Liquidity Providers Hold the Line in DeFi Selloff

The crypto market is down, but liquidity providers in decentralized finance are staying in regardless — some are even upping their positions.

“We’re hodling and investing more into new DeFi stuff,” Matti, of the reflexivity-oriented VC firm Zee Prime Capital told The Defiant over Telegram.

This despite the fact that the market took a turn on Dec. 1, when ETH was at almost $4,800. The price has since fallen to as low as $3,671, according to CoinMarketCap, more than 20% down. But DeFiLlama put the total value locked (TVL) for all the decentralized finance (DeFi) projects it tracks at $275B on that day. Now it’s at $232B, which is a 16% drop.

Core Value

The upshot: Investors are going into DeFi rather than out. After all, if everyone just stayed put, dollar-denominated TVL should be down the same as the market. If they were leaving, the TVL drop would be worse than the market.

“That’s exactly right,” Robert Leshner, the founder of Compound, one of the big money markets on Ethereum, told The Defiant in a phone call. “It’s not like people are fleeing DeFi. The core value proposition of the platforms doesn’t change when the price of crypto changes.”

TVL is a metric that looks at the total value of assets that have been turned over to a DeFi protocol for its users to access. People do this because these projects all pay some kind of yield in crypto to people who lend them cryptocurrencies. This is particularly attractive for long term holders of a particular crypto asset, because it allows them to accumulate more of the asset they believe in.

TVL is usually reported in dollar terms, but it doesn’t have to be. In a case like this, it’s more illuminating to look at TVL in crypto-native terms, because it shows that investors are moving into DeFi more clearly.

Highest TVL

“We’re staying in,” Lasse Classe of the venture fund 1kx told The Defiant over Telegram. “I think numbers confirm that it’s generally the trend.”

Indeed, looking at the top five assets listed on DeFiLlama, a gentle uptick in liquidity is evident from Dec. 1 to today, when the numbers are measured in ETH not dollars.

Curve, the decentralized exchange, which is on seven blockchains and has the highest TVL of any project, went to 5.36M on Dec. 17, from a TVL of 4.64M in ETH on Dec. 1. MakerDAO is now at 4.48M compared to 4.3M ETH. Convex, a meta-liquidity mining protocol that runs atop Curve, went to 4.07M from 3.53M. Aave, the money market, which is on three chains, is one example of a quite flat value. It now has 3.48M in value, up from 3.4M ETH. Instadapp, a DeFi utility, ticked up to 3.04M from 2.5M ETH in value. Lastly, ETH2 derivatives protocol, Lido, went to 2.62M from 2.43M ETH.

DefiLlama lists WBTC in the top seven protocols but discussing its TVL in ETH terms is incongruous since its deposited assets are exclusively BTC. That said, looking at CoinMarketCap, WBTC went from 249.8K BTC locked to 259.45 BTC today, so investors are still going in there as well, perhaps to make commitments with WBTC elsewhere in DeFi.

There are a few explanations for why DeFi users are holding on. First of all, gas prices remain high, so it might not be worth it for retail holders to leave. Why wipe whatever yield they have earned with gas fees? There’s no point.

But it’s not only gas fees. Gas fees on the Solana blockchain are much, much lower, to the point of negligible for most users. We previously reported on a Solana money market, SoLend, when it hit $100M in TVL. Now it’s well over $500M, according to DeFiLlama.

Rooter, one of the founders there, told The Defiant that their numbers are basically flat. They recently got hit by one whale liquidity mining their token very hard and leaving, but when that’s factored out they’ve stayed steady, he said.

Diamond Hands

Solana’s SOL price has followed basically the same arc as ETH. SOL’s most recent high of $237 came on Dec. 2. It’s at $169 now, a drop of 29%. Since the beginning of the month, SoLend is down a little in SOL terms. It had 3.37M in SOL value on Dec 1 and 3.21M today, a 5% drop in SOL terms.

The “diamond hands” on an asset find it useful to stick around in DeFi, Rooter said, there are “less farmers, but they’re mercenary, so it’s expected they would leave.”

DeFi believers don’t fear a downturn like traders do. After all, yields continue in DeFi, even if they slow down or their dollar value diminishes. Long term yield farms will continue growing crops, expecting one day those crops value on the open market will return.

Until then, the “first real DeFi bear should be a great long-term value opportunity,” Matti said.