TVL in DeFi Fails to Keep Pace with Rebounding Ether

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In a sign that investors may be los­ing con­fi­dence in the long term prospects of DeFi, the total val­ue locked in the sector’s pro­to­cols has increased just 5% even though the price of Ether has rebound­ed 30% since bot­tom­ing out on June 18. 

That means users are con­tin­u­ing to remove assets from DeFi even though token prices are start­ing to recover.

Spiralling Losses

The bear mar­ket has exposed the risks in many pop­u­lar DeFi prod­ucts, with algo­rith­mic sta­ble­coins, yield farms, and stak­ing deriv­a­tives among the hard­est hit. 

Algo­rith­mic sta­ble­coins are not backed by col­lat­er­al, mean­ing they can quick­ly post spi­ralling loss­es should they fail to remain pegged to the dol­lar. Stak­ing deriv­a­tives are also vul­ner­a­ble to los­ing price par­i­ty with the under­ly­ing assets they represent.

Ter­ra Clas­sic and UST are no more, and oth­er algo­rith­mic sta­ble­coins are strug­gling to main­tain their peg. Lido’s stETH stak­ing deriv­a­tive also lost its peg, while farmed tokens have post­ed extreme loss­es in recent weeks.

The TVL in DeFi pro­to­cols has plunged 71% to $73.2B since ear­ly Decem­ber, accord­ing to DeFi Lla­ma.

The Ethereum net­work rep­re­sents near­ly two-thirds of the sector’s com­bined TVL. How­ev­er, Ethereum’s locked val­ue is still down more than $100B in sev­en months since its high of $160B.

The spec­tac­u­lar col­lapse of Ter­ra made way for Binance Smart Chain to reclaim the posi­tion of DeFi’s sec­ond-largest chain, cur­rent­ly rep­re­sent­ing a TVL of $6B. 

Overcollateralization

Tron is among the few net­works that grew dur­ing the recent down­trend, ris­ing to third place with $4B locked. Its ascen­sion came despite con­tro­ver­sy sur­round­ing its UST-style algo­rith­mic sta­ble­coin, USDD, and pur­port­ed shift to over­col­lat­er­al­iza­tion. But the dra­ma cul­mi­nat­ed in Tron shed­ding more than one-third of its val­ue over just two days, slip­ping from $6B on June 19 as users pulled cap­i­tal from its dom­i­nant dapp, JustLend. 

The low-cost Lay­er 1 net­works that surged dur­ing late 2021 have been among the hard­est hit by the DeFi crash. The TVLs of Avalanche, Solana, and Fan­tom have each bled more than $9B from their 2022 highs, cur­rent­ly rep­re­sent­ing $2.6B, $2.5B, and $967M respectively.

Ether Climbs

The col­lat­er­al­ized debt pro­to­col Mak­er­DAO is the largest DeFi pro­to­col with about $8B locked. Curve, the decen­tral­ized sta­ble­coin exchange that dom­i­nat­ed DeFi towards the end of the bull run with a $24B TVL, now ranks third with $5B.

The sector’s com­bined mar­ket cap has also under­per­formed Ether, bounc­ing just 10% from a June 19 low of $33.5B, accord­ing to CoinGecko. Ether’s mar­ket val­ue has climbed 30% to $140B.

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