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TVL in DeFi Fails to Keep Pace with Rebounding Ether

Key Metric May Signal Fading Confidence in Sector

TVL in DeFi Fails to Keep Pace with Rebounding Ether

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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