The DeFi market crashes and falls to levels of a year ago

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The DeFi market crashes and falls to levels of a year ago

After a year of almost uninterrupted growth, funds deposited in decentralized finance (DeFi) protocols have reached levels of a year ago. The bear market in cryptocurrencies and the fall of Terra emerge as the main explanations.

As of today, May 16, 2022, DeFi accumulates a total value locked (TVL) of USD 110.77 billion. The last time this figure was at that level was in July 2021, after spending two months averaging that value, according to data from defillama.com.

With regard to the reasons that may have led to this decline, two stand out. The first of these has to do with market conditions. As the price of major crypto assets such as bitcoin (BTC) and ether (ETH) declines, dollar deposits in DeFi also decline. In other words, although the deposited cryptocurrencies remain the same, their price is lower and, therefore, they accumulate less TVL.

This can be seen by looking at the chart below, which shows the TVL of DeFi over the last 12 months, compared to the bitcoin price chart. Chronologically, the sharp declines in bitcoin and DeFi’s TVL start in April.

In December 2021, DeFi peaked at TVL. Source: defillama.com

In May of last year, the main cryptocurrency was undergoing a correction after its April all-time high price (ATH). That downtrend continued until July, when both the BTC price and the DeFi TVL began to grow almost without pause.

chart shows current bitcoin price quote
The BTC price resembles the DeFi TVL chart. Source: coinmarketcap.com

The Terra case, also momentous for DeFi

Another fact that has marked the journey of DeFi this year (and will surely continue to do so) is the debacle of the Terra network. This includes both its terra USD (UST) and terra (LUNA) cryptocurrencies, as well as the rest of its ecosystem, including the DeFi Anchor protocol, as CriptoNoticias has reported in various recent publications.

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This could be considered as a weight factor for the current situation of DeFi, whose figures began to decline frankly on May 7, hours after the crisis with UST and LUNA began.

Already losing more than $27.6 billion of capital invested in its decentralized finance protocols, Terra went from being the second network in DeFi, only behind the undisputed leader Ethereum, to being in fifteenth place of this index.

Currently, Terra has “barely” USD 392 million blocked in its protocols, a figure that is far from the USD 28.67 billion it had in the first week of May. Percentage-wise, the network came to dominate 14% of the decentralized finance spectrum, but now only reaches 0.46% in this regard.

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