It’s true. Despite the crypto winter, the Total Value (TVL) is increasing rapidly for many DeFi protocols. Even right after the FTX collapse.
Most observers agree that another winter began for crypto sometime between its price drop in late 2021 and its further collapse over the summer. Why are some protocols bucking the trend by having their TVL go the other way?
The total value locked identifies which DeFi protocols have attracted investor attention and trust. TVL is the dollar value of crypto locked into DeFi smart contracts through staking, yield and also lending protocols or liquidity pools.
The TVL tends to correlate with the potential returns and ease of use among the end users of DeFi applications. TVL also provides an overview of the overall health of the DeFi market and acts as a sort of DeFi adoption indicator.
TVL over DeFi
In 2022, TVL reached nearly $2 billion globally, up from $400 million in the previous two years. The DeFi space has clearly experienced rapid growth in popularity and has built some momentum. Market volatility can of course greatly affect the value of locked assets, mainly via the price of ETH, the platform used by most DeFi assets.
It is worth outlining the crucial factors at play in TVL, including the platform’s ability to offer unique or appealing financial services, the strength of its technology and security, a strong development team and use cases, and the trust 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 on specific platforms to take advantage of the potential.
Protocols and platforms on the rise
__Overnight Finance’s __USD+, a high-yield stablecoin on the Optimism and Polygon blockchains, surged from $5.81 million to $9.37 million in October and November.
This period included the collapse of FTX which seems to have little impact. Around the time of FTX’s liquidity crisis and final bankruptcy filing (November 11), TVL for USD+ was $7.35M.
FTX pulled Bitcoin below $17,000 for the first time in two years and ETH from above $1,600 to $1,200. Nonetheless, the USD+ total locked value continued to increase, reaching $9.37 million at the end of the month.
Overnight is the DeFi protocol behind USD+, a reliable 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 improve liquidity pools across the ecosphere, with claims of being the “vanguard of DeFi”.
Vesta Finance made similar gains over the same period. At the beginning of November, its TVL was $18.44m and fell to $15.8m (22nd November) as the broader market bore the impact of FTX. Here, however, Vestas TVL saw a sudden jump, rising to $27.26 million by mid-December.
Vesta Finance – $18.44-$27.26 million
Vesta Finance allows for lending a collateralized stablecoin against supported crypto assets with no interest rate. The platform allows users to lend their crypto assets without selling them.
VST is their collateralized stablecoin, which has assets worth more than $1 for each VST unit. Users can participate in the ecosystem by using their rented or purchased VST to contribute to stability pools.
__DEUS Finance__ saw a jump to $22.16 million (Nov. 23) and is up an overall impressive 141% for the month.
DEUS Finance – $9.71 to $22.16 million
DEUS Finance is a marketplace for decentralized financial services where the infrastructure for others to build financial instruments is provided by the DEUS DAO. These instruments include trading platforms for synthetic stocks, options and futures trading.
They proudly announce that they are a “world’s first decentralized bilateral OTC derivatives platform”. Enabling next-gen DeFi will give users and developers unrestricted access to global markets.”
Finally, __Tetu Earn__ rose steadily from $7.26M to an impressive $44.96M in October and November. The surge appeared to be briefly halted for a day or two when FTX filed for bankruptcy.
Tetu Earn – $7.26-$44.96 million
Tetu is a Web3 wealth management protocol that implements automated yield farming strategies to provide investors with a surefire way of earning a high and stable return on their investments.
Tetu’s innovative solutions provide automated yield aggregation and distribution for its users and DeFi investors in general.
How they power TVL
Tetu proudly boasts on its website that it is among the five most secure dApps on Polygon and in the top 20 in all of DeFi (according to DeFi Safety). Trust is a hugely attractive aspect at a time like this, but it will continue to be woven into the best DeFi protocols.
Overnight mints its USD+ stablecoin against USDC, while Vesta and DEUS mint their own secured lending stablecoins. Stablecoins have seen incredible growth over the past year.
At the beginning of 2021, the total stablecoin supply was $30 billion. Here, at the end of 2022, that number has increased six-fold to over $175 billion. Rising stablecoin supply signals significant capital is flowing into DeFi.
Increasing TVL means stablecoin users are not simply redeeming them for cash, but storing their money in stablecoins. This is a massive vote of confidence in DeFi as well as every single protocol driving the increase.
For these users, stablecoins have become a better option than traditional banking.
However, stablecoins tend not to be robust and do not have a consistent bond. This is mainly due to the lack of adequate collateral. Also, allowing users to earn returns on their stablecoins requires time and expertise for users, which of course deters the DeFi newbie.
For example, a feature of Overnight’s USD+ stablecoin is that it allows users to earn passive income, in addition to building a secure collateral narrative. The stablecoin is linked to USDC and can be redeemed at any time for the security amount.
To make it more capital efficient, the collateral is deployed in a spectrum of stable-to-stable pools that generate rewards. These rewards are then passed on to holders daily via a rebase mechanism.
Finally
There are several key factors driving TVL in a DeFi protocol or application. These include:
- Yield or Yield: DeFi protocols often offer attractive yields or yields on assets that can propel TVL as users seek to take advantage of these opportunities.
- Utility: DeFi protocols that offer useful or valuable services (e.g., lending, borrowing, or trading) may experience increased TVL as users flock to the protocol to utilize those services.
- Innovation: DeFi protocols that offer new or innovative features or services can attract more users and increase TVL.
- Trust and Reputation: Protocols that have a good reputation and are perceived as trustworthy may experience increased TVL as users are more likely to trust them with their assets.
- Network Effects: As more users join a DeFi protocol, it can become more attractive to other users, resulting in 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. Of course, if these factors can be adequately supported, money will flow there and stay.
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