Despite declines, the value of crypto assets in DeFi protocols is up 3x from a year ago

Total DeFi TVL is off 16% from peak, but market players argue it's just a bump on the way to growth

The bears might have you believe it’s a down market for decentralized finance (DeFi) chains, with total value locked across all decentralized finance (DeFi) chains down from all time highs, but that hasn’t been true for most of the major protocols over the past week.

Of the top 100 chains, only 18 have lost value over the past seven days, according to DeFi Llama data. The rest, it appears, are riding a rising wave on the back of demand and early adopter enthusiasm.

Blockchain protocol Terra hit a new TVL peak on March 22 at $27.45 billion, rising over 68% from a month earlier, and Curve, a decentralized exchange liquidity pool on Ethereum, took the No. 1 spot in terms of TVL, seeing a 13.4% increase from a week ago to $20.41 billion.

Total value locked, or TVL, across all DeFi protocols is the sum of all staked crypto assets that are earning rewards, interest and so on.

The total amount locked on chains has dropped about 16% from a peak in early December 2021, but market players feel the DeFi space is still in its early stages and has room to grow.

“At a high level, TVL is a good indication of the trust that users have in the various DeFi protocols, namely the blue chip ones like Maker, Aave, Uniswap,” Derek Lim, head of crypto insights at crypto exchange Bybit said.

“It is also representative of the users’ recognition that DeFi protocols do have some substantive value-add. However, although TVL does paint a certain picture of the DeFi landscape, it doesn’t paint a full one.”DeFi TVL is still very much reactive within the space, and many protocols are struggling to build a moat like the blue chip Layer 1s have done, Lim said.

“In my opinion, and in spite of the exponential growth this sector has experienced in the past year, I still think DeFi is still at the innovation and early adopter stage of its adoption lifecycle,” he said. Compared with the global cryptocurrency market cap of about $2 trillion, DeFi only accounts for about 10%, or $215 billion, Lim added.

The sector’s growth reflects its early stage, too.

For instance, Parallel Finance, a staking and lending protocol, saw its TVL rise to more than $300 million across all Polkadot projects it participates in within five days of launching in November. In the months since, its TVL has risen to about $638 million, according to data from the protocol. Polkadot is an open source blockchain platform and cryptocurrency.

“The growth in [all of] DeFi TVL has nearly tripled since last year; this is an incredible feat and likely to continue, considering DeFi is still early in terms of adoption,” Yubo Ruan, founder of Parallel Finance, told TechCrunch. “There is much to do in DeFi, and projects like Parallel have only existed for a few months and are already seeing massive amounts of TVL,” he said.

Before DeFi really took off in the summer of 2020, the sector was mainly focused on Ethereum, Bette Chen, co-founder of Acala, said. “Since then, there have been many new blockchains like Solana, Avalanche and soon Polkadot, that are bootstrapping strong DeFi ecosystems, taking lessons learned and product concepts from what was done on Ethereum.”

The substantial growth of DeFi TVL also points toward continued interest in the space from both institutions and retail investors alike, co-founder of Integral, who goes by the pseudonym 0xDorsal, said. Integral is a decentralized exchange that focuses on large orders for crypto whales.

“In the decentralized and permission-less blockchain world, capital contributed by liquidity providers powers transactions on different dApps,” 0xDorsal said. “With the recent innovations in DeFi, especially on the capital efficiency front such as Uniswap v3 and Integral SIZE, the percentage of TVL growth does not correspond to usage and its potential in the space.”

TVL is still a good indicator for DeFi demand and growth, 0xDorsal noted. However, it can be considered a “vanity metric,” Integral’s chief marketing officer, who goes by the alias 0xKeiko, said.

“One thing that does concern me is the [Ethereum]-denominated TVL has dropped nearly 30% against all time highs (May 2021),” 0xKeiko said. “Where has the ETH gone? Probably NFTs then [centralized exchanges]. They miss the train of DeFi, and now they are really getting into the web3 game by using NFTs aggressively to acquire new customers. This may not create some sort of liquidity crisis for top protocols, but it will impose more uncertainty for new, tail-end DEX, and this is not good for innovation in this space.”