Creditors of cryptocurrencies have experienced a real boom in the past two years, attracting tens of billions of dollars in bitcoin, ether and other coins which they in turn borrow or invest, often in decentralized financial projects (DeFi) with staggering returns.
But as cryptocurrency markets plummet, DeFi activity is being particularly hard hit, depriving creditors of their most lucrative returns and threatening to put pressure on the entire industry — well beyond Celsius Network, which made headlines.
Total Blocked Value (TVL) on ethereum, a metric that attempts to track the value of tokens deposited in various DeFi protocols, has fallen $124 billion or 60% in the past six weeks, according to the provider. †
The crash occurred in two major crypto tranches, losing $94 billion in the collapse of Project LUNA — with the failure of stablecoin TerraUSD — and another $30 billion in mid-June, Glassnode said, who attributed the declines to reduced risk appetite.
“Current market conditions have put tremendous pressure on traders who interact with decentralized financial protocols to generate their returns,” said Mauricio Di Bartolomeo, co-founder and chief strategy officer of cryptocurrency lender Ledn.
Bitcoin VS THER VS DOLLAR
Similarly, an index tracking cryptocurrency tokens related to lending/lending protocols and DeFi exchanges, from research firm Macrohive, fell 35% in the past week as investors withdraw their money from the once-hot sector.
Some DeFi protocols or projects are starting to offer lower yields, with average borrowing and lending rates on one platform, Compound, over the course of the week for all crypto but one, the stablecoin Pax Dollar, Macrohive found.
In another sign of the slowdown, ether — the token underlying the ethereum network on which many DeFi protocols run — fell to its lowest level against its major peer, bitcoin, in 14 months last week.
† Against the dollar, bitcoin is down 34% so far in June, while ether is down more than 40%.
The turmoil in this higher-yielding part of the cryptocurrency market raises questions about the sustainability of the high interest rates that cryptocurrency lenders offer their customers, often at double-digit rates.
TOO GOOD TO BE TRUE?
Some market participants argue that creditors of cryptocurrencies should educate customers about the risks of the projects their money is being pumped into.
“I expect users to demand greater transparency as their assets are managed in the DeFi space,” said Iakov Levin, CEO of crypto investment platform Midas Investments. “Crypto needs to find a more transparent model of returns for individuals.”
New Jersey-based Celsius, with more than $11 billion in assets on its platform, cited market volatility when it suspended redemptions last week. A search for data shows she was invested in several DeFi projects that were experiencing difficulties.
“The DeFi market will no doubt suffer from this development as it is also related to cryptocurrencies and people will be more wary than ever before investing their assets in what they consider to be similar ecosystems,” said Yubo Ruan, founder and CEO of Parallel Finance, a decentralized lending protocol.
Ruan said if the projects “promise rewards that seem too good to be true, there’s always a chance they are.”
CHART: Cryptocurrency lending rates https://graphics.reuters.com/FINTECH-CRYPTO/mopanrlwmva/