TVL in DeFi is down 41% in the last 7 days
Total value locked in key lending protocols is dropping as investors started flipping tokens to stablecoins with the intention of cashing out to fiat. Key lending protocols on several networks are seeing their TVL figures slashed while lending dapps on Terra see their TVL diminish by more than 99% amidst the biggest wealth drain in crypto history.
There are two main reasons for investors to consider crypto-related lending. First, investors can put up their cryptocurrency holdings as collateral to take out a cash loan. This way, investors can release liquidity without having to completely cash out their holdings. The other reason for collateralizing crypto assets is for short selling.
Short sellers collateralize their cryptocurrencies to effectively place a bet that the price of a crypto asset will fall. When the open short position is closed, the investor who placed the bet will receive either cash or an additional sum of cryptocurrency depending on how the contract is formulated. On the flip side, if the price increases while a short position is open, a portion of the collateral will be lost.
However, amidst massive concerns for Terra, UST and LUNA traders appear to be getting spooked and moving large quantities of stablecoins out of protocols. Ironically, three years ago during the last bear market scenario, Aave’s CEO Stani Kulechov called crypto-backed lending ‘true magic’ because the business model continued to perform well during a bear market.
Terra & UST problems threaten lending
The general logic behind lending in the crypto space is to provide a slicker off-ramp for investors rather than have them sell their crypto for fiat. Because that would negatively impact prices. However, the failure of Terra’s LUNA and UST tokens has sent waves of fear through the industry. First of all, it reinforced the decline of the price of BTC, while also knocking other stablecoins off their pegs. Moreover, the Terra downfall restated concerns from onlookers and investors about the viability of the stablecoin asset class.
The total value locked in DeFi is down from $224 billion on May 1 to $132 billion at writing. Crypto lending appears to be its next victim as data points toward traders moving crypto out of DeFi protocols and into stablecoins like USDC and USDT with plans to redeem for fiat.
Institutional investors use stablecoins to step away from crypto
USDC is an important player in the space as it is heavily utilized by institutional investors and US-based traders due to its regulatory compliance. USDC trading volume typically hovers around the $5 billion per day mark, however, in the last few days volume has exploded, peaking at almost $25 billion in the last 24 hours. The circulating supply of USDC is now 49.8 billion, down from 53 billion at the start of March 2022.
The market capitalization of lending and borrowing today is $4.67 billion, a 14.6% change in the last 24 hours. Moreover, lending protocol prices aren’t reacting nicely to the situation. Across the board, the tokens of major lending protocols are down with AAVE falling 38% this week. KAVA has dropped 45.2% over the past week and COMP has fallen by more than 32% during that time.
Further evidence comes from looking at the amount of gas being burned in the last seven days through the UltraSound Money burn leaderboard as USDT and USDC are both in the top five having burned more than 5,000 ETH, or about $10 million between them in transactions. While data from Nansen shows that gas fees from USDC and USDT are up around 190% and 160% respectively in the past week. While Curve, Balancer, and Aave have all seen massive increases in gas usage over the same time period.
Despite less USDC in circulation, there doesn’t seem to be much appetite for it given a bear market scenario. The expectancy is that trading will decrease and any planned investments into infrastructure might delay until some stability is restored.
The future of stablecoins has been thrown into doubt but it is well worth remembering that, unlike UST, which is backed by crypto assets, the majority of stablecoin assets are backed with more tangible support. USDC, for example, is backed by fiat money with USDC reserve assets held in separate accounts with US-regulated financial institutions.
Once the dust settles we may see traders return to the table and resort to more established trading techniques during a bear market. Lending thrived during the last cycle and we would expect actions such as staking and providing liquidity in return for rewards to emerge victorious as investors look for a safe store of value and hedge against global inflation. For now, the popcorn is out and we will keep tracking this story as it unfolds.
The above does not constitute investment advice. The information given here is purely for informational purposes only. Please exercise due diligence and do your research. The writer holds positions in various cryptocurrencies, including BTC, ETH, and RADAR.