The year's second quarter was marred by high-profile contagion events within the digital assets ecosystem. While Bitcoin and Ethereum lost 56.3% and 67.4% of their value, respectively, the total value locked (TVL) in decentralized finance (DeFi) protocols plunged 65.7% to $93.2 billion in Q2.
Platforms such as Aave, MakerDAO and Curve Finance have played important roles in the crunch of the digital asset space, but managed to function as normal with little to no operational downtime.
Aave launched its v3 application near the end of the first quarter and was the largest protocol with $10.4 billion in TVL at the end of Q2. It was used by embattled crypto hedge fund Three Arrows Capital and centralized lenders pursuing DeFi yield.
MakerDAO, the protocol behind the DAI stablecoin, gained interest after its overcollateralized algorithmic model was deemed safer when compared to the algorithmic stablecoin Terra used within its ecosystem.
Decentralized exchange Curve was a key marketplace in the depegging of the UST – as described in our report on UST’s fall from grace – while Lido Finance’s stETH product, which is a liquid token representing Ethereum stake on the Beacon Chain, has been a major matter of questioning after it fell in parity with ETH.
A poor macroeconomic environment combined with the possibility of a multi-year-long bear market has made it difficult for decentralized finance protocols to sustain themselves, particularly if they haven’t shown prudent treasury management.
Aave, DeFi’s flagbearer, has seen its treasury value plunge from around $532 million to $102 million in the year's first half. With all signs pointing to a more sustained period of pain for the DeFi sector, total value locked may remain range bound as crypto prices attempt to recover.
Another challenge DeFi protocols are facing relates to their adherence to the ethos of decentralization, with a number of protocols exhibiting behavior reminiscent of centralized entities.
These include Juno Network voting to confiscate the funds of an account that was able to take advantage of its stakedrop, and Solend DAO proposing to grant emergy powers to the team to take over the account of a whale. While the proposal was reversed shortly after, it was passed with one voter accounting for 98% of all “yes” votes.
Read CryptoCompare’s 2022 Q3 Outlook to learn more about developments in DeFi, the digital assets space, and macroeconomic factors affecting it.
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