It’s true. Despite the crypto winter, total value locked (TVL) for many DeFi protocols is rapidly rising. Even in the direct aftermath of the FTX collapse.
Most observers agree another winter for crypto began sometime between the price drop at the end of 2021 and its further collapse in the summer. So, why are some protocols bucking the trend with their TVL going in the other direction?
Total value locked identifies which DeFi protocols have attracted investor attention and confidence. TVL is the dollar value of crypto locked up in DeFi smart contracts, through staking, yield, and also lending protocols or liquidity pools.
The TVL tends to correlate with potential yields and usability among DeFi application end users. TVL also provides a view of the overall health of the DeFi market, acting as a type of DeFi adoption indicator.
TVL Across DeFi
In 2022, TVL reached almost $2 billion globally, up from $400 million in the prior two years. The DeFi space has clearly seen rapidly growing popularity and has built some momentum. Market volatility can of course highly affect the value of locked assets, principally via the price of ETH, the platform employed by most DeFi assets.
It's worth outlining the determining factors in play with TVL, which include the platform's ability to offer unique or appealing financial services, the strength of its technology and security, a strong developer team and use cases, and the trust and confidence of its users.
And so, even in a bear market, many investors clearly see the potential for long-term growth in the DeFi space and are willing to lock up their funds in particular platforms in order to take advantage of the potential.
Protocols and Platforms on the Rise
__Overnight Finance's __USD+, a yield-bearing stablecoin on the Optimism and Polygon blockchains, went from $5.81m to $9.37m during October and November.
This period contained the collapse of FTX, which barely seems to impact. Around the time of FTX's liquidity crisis and ultimate bankruptcy filing (November 11), the TVL for USD+ was at $7.35m.
FTX dragged Bitcoin to below $17,000 for the first time in two years, and ETH down to $1,200 from above $1,600. Yet, the total locked value for USD+ kept climbing, by month’s end hitting $9.37m.
Overnight is the DeFi protocol behind USD+, a dependable and liquid stablecoin with a high daily profit payout. It is a rebased stablecoin native to the protocol and backed by liquid strategies.
The stated mission is to upgrade liquidity pools across the ecosphere, with an aspiration to be the "Vanguard of DeFi".
In the same period,
Vesta Finance allows the borrowing of a collateralized stablecoin against supported crypto assets with no interest rate. The platform enables users to borrow against their crypto assets without selling them.
VST is their collateralized stablecoin, boasting more than $1 worth of assets for each unit of VST. Users can participate in the ecosystem by using their borrowed or purchased VST to contribute to stability pools.
__DEUS Finance __saw a leap up to $22.16m (November 23), improving an impressive 141% in total over the month.
DEUS Finance is a marketplace for decentralized financial services where the infrastructure for others to build financial instruments is provided by the DEUS DAO. Such instruments include synthetic stock trading platforms, options, and futures trading.
They proudly proclaim to be a “World-first decentralized bilateral OTC derivatives platform. Enabling next-gen DeFi giving users & developers unlimited access to global markets.”
Finally, __Tetu Earn __rose consistently across October and November, from $7.26m to an impressive $44.96m. The rise seemed to be only briefly interrupted for a day or two around the time FTX declared bankruptcy.
Tetu is a Web3 asset management protocol that implements automated yield farming strategies to provide investors with a secure method of receiving a high and stable yield on their investments.
Tetu's innovative solutions provide automated yield aggregation and distribution for its users and DeFi investors in general.
How They Drive TVL
Tetu proudly boasts on its website that it is in the top five safest dApps on Polygon and the top 20 in all of DeFi (according to DeFi Safety). Trust at such a time is a deeply attractive aspect but also looks set to continue to be interwoven in the best DeFi protocols.
Overnight mints its stablecoin USD+ against USDC, while Vesta and DEUS mint their own stablecoins using collateralized lending. Stablecoins have seen incredible growth over the past year.
At the start of 2021, the total stablecoin supply was $30 billion. Here at the end of 2022, that figure has grown sixfold to over $175 billion. An increasing stablecoin supply signals significant capital flowing into DeFi.
Rising TVL means stablecoin users are not simply redeeming them for cash but keeping their money in stablecoins. This is a massive vote of confidence for DeFi, as well as for each individual protocol driving the increases.
For those users, stablecoins have become a better option than traditional banking.
Stablecoins, however, tend not to be robust and lack a consistent peg. This is mainly due to them lacking appropriate collateralization. Also, for users to earn yields on their stablecoins, they need time and know-how, which naturally deters the DeFi novice.
A feature of Overnight's USD+ stablecoin, for example, is that it allows users to earn passive income on top of establishing a secure collateralization narrative. The stablecoin is pegged to USDC and always redeemable for the collateral amount.
To make it more capital efficient, the collateral is deployed across a spectrum of Stable-to-Stable Pools that generate rewards. These rewards are then passed onto holders daily via a rebase mechanism.
In Conclusion
There are several main factors that drive TVL in a DeFi protocol or application. These include:
- Returns or yield: DeFi protocols often offer attractive returns on investments or yield on assets which can drive TVL as users seek to take advantage of these opportunities.
- Utility: DeFi protocols that offer useful or valuable services (such as lending, borrowing, or trading) may see increased TVL as users flock to the protocol to take advantage of these services.
- Innovation: DeFi protocols that offer new or innovative features or services may attract more users and increase TVL.
- Trust and reputation: Protocols that have a good reputation and are perceived as trustworthy may see increased TVL as users are more likely to commit their assets to them.
- Network effects: As more users join a DeFi protocol, it may become more attractive to other users, leading to increased TVL.
Overall, TVL in DeFi protocols is driven by a combination of these and other factors, including market conditions, investor sentiment, and the overall health and stability of the protocol. When these factors can be sufficiently supported, money naturally flows there, and stays, too.