Despite broad market weakness and waves of forced liquidations in cryptocurrencies, DeFi total value locked (TVL) has proven surprisingly resilient, a sign that traders are still trying to generate returns despite the bearish sentiment flooding the cryptocurrency market.
Over the past week, major cryptocurrencies BTC, ETH, XRP, and SOL have fallen to multi-year lows, with ETH now losing 21% of its value in the last seven days alone.
But that drop did not translate into capital outflows from DeFi protocols. Total value locked fell from $120 billion to $105 billion, a 12% drop, as it outperformed the market.
The 12% drop can be attributed to falling asset prices rather than yield producers rushing out. The amount of ether deployed in the DeFi market has increased from 22.6 million ETH at the beginning of the year to 25.3 million, with 1.6 million ETH added in the last week alone, according to DefiLlama.
Silenced chain liquidations
In February last year, the cryptocurrency market experienced a similar decline following the rise of Donald Trump to the presidency of the United States. Back then, the DeFi market was much more fragile, with a gigantic pool of $340 million in on-chain liquidations about to go live.
This time, the DeFi market is better secured with only $53 million in liquidable positions within 20% of the current price. Positions in algorithmic interest rate protocol Compound are only at risk if ETH falls below $1,800, although the greatest danger zone is between $1,200 and $1,400, which contains $1 billion in liquidable positions, DefiLlama data shows.
Resilience shows a sector in the process of maturation
In previous cycles, the DeFi market was the first to implode. In 2022, investors succumbed to overly tempting returns on the Terra blockchain by betting on the UST algorithmic stablecoin, only to have the entire ecosystem collapse months later during a market crash that reduced the value of the cryptoassets backing the stablecoin.
This caused contagion across all DeFi markets, with TVL falling from $142 billion to $52 billion between April and June of that year.
This time the downside risk is minimal, returns are stable and inflows are quietly increasing, suggesting the sector has matured against a backdrop of institutional adoption and broader market volatility.
