Defi back on a record-breaking spree

The Decentralized Finance (DeFi) Ecosystem Approaches Old Highs – But Not Every Category is Equally Involved. We Look at the Developments with Numerous Charts and Figures.

When we talk about DeFi, we mean „Decentralized Finance“ which involves borrowing, lending, swapping, and earning interest on money or tokens without a central intermediary. Typically, DeFi operates as a „dApp“ within a smart contract, allowing users to retain control over their tokens.

The most important indicator for the DeFi ecosystem is the TVL, an abbreviation for „Total Value Locked.“ It refers to the values stored across DeFi platforms. This will serve as our benchmark to recognize and examine the growth of DeFi.

DeFi is Back!

However, the exact amount of total TVL across all DeFi apps is unclear. It depends on how you measure it, which categories you include or exclude, and which blockchains you count, among other factors.

The website DeFiLlama, typically a reliable source, lists a total TVL of 102 billion dollars. TheBlock reports approximately 112 billion, and DappRadar, a platform with a somewhat broader focus, notes 192 billion dollars in a report for May. Nonetheless, all sources agree on one thing: DeFi is back. The TVL has reached a level last seen in early 2022.

However, not all DeFi categories contribute equally to this new growth. Some are mere shadows of their former strength in 2022, others are nearing their old highs, while new ones are just beginning to bloom. This reallocation within the ecosystem is what interests us here.

A Small but Insightful Overview

A chart from DeFiLlama illustrates this well. It lists all DeFi categories with more than 10 billion dollars in TVL:

These categories are:

– Lending
– DEXes (swapping)
– Bridges (switching to other blockchains)
– Restaking (staking tokens like stETH again)
– CDP (creating stablecoins through collateral)

So, this is what is generally understood by DeFi: tokens and coins are borrowed, lent, collateralized, swapped, staked, earned interest, collateralized again; all of this in a decentralized manner, typically meaning that you interact with a smart contract instead of an intermediary, while users continue to hold their tokens themselves.

To clarify, Restaking has two categories on DeFiLlama: with and without liquid tokens. More on this later.

Within these five major categories, significant shifts can be observed.

Lending and Restaking Rock, DEXes and CDP Not So Much

Decentralized Exchanges (DEXes) like Uniswap, a prototypical DeFi application because of their obvious utility, peaked with 80 billion in TVL by the end of 2021.

From this proud bloom, they have now fallen to a value of 22 billion dollars. Although they have about doubled in strength from the fall of 2023, the current figure still represents a faint shadow of their former glory. There’s no talk of setting new records.

The picture is much rosier for Lending, the second classic DeFi application. Here you can deposit a token as collateral to borrow other tokens, or lend your tokens to earn interest.

Lending, with a current TVL of 35 billion, is still below its peak of 50 billion but is much closer to this high than the DEXes and is three times as strong as in spring 2022. The market leader in this sector is AAVE with 12 billion dollars, far ahead of Compound, the leading lending platform.

Meanwhile, Bridges are close again to their old high of 31 billion dollars in TVL.

Bridges, which allow tokens or coins to move from one blockchain to another (from Ethereum to Solana, Solana to Polygon, and so on), are almost a natural response to the ecosystem’s fragmentation across multiple blockchains.

In principle, bridges should be decentralized. However, the strongest bridge is WBTC, a centralized protocol for bringing Bitcoin as a token onto Ethereum. JustCryptos, a bridge specifically for the Tron blockchain, follows, which appears to be decentralized.

The next category is more unconventional: Restaking.

If you stake Ethereum in a pool like Lido, you receive a „Liquid Staking Token“ (LST), such as stETH. This is a nice idea to stay liquid even though your ETH is frozen in a staking contract. The concept becomes even more attractive with Restaking: you stake the stETH or other LST to earn even more interest.

Restaking can be done without or with a liquid token, as with Eigenlayer or Ether.fi respectively. These categories are fairly new, having hardly existed before 2024, but now total 20 and 15 billion in TVL, respectively. A tempting idea that arrived at the right time and is taking off rapidly.

The situation is less rosy for CDPs, which are stablecoins backed by collateral.

When talking about CDPs, one primarily means Maker, hence the DAI dollar. The CDP category is comparatively stable with 10 billion dollars, which means it’s grown only slightly compared to other categories this year. The TVL remains significantly below its peak of around 30 billion dollars in 2022.

A Sobering yet Surprising but Plausible Explanation

The growth of DeFi is therefore less pronounced in Decentralized Exchanges and Stablecoins, but stronger in Lending. However, it is primarily driven by new categories such as Restaking, which have had a spectacular start.

DappRadar notes the „remarkably bullish trend of TVL in DeFi since the beginning of the year“ in a report for May 2024 but immediately adds a rather sobering fact.

The number of UAW – Unique Active Wallets, indicating the number of involved wallets, has not only not increased at the same rate but has even significantly decreased: by 21 percent to 1.75 million daily UAW. There is no trace of new users; instead, the DeFi landscape is becoming more desolate.

Instead of new users, the growth in TVL is driven, as DappRadar explains, by rising token prices, especially Ethereum. The report goes on to say that behind the appealing upward chart and record pursuits of decentralized finance lies, above all, speculation on the Ethereum ETF. And to top it all off, this speculation predominantly occurs on centralized traditional exchanges.