The decentralized finance (DeFi) industry has just suffered a serious blow, with the total value locked (TVL) in DeFi protocols falling to its lowest level since February 2021, according to data from DefiLlama, where it presently stands at $37.5 billion. This loss is now less than the $38 billion post-bull market bottom that was seen in December.
DeFi, which had once been seen as the financial industry’s wave of the future, had experienced a rise in popularity, with TVL hitting a high of $177 billion in late 2021. However, it had a severe downfall in 2017 as a result of falling cryptocurrency prices and a number of scandals that scared off investors. Due to increased regulatory scrutiny of cryptocurrencies by the U.S. government this year, traditional financial institutions are wary about DeFi for fear of potential dangers.
Several DeFi protocols have lost more than half of their locked value over the past month. For instance, the TVL of the optimism-based decentralized exchange (DEX) Velodrome dropped by a startling 58%. One of the top liquidity protocols, Balancer, saw a 35% decline in TVL to $641 million.
The recent volatility in the larger cryptocurrency market is one of the main factors contributing to DeFi’s drop. A significant portion of DeFi is built on top of major cryptocurrencies like Bitcoin (BTC) and Ethereum’s Ether (ETH), both of which have experienced double-digit percentage drops recently. Typically, traders seek to remove liquidity from riskier assets like those within DeFi when the prices of such significant assets decrease. When Bitcoin fell 77% from its peak last year, several altcoins followed suit, demonstrating this trend.
DeFi’s weaker performance this year than Ethereum is, however, what should worry users the most. DeFi’s TVL has decreased while Ethereum’s value has increased by 40% since December. This shows that DeFi’s problems are unique to the industry and not just a result of how its underlying tokens have performed.
Some business analysts have cited DeFi’s recent troubles as being fundamentally impacted by the company’s susceptibility to U.S. Treasury yields. Doo, co-founder of StableLab and Asia Lead at MakerDAO, stated, “Fundamentally, it’s because DeFi yields, which carry higher risk but offer smaller rewards, are down while U.S. Treasury yields are up. We observed a four-fold increase in DSR [Dai Savings Rate] deposits when yields were raised to 8%.
In conclusion, a number of variables, such as market turbulence, regulatory worries, and shifting yield dynamics, have contributed to DeFi’s current difficulties. Stakeholders are keenly monitoring the sector’s resilience and adaptation in the face of adversity as it navigates these obstacles because the future of the sector is still unknown.