DeFi TVL Hits a 2.5 Year Low
And how it’s evolving to bring back users
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This week we dive into the state of decentralized finance. We highlight some of the struggles the space has been going through, and how it is evolving to attract users back.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
- Bitcoin network fees dropped by 15.9%
- Ethereum fees increased slightly as the market volatility led to higher on-chain activity on Mainnet
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
- Approximately $750M of Bitcoin and Ether left CEXs this week, their highest since June
- Meanwhile, USDT recorded $200M in net inflows, potentially suggesting users were depositing stablecoins to buy and withdraw BTC and ETH
DeFi TVL Hits 2.5 Year Low
The DeFi space has been one of the worst hit during the bear market. As yields compressed and exploits ramped up, approximately $170B in deposits have left the DeFi ecosystem.
In the last few months, even though the market has trended upwards, the value locked in DeFi continues heading lower. However, as we will discuss, the DeFi ecosystem is evolving in ways that are likely to drive some demand back to the space.
2.5 Year Low — The total value locked in DeFi protocols reached its lowest since February 2021
- DeFi’s TVL dropped by 80% in 2022 as incentive programs from L1s largely came to an end, Terra collapsed and $3B+ was lost to exploits
- Decreasing token prices led many DeFi protocols into a negative feedback loop where the yield offered to depositors (subsidized by tokens) decayed, leading to decreasing TVL, resulting in less perceived value for the protocol and so forth
- Between these factors and decreased appetite for speculation, it might not come as a surprise that value locked in DeFi is at its lowest since 2021
2021’s speculative frenzy drove people into DeFi, lured by unsustainably high yields. As the dust has settled in the bear market, we see the DeFi space transforming, taking different approaches and abstracting some of its complexities.
DeFi’s Ongoing Transition
Low Borrowing Costs — DeFi is transitioning from high yields to depositors, to low costs to borrowers, as exemplified by Aave GHO
- When treasury yields were at near 0%, offering significantly higher yields to depositors in DeFi
- At 5%+ treasury yields, DeFi has strategically shifted to a place where users can look to borrow at discounted rates
- An example of this is Aave’s GHO stablecoin, which users can borrow at rates between 1%-1.5%, leading it to grow to $20M+ in supply and $60M+ in collateral within a month of launching
Sustainable Yields — The introduction of real world assets (RWAs) into DeFi has brought sustainable stablecoin returns into DeFi
- MakerDAO has begun redirecting part of its revenues accrued from treasuries to DAI users through the DAI savings rate (DSR)
- As discussed in the ITB newsletter from a few weeks ago, the increase in the DSR brought attracted over $1B in deposits within a week
- With sDAI (DAI earning the DSR) soon becoming collateral on Aave, demand for DeFi is likely to grow as users will be able to borrow at low costs against collateral earning sustainably higher yields
Outside from the “DeFi bluechips”, new protocols are also entering the space. One that has grabbed many’s attention quickly is Unibot, a protocol that turns the relatively complex DeFi trading experience into a simple Telegram bot.
Is Convenience the Answer? Thousands of users are foregoing the option to hold their own keys in favor of a simpler trading experience in Unibot
- Unibot is sacrificing DeFi’s original ethos for a quick, easy to use trading experience
- Regardless of its custodial set up, Unibot is on track to accruing ~$30M in fees annually per DeFi Llama
- Unibot’s set up is not too disimilar from the viral Friend.Tech, the social media app which hosts keys for users looking to trade “keys” to access influencers
Overall, there is plenty of experimentation going on in DeFi despite its decreasing TVL numbers. While established protocols are opting through low borrow costs and sustainable yields, newer protocols are attempting to simplify the DeFi experience. Though there is no clear answer as to which approach will end up being more successful, there are promising signs for both to reignite the DeFi space.
