Declining Value Locked in DeFi Despite Centralized Exchange Failures

The Decline of Value Locked in DeFi

Data shows that decentralized finance (DeFi) has experienced consistent outflows despite a series of failures in centralized crypto exchanges and services. The total value locked (TVL) in DeFi protocols has decreased from $178 billion to less than $38 billion. Ethereum protocols currently hold $21.8 billion of that amount. Even after the collapse of centralized exchange FTX in November 2022, which caused a significant drop in TVL, the current figure is still lower. Other centralized crypto lenders like BlockFi, Genesis, and Gemini Earn also collapsed during this time.

Factors Contributing to the Decline

FTX collapse: The aftermath of FTX’s collapse resulted in a two-year low for assets locked in DeFi protocols.
Liquid staking protocols: Funds locked in liquid staking protocols like Lido and Coinbase’s staking service are not included in the TVL figure.
Liquid staking advantages: Liquid staking provides investors with the opportunity to earn yield while maintaining trading liquidity, which may be more appealing than traditional lending protocols.
Hawkish monetary policy: The United States Federal Reserve’s hawkish monetary policy has increased yields on short-term government debt, making them more attractive to investors compared to stablecoin yields.

The Impact on DeFi Platforms

Aave’s total value locked has declined by 21% in the past month to $4.5 billion.
Curve Finance’s total value locked has decreased by 26% to $2.3 billion.

Hot Take

The decline in value locked in DeFi protocols despite the failures in centralized exchanges and services highlights the challenges and risks associated with decentralized finance. Investors are seeking alternatives like liquid staking that offer the potential for yield and trading liquidity. Additionally, the attractiveness of short-term government debt yields driven by the Federal Reserve’s monetary policy further diverts capital away from stablecoin yields. DeFi platforms will need to innovate and address these challenges to regain momentum and attract new users.