Decentralized finance (DeFi) is quickly emerging as the biggest loser in the ongoing cryptocurrency bear market.
The total amount of capital tied up in DeFi protocols fell to the lowest since February 2021 on Thursday, as traders turn to liquidity to secure higher returns that come with less risk.
When DeFi burst onto the scene in 2020 in a period dubbed the “DeFi Summer,” many believed that the ability to borrow without an intermediary was groundbreaking and that DeFi companies were on the verge of overtaking their traditional finance (TradFi) counterparts. expel.
However, DeFi’s narrative of the “future of finance” was quickly overturned when the broader crypto market succumbed to a bearish cycle in 2022. Interest rates continued to rise around the world as central banks looked for a way to combat inflation. This led to higher returns for money market funds and mortgage funds, leaving the DeFi sector without incentives for new capital.
TradFi competition
Now, Vanguard’s Money Market Fund offers customers a return of 5.28%, while the return for staking Ethereum on Lido is only 3.3%, leaving a minimal risk-reward ratio compared to traditional financial products.
This sent DeFi’s fragile liquidity rushing to the exits, with the total value locked (TVL) across all protocols falling from $163.5 billion in April 2022 to the current figure of $36 billion.
“There is definitely less return in everything now,” Folkvang’s head of DeFi Trading Vyomesh Dua told CoinDesk. “But even in this low TVL regime, we see a lot of high activity and opportunity around the new things that people have developed.”
“Every time a new DeFi product attracts a lot of attention, activity in the entire ecosystem around it increases and there are exciting but short-lived monetization opportunities,” Dua added. “However, the capital one can deploy in this area today is limited because the opportunities are smaller.”
There have been a few emerging stories, such as liquid staking, which lost much of its interest after Ethereum moved to a proof-of-stake network, tokenization of real world assets (RWAs), on-chain derivatives, and new blockchains, but none of these these have managed to capture the level of appetite last observed in the summer of 2020.
That summer, it was not uncommon for DeFi returns to rise between 18% and 35%. Of course, this return came with some risk, as hackers tightened the industry with a series of complex exploits to separate investors from their money.
DeFi hacks proliferated in 2022 and 2023, with a message earlier this month detailing how $212.5 million had recently been stolen in a three-week period.
There will be 297 crypto hacks in 2023, resulting in a loss of $1.89 billion, according to Money Monger’s crypto heist report.