Decentralized finance (DeFi) was one of the driving forces behind this year’s surge in the cryptocurrency market as projects like Yearn.finance (YFI), Aave (AAVE) and Uniswap (UNI) quickly climbed to ‘blue-chip unicorn’ status and older protocols like Maker (MKR) and Compound (COMP) saw their prices skyrocket to new record highs.
But as the old saying goes, “markets take the escalator up and the elevator down,” and given the volatile nature of the crypto market, it seems that the elevator is in a free fall.
Previously hot DeFi sector tokens have on average seen their token values fall by at least 60% since their recent all-time highs as the crypto market in total has seen more than $1.2 trillion in value vanish in less than two weeks.
The pullback resulted in the total value locked (TVL) across all DeFi platforms falling from its all-time high value of $164.2 billion on May 10 to its current value of $93.34 billion according to data from Defi Llama.
Much of the value locked in DeFi protocols is derived from the price of their native tokens combined with deposits of Bitcoin (BTC) and Ether (ETH). Thus, the market-wide downturn has led to a precipitous fall in the total TVL, compounded by frantic traders withdrawing funds to try and lock in what value they still have left.
Evidence of the sprint to the exits can be seen in the spike in activity across the top decentralized exchanges (DEX) on the Ethereum network, which equaled “10% of the total 2020 DEX volume” according to data from Dune Analytics.
Yesterdays DEX volumes were… 🥁🥁🥁
…10% of the *total 2020* DEX volume 📈💪
— Dune Analytics (@DuneAnalytics) May 20, 2021
Overall, the total altcoin market cap has fallen by more than 50% from a record high at $1.48 billion on May 11 to a low of $705 million in the early trading house on May 23.
Newer traders who joined during recent market exuberance are now having their first experience of a significant market pullback and this has also led to the re-emergence of the biggest Bitcoin naysayers like Paul Krugman and Nouriel Roubini.
On the other hand, aggressive dip-buying from some of the largest Bitcoin holders during the recent mayhem hints that rather than a popped bubble, the market may be in more of a ‘bubble deflation phase’ which will allow it to reposition itself after the incredible run-up from $3,700 in March 2020 to the April 14 all-time high at $64,900.