Defi on the hunt for records again – BitcoinBlog.de – the blog for Bitcoin and other virtual currencies

The decentralized finance (Defi) ecosystem is approaching new highs – but not every category is equally involved. We take a look at what’s happening with all kinds of charts and numbers.

When we talk about DeFi, we mean “decentralized finance,” which means borrowing, lending, exchanging and paying interest on money or tokens without a central middleman being involved. DeFi usually runs as a “dApp” in a smart contract, and the user retains control over their tokens.

The most important indicator for the DeFi ecosystem is the TVL. This is the abbreviation for “Total Value Locked”. It refers to the values ​​stored in the DeFi platforms. We will use these as a measuring tape to identify and examine the growth of DeFi.

DeFi is back!

However, it is unclear how high the TVL of all DeFi apps is. As is often the case, it depends on how you measure it, which categories you include, which you leave out, which blockchains you value, which you don’t, and so on.

The website DeFiLlama, usually a solid source, reports a total TVL of $102 billion, TheBlock comes in at around $112, and DappRadar, a platform with a slightly broader focus, reports $192 billion in a May report. But everyone agrees on one thing: Defi is back. The TVL has reached a value last seen in early 2022.

However, not all DeFi categories are contributing equally to this new growth. Some are only a shadow of their former strength in 2022, while others are already getting close to it and the next are just beginning to flourish. And this rebalancing within the ecosystem is exactly what interests us here.

A small but informative overview

A chart from DeFiLlama shows this quite nicely. It lists all DeFi categories with more than $10 billion TVL:

These are the following categories:

– Lending (borrowing and lending)
– DEXes (Exchange)
– Bridges (switch to other blockchains)
– Restaking (re-staking staking tokens such as stETH)
– CDP (creating stablecoins through collateral)

So this is what is commonly understood by DeFi: tokens and coins are borrowed, lent, collateralized, exchanged, staked, interest-bearing, collateralized; all in a decentralized manner, usually in the sense that you are not interacting with an intermediary, but with a smart contract, while users continue to hold their tokens themselves.

To avoid confusion, restaking has two categories in DeFiLlama, with and without a liquid token. More on that later.

A significant shift can now be observed among these five major categories.

Lending and restaking rock, DEXes and CDP not so much

Decentralized exchanges (DEXes) like Uniswap, actually a prototypical DeFi application because they are so obviously practical and traceable, peaked at 80 billion TVL at the end of 2021.

Today, with a value of 22 billion dollars, they are far from this proud heyday. Although at just under 22 billion dollars they are about twice as strong as they were in autumn 2023 – it remains a weak, almost sad reflection of the glorious past. There can be no talk of a new record hunt.

Things look much rosier when it comes to lending, the second classic DeFi application. You deposit a token as collateral to borrow other tokens, or you lend your tokens to collect interest.

While lending is still below the peak of 50 billion with a current TVL of 35 billion, it is clearly much closer to it than the DEXes – and three times as strong as it was in spring 2022. The top dog in this sector is AAVE, the leading lending platform with 12 billion dollars, well ahead of Compound.

Bridges, on the other hand, is now back close to its old peak of $31 billion TVL.

Bridges are an almost natural reaction to the fragmentation of the ecosystem across multiple blockchains. They allow a token or coin to jump from one blockchain to another, from Ethereum to Solana, from Solana to Polygon, from Polygon to Avalanche, from there to Arbitrum, and so on.

Basically, the bridges should be decentralized. But the strongest bridge here is WBTC, a centralized protocol to bring Bitcoin as a token to Ethereum. It is followed by JustCryptos, a bridge specifically for the Tron blockchain, which works decentralized as far as I can see.

The next category is more unconventional: restaking.

Anyone who stakes Ethereum in a pool like Lido receives a “liquid staking token” (LST), such as stETH. This is a nice idea to remain liquid even though you have frozen your ETH in a staking contract. But restaking makes things even nicer: you now stake the stETH – or other LST – yourself to earn even more interest.

Restaking is possible with Eigenlayer without or with Ether.fi with a liquid token. The two categories are fairly new; they basically didn’t exist before 2024, but now have 20 and 15 billion TVL respectively. A tempting idea came at the right time and is taking off.

Things look less rosy for CDPs, i.e. stablecoins backed by collateral.

When people talk about CDPs, they primarily mean Maker, i.e. the DAI dollar. The CDP category is relatively stable at $10 billion, meaning it has grown only slightly compared to the other categories over the course of this year. The TVL is still well below the peak of around $30 billion in 2022.

A sober and surprising but conclusive explanation

The growth of DeFi is therefore less pronounced in decentralized exchanges and stablecoins, but stronger in lending. However, it is largely driven by new categories such as restaking, which have had a brilliant start.

DappRadar also notes the “remarkably bullish trend of TVL in Defi since the beginning of the year” in a report for May 2024 – but immediately follows it up with a rather sobering fact.

The number of UAW – Unique Active Wallets, i.e. the number of wallets involved – has not only not increased to the same extent, but has even decreased significantly: by 21 percent to 1.75 million daily UAW. There is no sign of new users, instead the DeFi landscape is becoming more desolate.

Instead, DappRadar explains, the growth in TVL is driven by the rise in token prices, especially Ethereum. Behind the beautiful, rising chart, behind the record-breaking decentralized finance, the report continues, is primarily speculation on the Ethereum ETF. And to top it all off, most of this is taking place on centralized traditional exchanges.