DeFi Hits Historic $17.5 Billion Locked, But ETH Is Still Flowing Out

Total value locked in DeFi is higher than ever, but the surging prices of ETH and BTC are leading users to pull those assets out.

In brief

• Total value locked in DeFi has hit $17.5 billion, a new all-time high.
• Even as TVL is rising, ETH and BTC are being pulled out of DeFi protocols after huge holiday pumps.
• TVL also accounts for many altcoins locked in DeFi, and locked value could rise even higher if an "alt season" materializes.

The DeFi market is rising again, but the surging price of Bitcoin and Ethereum are hiding a trend that will need to be changed if the industry wants to keep growing.

Total value locked (TVL) in DeFi protocols has grown to a new all-time high of $17.5 billion, increasing 23% in just the first few days of 2021, according to data aggregator DeFi Pulse. TVL is a metric widely used throughout the industry as a way to measure the relative popularity of DeFi projects, as well as decentralized finance as a whole.

But the metric is denominated in US dollar terms, and the apparent growth over the last few days is riding on the coattails of the exploding price of Ethereum (ETH), itself up more than 65% since the beginning of December. In reality, the DeFi protocols are seeing significant outflows of ETH and Bitcoin, as crypto users consider selling their assets and taking some profits in the face of rising prices.

DeFi, short for decentralized finance, represents a collection of blockchain-based protocols aiming to provide financial services with lower costs and greater accessibility. Protocols using automated blocks of code known as smart contracts provide services such as offering loans, exchanging assets, and providing interest on deposits. The vast majority of the action happens on the Ethereum network. And it’s native asset, ETH, is today priced at over $1,000, nearing its January 2018 all-time high.

To facilitate these activities, DeFi protocols rely on deposits of crypto assets like Bitcoin and Ethereum to provide the underlying collateral for loans and exchanges; as the value locked in DeFi increases, more participants can use loan and exchange services, and at a better interest rate.

In return, users who lock their assets are rewarded with interest payments, many offering annual returns that are unheard of in the traditional finance industry.

During the same period that TVL in dollar terms increased 23%, total ETH locked in DeFi protocols actually dropped 4.5%, while BTC locked fell about 4%. That means that DeFi users are seeing profitable opportunities elsewhere, and could be removing BTC and ETH to sell at current prices after huge holiday season run-ups.

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It’s worth noting that while the two leading cryptocurrencies make up a sizable portion of DeFi TVL, other digital assets are tracked in the calculation. Dollar-pegged stablecoins like DAI and USDC and a sea of other lesser-known tokens also contribute billions to TVL, and a rotation of value into so-called ‘altcoins’ could push TVL even higher.

But with BTC marking new all-time highs and ETH back above $1,000 for the first time in four years, it’s probably best to look beyond TVL as a measure of DeFi’s growth.