Total Value Locked in DeFi plummets over 20% in 4 days

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A decrease of $1.6 billion in value

The total value locked in DeFi platforms has taken a huge hit over the last week. Falling over 20% since its peak figure of $8.41 billion on the 2nd September 2020.

It signals the first major correction for DeFi protocols after recent unparalleled growth driven by a slew of new products, namely the yield farming craze.

total value locked

The decrease represents over $1.6 billion in value. A fall from a high on the 2nd of September of $8.41 billion to $6.75 billion in just 4 days.

What’s happening?

There have been two theories circling the crypto-verse as to why the price of Bitcoin fell so rapidly dragging the entire space down. First, it is suspected that Bitcoin miners from China sold of their pots of BTC on various crypto exchanges.

Secondly, it is well understood that the price of Bitcoin is highly correlated to the traditional stock market which has experienced its own considerable losses in the past week. Especially tech stocks such as Tesla and Apple.

Further volatility arose as Ethereum the leading protocol in the DeFi explosion was effected by the fall in the price of Bitcoin due to their close correlation. The most logical reason for the mass sale could be that yield farmers decided it was time to exit to keep any profit they could.

total value locked
Source: CoinGecko

aTVL – Adjusted total value locked

The correlation between the falling price of the Ethereum token and the total value locked in Ethereum DeFi protocols shows why the aTVL (adjusted total value locked) metric launched by DappRadar will become a vital metric for the DeFi industry.

TVL, or total value locked, measures how much capital appears on a project’s smart contracts. It is akin to deposits and reserves in the traditional industries. It is measured as TVL = A * P, the number of tokens multiplied by the current price of those tokens.

It’s easy to imagine a case when the number of tokens stay the same or even decrease. But TVL increases because of rising prices. This is why the standard TVL can be so misleading.

Looking at Ethereum as an example. It is accepted by a number of DeFi dapps as collateral and accounts for a large portion of their TVL. Over the past 90 days, Ethereum saw a dramatic increase in price. This in turn was reflected in the TVL of the projects that accept it.

Now we see the opposite effect when the price of Ethereum is falling. Further confirming our beliefs and establishing the need for aTVL.

Looking at aTVL and TVL today (o7.09.20) we can see that the TVL decrease was not caused by people withdrawing their locked funds. But instead because of the decrease in token prices.

Something fishy

Further speculation about falling prices came as Chef Nomi of SushiSwap admitted to selling off his SUSHI holdings. Stating that he did it for the community. Likening selling his SUSHI to how Charlie Lee sold his Litecoin.

This exit could have accelerated an investor exodus from DeFi platforms. Caused by mounting fear that other project administrators might pull the same move.

As always we will continue to monitor developments as they unfold. Make sure to bookmark DappRadar and sign up to our newsletter below to receive updates directly to your inbox.

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