Is DeFi really growing: how inflation could be distorting TVL and fueling a bubble

Dapp Digest | Week #34 | Ilya Abugov

The focus remains on DeFi as the sector continues to expand to more blockchains and attract the attention of developers and investors. Ethereum continues to be the leader and given the amount of capital locked in projects on its network, it is starting to amass significant network effects. However, while gas fees remain high, competitor networks have a chance to highlight their efficiency benefits. Blockchains that are EVM compatible may be able to make the most convincing case in the short term.

Competing with Ethereum

Last week there was news of an IOST DeFi fund, this week it is Qtum that makes a similar move. The project has announced that it will launch a $1M DeFi Developer Grants program. Qtum outlines a number of advantages its blockchain offers, not the least of which is its EVM compatibility. In theory, this should simplify the migration for dapp projects looking for a lower fees, higher scalability environment.

High transaction fees stall adoption efforts for dapp projects, particularly when it comes to retail investors who transact in lower volumes. However, given the limited user base and the high impact whales have on the ecosystem, this does not present the same problems for DeFi dapps that it does for gaming dapps.

JustSwap also launched this week. Justin Sun published a letter to the community in which he outlined “8 measures to stimulate JustSwap and the TRON DeFi ecosystem”. The letter included some unfriendly language towards Uniswap, saying: “we’ve accomplished in a dozen hours what Uniswap took a dozen months to achieve”.


Tron has shown the ability to generate activity on the network, the JUST application is one of the top DeFi dapps based on daily unique active wallets. However, a healthy DeFi ecosystem requires capital and it is unclear if Tron’s ecosystem will be able to attract enough of it to become a serious competitor to Ethereum.

If you can’t beat them join them

Waves, one of the older blockchain projects, has announced that its stablecoin project Neutrino has ported over its token to Ethereum. Not only will the stablecoin be available on the network, but users will be able to participate in staking.

Waves has been making a lot of noise recently announcing cooperations with Tron and Ontology. It appears that the project is trying to connect itself to as many user bases as possible, and instead of attracting users away from networks, make Waves a part of a bigger whole.

One of the biggest issues for new DeFi ecosystems is the ability to attract capital. Ethereum dominates in terms of TVL in DeFi. New dapps often benefit from integration with existing ones, here network effects start to play an important role.
Waves may also be trying to step outside the crypto realm to attract capital, as its underlying asset was used to secure a bank loan. If players from the traditional financial sector increase their engagement with crypto, the DeFi sector may get a big boost.

The scalability race

There are a number of layer two solutions being developed on Ethereum. However, tangible adoption among dapp projects has been slow. This could be due to the expectations for Ethereum 2.0. However, there are some signs that scalability solutions are gaining traction.

For example, Blockade Games have started to use Matic Network for their game Neon District. For now this is limited to trading assets, but usage may expand going forward.

Also, dYdX has announced a partnership with StarkWare to develop a scaling solution for Perpetual Contracts. If DeFi protocols begin to utilize layer 2 solutions it could have a major impact on the ecosystem. It could make the network less congested, giving life to gaming projects as well as create confidence in scalability solutions.

It would also undermine the biggest selling points for Ethereum’s competitor’s.

TVL and the impact of inflation

Many crypto proponents focus on the destructive nature of inflation of fiat-currencies. However, when it comes to inflation in the crypto space criticism is notably quieter. DappRadar analyzed the impact of inflation on TVL, one of the most quoted metrics in the DeFi space.

A number of DeFi projects rely on users locking capital either as collateral or a contribution to a liquidity pool. Thus TVL is often seen as a metric of the sector’s growth and activity. The analysis took one project MakerDAO as an example and studied the dynamic of its TVL, locking prices as of 90-days prior.


Ethereum accounts for 73% of TVL in MakerDAO and with its staggering price appreciation over the past few weeks MakerDAO crossed the $1.5B mark. In fact, 75% of the growth of TVL can be accounted for by inflation of the underlying assets.

This severely distorts the real picture of what is happening in the DeFi space. The prevailing narrative at the moment is growth. However, it appears that much of that growth may be due to price appreciation rather than user engagement.

A recent poll by Blockfolio has shown that only 29% of users are actively engaged in DeFi. The numbers seem to support the contrarian notion that DeFi is not growing nearly as fast as the industry seems to believe.

There seems to be a self-perpetuating hype cycle where there is belief in growth which feeds asset prices, which in turn inflates TVL, which is then used to confirm the idea that the sector is growing.

DeFi is a promising sector, but the perception of its rapid growth may be misleading.

Updates keep support momentum has announced that it will be working to roll out tokenized insurance in the form of The project has attracted a lot of attention as part of the yield-farming boom. However, there are some concerns that stepping into the insurance field will attract attention from regulators.

Aave looks to continue to extend the reach of DeFi and may try to incorporate home mortgages as part of V2 of the protocol. Home mortgages present an enormous opportunity for DeFi, but given the current level of risk in the sector, it may also dramatically increase the cost of mistakes.

Animoca Brands introduces NFT staking to its F1 Delta Time game. Players will receive their rewards in REVV tokens. While the gaming sector may not be currently getting the attention DeFi is, it appears to be learning from DeFi.

Another crypto art headline

Paris Hilton has auctioned off a token with a painting of her cat for nearly $17,000 in ETH. While the auction did not attract many bids, this is another piece of crypto art that sold for an impressive amount. The capabilities provided by NFTs, may give a boost to the digital art space.

The more auctions attract substantial sums of money, the more interest they are likely to garner from the art community. The high transaction costs that are troubling Ethereum at the moment may not be a big obstacle to collectors looking to acquire multi-thousand dollar pieces.

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NB: The information provided here is for reference and informational purposes only. This is not investment advice and should not be treated as such.

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