DeFi
Cryptoverse: The DeFi Dream Is Still Alive
Feb 6 (Reuters) – Decentralized finance – DeFi – is enjoying a second wind.
The amount of money being poured into such crypto projects has surged in recent months, driven by a surge in bitcoin driven by the launch of bitcoin spot ETFs in America.
The total value of tokens (TVL) deposited on DeFi-focused blockchains has increased by about 40% since November to about $60 billion, reaching its highest level since August 2022 last month, according to data provider DeFi Llama.
In an ironic twist, bitcoin’s infiltration into the traditional centralized financial system has actually fueled risk-taking in the parallel, decentralized world of crypto.
“The increase in DeFi TVL is an indicator of growing speculation in the digital asset space as people look for the next narrative and the next big thing,” said Austin Alexander, co-founder of bitcoin trading firm LayerTwo Labs.
Daily trading volumes on DeFi protocols surged to $7.3 billion in early January, their highest level since March 2023. The market capitalization of DeFi-related crypto tokens rose to $77 billion, up from $72 billion in early December, according to CoinGecko.
The ethos of DeFi is radically different from that of the regulated financial system. It seeks to replicate the usual processes of investing, borrowing, and trading, but in a decentralized world where peer-to-peer transactions on the blockchain are executed via smart contracts, without banks or brokers acting as intermediaries.
The anticipation of lower interest rates in the United States has also boosted the appeal of DeFi protocols, where investors can deposit their crypto tokens in exchange for yields, according to many market participants.
“For the first time in about a year, the rate you can get in DeFi is higher than the US Treasury rate,” said Michael Rinko, an analyst at Delphi Digital.
For example, popular protocol Aave offered annual percentage rates on deposits of Ethereum-based USDC stablecoins of over 14%, according to tracker Aavescan.
“The market is ahead (of the Fed rate cuts) in terms of capital flows into DeFi,” said Phillip Shoemaker, executive director of decentralized identification platform Identity.com.
Beware of the extreme volatility that has characterized this sector in recent years; deposits in DeFi-focused blockchains rose from $17.3 billion in January 2021 to nearly $178 billion in December of the same year, before falling below $40 billion in December 2022, according to data from Defi Llama.
Charts from Reuters
SOLANA FLYING AND SLIDES
The recent surge in DeFi deposits coincided with a surge in bitcoin and ethereum prices in early January, driven primarily by U.S. bitcoin spot ETFs (exchange-traded funds).
“Traders have more liquidity because their bitcoin and ethereum are worth more, so they start moving down the risk ladder and into riskier assets,” said Thomas Tang, vice president, chief investment officer at venture capital firm Ryze Labs.
Yet despite a blistering start to the year, bitcoin and ethereum – the two largest cryptocurrencies – have lost most of their gains and are now up just 0.2% and 0.5% respectively.
This has impacted the prices of many DeFi tokens.
A CoinDesk index tracking DeFi-related tokens has fallen 13% in 2024, while the token of the Solana blockchain — one of the most popular DeFi chains — has slid 5.7%.
Some market participants believe DeFi activity may be more sustainable this time around, given that Solana’s price has quadrupled in the past six months, far outpacing that of Bitcoin and Ethereum.
Others predict tough months ahead for DeFi as financial markets once again push back expectations of interest rate cuts.
It also remains to be seen how sustainable the new DeFi yield offerings are, said Katie Talati, research director at asset manager Arca.
“I don’t think we’ll see the impact of rate cuts on DeFi activity right away, I think it’ll take some time to see users and activity come back,” Talati added.
Register here.
Reporting by Lisa Mattackal and Medha Singh in Bengaluru; editing by Vidya Ranganathan and Pravin Char
Our standards: The Thomson Reuters Trust Principles., opens in a new tab
The views expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and impartiality in accordance with the Trust Principles.