DeFi locked funds up 5000% in a year

The value of funds locked in DeFi apps is currently US$60 billion – up an eye watering 5354% in the year from June 14th 2020 to June 14th 2021 according to website DeFi Pulse. The value of assets in DeFi apps as recently as February 2019 was just 276 million.Locked funds in DeFi is now $60 billion. Source: DeFi Pulse

The breakout performer in the last 12 months has been AAVE which currently holds 21% of the funds with just over $13 billion. Number 2 is MakerDAO, holding 14% of the funds with $8.4 billion, followed by Curve Finance with 13% and $7.8 billion. By comparison, In February 2020 the top three platforms were MakerDAO with 61% of the funds, Synthetix with $13%, and Compound with $12.7%.

Today Compound, which is a lending and borrowing protocol, is down slightly to number 4 on the DeFi Pulse top 100 projects list – with 7.5 billion in locked assets, while Synthetix, which is a derivatives platform has slipped to 14th. For more info on DeFi projects, check this list of the 10 best DeFi projects of 2021.

For readers looking for additional perspective, AAVE founder Stani Kulechov spoke on the Crypto Conversation in February 2020. The interview is interesting to listen to now as Kulechov lays out his vision for AAVE and finance innovations the protocol has yet to roll out.

Locked DeFi funds down from all-time-highs

As recently as May 12th the amount of locked funds was $86 billion – but it has fallen in recent weeks after the 50% decline in the Bitcoin price on the back of tweets by Elon Musk and concerns about a crypto crack down in China. While a previous all-time-high of $86 billion means the current $60 billion in assets does at least have the potential to go higher, many analysts are operating in cautious mode with regards to DeFi currently.

In his most recent YouTube analysis of the main DeFi assets, Brave New Coin head analyst Josh Olszewicz said DeFi technicals were weak across the board and he did not anticipate a recovery in the near term. Olszewicz moved the majority of funds in Techemy Capital’s Managed DeFi Portfolio into aUSDC on June 13th.

So why did so many investors pile into DeFi in the last 12 months? Yield is the simple answer. Yield farming or liquidity mining is an incentive mechanism used by DeFi protocols to attract liquidity. The protocols achieve this by issuing tokens that represent network governance rights for those that bring liquidity to the network. One of the best examples of liquidity mining is Compound Finance. After the release of the project’s COMP token, last June, the protocol’s market cap today sits at around $1.6 billion.

According to the team at Techemy Capital, continued interest in Ethereum, DeFi, and liquidity mining is due to a phenomenon called the ‘Ethereum DeFi Liquidity Vortex’. To visualize this thesis, and show how Ethereum attracts assets via the various DeFi protocols, Paul Salisbury, crypto-economic Analyst at Techemy Capital, created the following visual.

Source: Paul Salisbury Twitter

We often see ecosystem maps cluttered with logos, however, the vortex illustration is uniquely useful for its ability to convey the interconnected nature of DeFi.

Salisbury says the visual illustrates the crypto-economic inputs that are driving the growth of the DeFi ecosystem, as well as the five overlapping classes within DeFi. "It starts with the outer vortex of Ethereum, where the protocol incentives have combined with the ecosystem growth of the past five years thanks to the momentum provided by developers."

Salisbury adds that the inner vortex of DeFi started to accelerate once there was a nexus of Collateralised Derivatives, Lending Markets, DEXs, Fund Management, and Liquidity Pools. “Perhaps most interesting is where permissionless innovation and composability has allowed for cross-overs between categories,” he says.

It is a point that Anthony Sassano, Product Marketing Manager at Set Labs / TokenSets, and a long term Ethereum contributor, continues to make. Writing on Substack Sassano says that as the DeFi liquidity vortex accelerates, Ethereum is on track to consume all assets, financial or otherwise, inside and outside of crypto.

“In the financial world, there is a saying that ‘liquidity begets liquidity’. What this means is that as more liquidity is added to a market, it attracts more users who add more liquidity, which then attracts even more users who add further liquidity. This quickly snowballs and becomes a self-perpetuating cycle,” he says.