DeFi TVL Hits Two-Year Low

The total value of tokens locked into DeFi protocols globally has slumped to its lowest level since February 2021, as institutional investors leave the space.

According to data compiled by DefiLlama, the total value locked (TVL) in DeFi is now only around US$37.5 billion. Previously, below the previous low of US$38 billion that was set in December last year in the aftermath of the FTX collapse.

Several protocols have experienced a dramatic drop in TVL, with some losing as much as 58 per cent of their TVL in the past month alone.

Even prominent layer 1 blockchains have not been spared. Ethereum lost 11.9 per cent of its TVL, and Solana and Cardano lost 9.1 per cent and 10.6 per cent respectively over the past week.

The exception to this trend is the Coinbase’s layer 2 Base network, which saw a 38 per cent growth in TVL over the past week.

These dynamics reveal the general bearish sentiment in the market, with institutional investors leaving the space in fear of running afoul of regulators.

Two weeks ago, US Senators introduced the CANSEE Act bill, which would require DeFi protocols to impose controls on their users in the same way that traditional financial institutions are required to.

It would also force anyone who ‘controls’ a DeFi protocol to enforce know-your-customer and anti-money laundering protocols.

There has also been a general rout in crypto asset prices over the past week, with even blue-chip tokens like Bitcoin and Ethereum suffering losses.

Steven Shi, an Investment Partner with Amber Group, attributed the lowered TVL to the increase in the US risk-free rate.Treasury bonds are generally seen as a safer investment, and increased interest rates on these investments would theoretically incentivise investors to pull money from riskier investments to invest in these safer choices instead.

Market sentiment isn’t great

A crypto trader that spoke to Coinlive on condition of anonymity also cited the disillusion and lack of trust in the industry, saying that in its current form, DeFi “leaves a lot to be desired”.

“From what I can tell, trust in DeFi is at an all-time low. It’s just been exploit after exploit, and even the two most trusted DeFi protocols, Euler and Curve, were affected. The odds seem stacked against the DeFi user in so many ways.

And for what? The attempt to remove human involvement and the pursuit of decentralisation has proven to be exploitable time and time again, and at this stage, the DeFi industry has too many flaws.

What’s the point of earning yields that are just a few percentage points higher than what traditional finance can offer, when the downside is that you could lose everything without recourse?

A great reset is needed, and we’re in the middle of it now”

Delroy Fong, Partner and Head of Flow Trading at Amber Group, echoed the sentiments on security within the DeFi space.

“We are not surprised with the recent moves. Rug Risk has empirically been correlated with the market backdrop in general. “

He added that the bearish sentiment has also caused developers to look at other ways to profit, including criminal enterprises.

That being said, Fong remains optimistic on the future of the industry.

“Amber is still selectively active in certain Defi pools and continues to be in the market as a liquidity provider to bridge trading and assets between Defi. CEXes and fiat ramps.

Amber is here to stay in a nascent asset class and continues to be optimistic with recent developments. There has been a long wait for institutional participation and a point of inflexion could be from the ETF approvals. Also, we have seen growing interest from corporates adopting Enterprise Blockchain into their technology stack.”