no doubt suf­fer from this devel­op­ment because it also deals with cryp­tocur­ren­cies and peo­ple will be more wary than ever about invest­ing their assets in what they per­ceive as sim­i­lar ecosys­tems,” said Yubo Ruan, founder and CEO of Par­al­lel Finance, a decen­tral­ized lend­ing protocol. 

Ruan said if projects “promise rewards that sound too good to be true – there’s always a chance that they are”. 

GRAPHIC: Cryp­to lend­ing rates (https://graphics.reuters.com/FINTECH-CRYPTO/mopanrlwmva/)

(Report­ing by Med­ha Singh and Lisa Mat­tack­al in Ben­galu­ru; Edit­ing by Alun John and Pravin Char)