Decentralized finance – DeFi – is getting a second wind. The amount of money pooled into this category of crypto projects has surged in recent months, fueled by the rally in Bitcoin driven by the launch of the Spot Bitcoin ETF in the US.
The total value of tokens (TVL) staked on DeFi-focused blockchains has surged nearly 40 percent since November to nearly $60 billion (roughly Rs. 4,98,337 crores) last month, according to the data provider. Has reached its highest level since. Defy Llama.
In an ironic twist, Bitcoin's infiltration into the mainstream, centralized financial system has effectively driven risk-taking in the parallel decentralized crypto world.
“The increase in DeFi TVL is a sign of increased speculation in the digital asset space, with people chasing the next narrative and the next hot thing,” said Austin Alexander, co-founder of Bitcoin transaction-focused firm Layer2 Labs.
Daily trading volume on DeFi protocols reached $7.3 billion (roughly Rs. 60,632 crores) in early January, the highest since March 2023. The market capitalization of DeFi-linked crypto tokens has increased to $77 billion (approximately Rs 6,39,498). crore), according to CoinGecko, up from $72 billion (roughly Rs. 5,97,972 crore) in early December.
The DeFi ethos is completely different from the regulated financial system. It attempts to replicate the normal processes of investing, borrowing and trading, but in a decentralized world where peer-to-peer transactions on the blockchain are executed through smart contracts, with no bank or broker acting as an intermediary. Don't work.
Anticipation of lower US interest rates has also boosted the appeal of DeFi protocols, where investors can stake their crypto tokens in exchange for yields, many market participants say.
“For the first time in almost a year, the rate you can get in DeFi is higher than the US Treasury rate,” said Michael Rinko, analyst at Delphi Digital.
For example, the popular Aave protocol offers an annual percentage rate of more than 14 percent on Ethereum-based USDC stablecoin deposits, according to tracker AaveScan.
“The market is leading (the Fed rate cut) in terms of capital inflows into DeFi,” said Philip Shoemaker, executive director of decentralized ID platform Identity.com.
Beware of the extreme volatility that has characterized the region in recent years; Deposits in DeFi-focused blockchains grew from $17.3 billion (roughly Rs. 14,36,79 crore) in January 2021 to nearly $178 billion (roughly Rs. 14,78,322 crore) in December that year, up from $40 billion (roughly Rs. Before falling down. ₹3,32,207 crore in December 2022), according to DeFi Llama data.
Solana flies high and slips
The recent surge in DeFi deposits has coincided with a surge in Bitcoin and Ethereum prices in early January, driven primarily by US spot Bitcoin ETFs (exchange-traded funds).
“Traders have more liquidity because their Bitcoin and Ethereum are worth more, so they start reducing their risk appetite and moving into more risky assets,” said Thomas Tang, vice president of investment leadership at venture-capital firm Raze Labs. “Let's start venturing into.”
Yet despite a strong start to the year, Bitcoin and Ethereum – the two largest cryptocurrencies – have given up most of their gains and are now up 0.2 percent and 0.5 percent respectively.
This has affected the prices of many DeFi tokens.
The CoinDesk index tracking DeFi-related tokens has fallen 13 percent in 2024, while tokens of the Solana blockchain – one of the most popular DeFi chains – have fallen 5.7 percent.
Some market participants believe that DeFi activity may be more sustainable this time, given that Solana's price has quadrupled in the past six months, far more than Bitcoin and Ethereum.
Others fear some tough months ahead for DeFi, with financial markets once again pushing back expectations of an interest rate cut.
It also remains to be seen how sustainable the new DeFi yield offerings will be, said Katie Talati, research director at asset manager Arca.
“I don’t think we will see the impact of the rate cut on DeFi activity immediately, I think it will take some time for users and activity to come back,” Talati said.
© Thomson Reuters 2024