DeFi survives crypto sell-off

Twitter traders in the DeFi ecosystem sometimes use the label ‘degen’ standing for ‘degenerate’, but Andrew Thurman at Coindesk, argues that they may not be so degenerate after all, and that many depositors are playing it safe, compard to what has recently happened in the wider crypto market.

Over the last week we have seen a pullback across crypto markets, with spot prices decimated, wiping out leveraged traders on centralised exchanges. Bitcoin (BTC) fell as far as $42,000 from $57,000 before a relief bounce, while ether (ETH) plummeted as low as $3,500 from $4,600.

Meanwhile, in DeFi, the total value locked (TVL) remained fairly constant, although there was a drop in the TVL from $270 billion to $260 billion. According to Thurman, “a number of industry experts said the outperformance is in part attributable to DeFi users being more cautious than some would expect.”

Given that leverage traders and derivatives speculators were so thoroughly routed on centralised exchanges, it would have been easy to assume that DeFi would suffer a similar pullback. Yet there is no on-chain evidence of this happening.

For example, liquidations across DeFi’s top lending platforms, including Aave, Compound and Maker, topped just over $66 million during the worst of the pullback. Additionally, the liquidations account for just .01% of Aave, Compound and Maker’s combined $42.37 billion in TVL. Ashwath Balakrishnan of Delphi Digital says that part of the reason for this is that DeFi loans are often even less leveraged than real-world ones. “The loans that you see on Aave and Compound, they’re a lot more prudent than the ones you’d see even at a bank mortgage,” Balakrishnan said. “At a bank you can get a mortgage for a loan-to-value of anywhere between 60%-80% depending on your credit score. But if you look at Aave and Compound, the larger loans that go through the loan to value is between 10% and 15% to 50%. That’s playing it super safe.”

Daniel Khoo, a researcher for analytics platform Nansen, also commented that DeFi yield farmers “continued to work the fields in spite of market action.” He further suggested, “DeFi TVL might outperform spot prices in part because they simply provide attractive income opportunities difficult to find in other financial products.”

Ultimately the reason why DeFi hasn’t experienced the same volatility as the crypto markets over the last week is this: “The risk-reward calculations on the part of depositors are far different from the ones made by leverage or derivative traders, and DeFi’s TVL chart reflects that.”