The value of funds locked in the DeFi sector is falling to a multi-year low. What is the reason for this?
The decentralized finance ecosystem shows a significant weakness in the face of negative sentiment in the digital currency market.
While the value of the Ethereum project, which is a fundamental ground for DeFi, has visibly increased since early 2023, the total amount of funds currently locked in decentralized finance protocols has decreased. According to the latest on-chain data, this value has fallen to levels last seen in around February 2021.
The crash in the digital currency market has left its mark on DeFi
It is relatively easy to conclude that 2022 has not been favorable for cryptocurrency assets. This innovative financial market at that time was plunged into a bear market. Deteriorating conditions ruthlessly exposed the imperfections of numerous projects in this industry. First of all, this is where the spectacular fall of many of them took place. The avalanche of this situation also led to the loss of a huge amount of cryptocurrency funds by investors, and as a consequence, the creation of negative moods in the entire industry.
After numerous and sometimes huge crashes, repeated scandals related to enterprises operating in the dimension of digital currencies began to scare away stakeholders who were long-time enthusiasts of this industry. As a consequence, this phenomenon also knocked on the gates of the DeFi sector.
It is worth noting that this year's intense battle between American financial regulators and cryptocurrency exchanges added fuel to the fire. As a result of these regulatory disagreements, traditional companies became increasingly concerned that they might violate US law by entering the DeFi space.
TVL in the DeFi ecosystem at multi-year lows
Negative sentiment spread widely and intensely to the decentralized finance sector. This fact is illustrated by the statement that in the last month alone, several DeFi protocols have lost more than half of the assets that were invested by users. For example, the Optimism network-based decentralized exchange Velodrome, which recently experienced a 58% drop in TVL. Additionally, one of the largest liquidity protocols called Balancer suffered a 35% drop during the same time.
Last week, after a long sideways trade, a 2-digit percentage correction appeared on the charts of the leading digital currencies. It is worth adding that usually when major virtual currencies experience a significant drop in their value, investors withdraw liquidity from more speculative assets, which include those in DeFi, in order to reduce their own exposure to excessive risk.
Some experts in the cryptocurrency industry believe that the DeFi ecosystem is showing increasing sensitivity to the recent surge in U.S. Treasury yields.