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DeFi’s $20B Jump is Not What It Seems

Photo by Pierre Borthiry on Unsplash

Decentralized finance (DeFi), the crypto sector that was the highlight of the summer last year, isn’t yet back where it was, but it seems that things are starting to look better for it.

While speaking to CoinDesk, Alameda Research founder Sam Bankman-Fried said: “Raw DeFi numbers are at all-time highs, and they’re not fake, but in relative terms to the rest of crypto, they’re down from their peak but up from their nadir.”

At first glance, DeFi might seem stronger than ever. If we measure its success using TVL, which is the metric of choice in DeFi, it has been adding about $1 billion in value every day since the start of 2021. It has gone from $15.67 billion all the way up to $35.06 billion as of Feb 6.

But in reality, most of that huge growth was simply the result of rising asset prices across the board. Founder of the venture firm Variant Jesse Walden told CoinDesk that “TVL isn’t the best indicator when ETH and all other crypto is green for weeks.”

ETH, which is the asset people use in DeFi, was worth $737 on New Year’s Day, and one month later, as of this writing, it is worth $1,681. This means that ETH has more than doubled in value since the start of the year, and so has DeFi.

We can expect DeFi to boom again once it has more assets locked in it. It’s evident that the increase in value is, in large part, to the increase in asset prices. However, that price increase alone is not enough to cause another DeFi craze.

“Uniswap alone is settling around $1 billion daily, so I think the ecosystem is growing, no doubt,” Walden commented.

The Explanation for DeFi: Jump Lies in the Stablecoins 

If we want to baseline these increases in DeFi’s value, a good place to start would be stablecoins, as they don’t normally get skewed as much by volatility. 

Compound, a DeFi money market, played a big role in starting the DeFi trend, and even now, yield farming on it continues.

When having a look at stablecoins USDC, USDT, and DAI on Compound, we notice that USDT is the only coin that has been rising slowly. However, the others have both had larger deposits than it by far.

Maya Zehavi, a Blockchain consultant, seems to agree with that. “My opinion is that DeFi just increased leverage in the system a bit, say 5%, the rest is just price appreciation,” she wrote in a text message.

In a Telegram Conversation, Stani Kulechov of the one-year-old money market Aave, shared some data with CoinDesk. This data showed more than $1.5 billion in Aave deposits between Aave 1 and 2. 

ETH was Aave’s biggest intake of deposits, making up over $450 of the platform’s deposits since the start of the year.

Doesn’t it make sense? When people have gathered a good sum of money, it’s appropriate that they put it somewhere where they can benefit in the long term. 

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