According to on-chain data, the total value locked (TVL) in decentralized finance (DeFi) protocols has dropped to its lowest level since February 2021 as traders have pulled liquidity to seek higher yields with lower risk.
At the time of writing, DeFi’s TVL stands at $35.389 trillion, which is nearly five times lower than the peak of $176 billion in November 2021.
Back in 2020, during the “DeFi summer” explosion, many believed that the ability to borrow and lend without intermediaries was a breakthrough in global finance. DeFi companies were seen as potentially outperforming their traditional financial counterparts (TradFi).
However, the DeFi “financial future” story was dampened as the crypto market couldn’t withstand the downturn in 2022. Surging interest rates, driven by central banks’ efforts to combat inflation, made the DeFi sector less appealing to new capital.
Currently, Vanguard’s traditional market fund provides customers with a 5.28% yield, while staking Ethereum on Lido only yields around 3.3%. This has forced DeFi’s fragile liquidity to look for an escape route, with the TVL across all protocols dropping from $163.5 billion in April 2022 to $36 billion today.
“Certainly, at the moment, everything is less profitable. But even with a low TVL, we still see a lot of activity and high opportunities emerging as people develop new things,” said Vyomesh Dua, Head of DeFi Trading at Folkvang.
Dua further added, “Whenever a new DeFi product attracts a lot of attention, the activity throughout the ecosystem around it increases, and there are interesting but short-lived money-making opportunities. However, the capital that can be deployed in this space today is limited due to smaller opportunity sizes.”
There have been some trends emerging in the market such as LSD, RWA, on-chain derivatives, and new blockchains. However, they all seem to be in their early development stages and cannot be compared to the DeFi summer of 2020.
During that summer, it was not uncommon to see DeFi yields surge from 18% to 35%. Of course, the high returns came with risks as hackers attacked the sector with a series of complex exploits to steal investors’ funds.
DeFi hacks have continued to rise in 2022 and 2023, with a report revealing that up to $212.5 million was stolen in the past three weeks. According to the Money Monger’s cryptocurrency theft report, there were 297 cryptocurrency theft cases in 2023, resulting in losses of $1.89 billion.