DeFi market rises again! But the rising price of Bitcoin and Ethereum keeps a trend that will need to be changed if the industry wants to keep on progressing.
Total value locked in DeFi protocols has grown to a new all-time high of $17.5B, increasing 23% in the first few days of 2021. TVL is a metric used widely in the industry to measure the corresponding popularity of DeFi projects and the DeFi as a whole.
However, the metric is labeled in US dollar terms, and the evident growth in the last few days depends on the exploding price of Ethereum (ETH), up more than 65% from the beginning of December.
The DeFi protocols are witnessing significant outflows of ETH and Bitcoin, as crypto users favor selling their assets and taking profits in the face of rising prices. DeFi represents a collection of blockchain-based protocols that provide financial services with lower costs and enormous accessibility.
Protocols that used automated blocks of code known as smart contracts provide services like loans, exchanging assets, and interest in deposits. The majority of the action happens on the ETH network. Now ETH is priced at over $1,000, nearing its January 2018 ATH.
To facilitate these activities, DeFi protocols rely on deposits of crypto assets like Bitcoin and Ethereum to provide elemental collateral for loans and exchanges; as the value locked in DeFi increases, more participants can use loan and exchange services at a better interest rate.
Users who lock their assets are then rewarded with interest payments, many offering yearly returns unheard of in the traditional finance industry. In the same period that TVL in dollar terms increased 23%, total ETH locked in DeFi protocols dropped 4.5%, while BTC closed fell by 4%. It means that DeFi users see profitable opportunities somewhere, and it can be removing BTC and ETH to sell at current prices after significant holiday season run-ups.
It is vital to remember that while the two leading cryptocurrencies make up a portion of DeFi TVL, other digital assets are tracked in the calculation. Stablecoins like DAI and USDC and other lesser-known tokens also contribute billions to TVL, and a rotation of value into āaltcoinsā can push TVL higher.
However, with the BTC marking a new all-time high and ETH above $1,000 for the first time in four years, it is no doubt best to look beyond TVL as a measure of DeFiās growth.
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