Key points to remember
- The total value locked in DeFi has fallen along with the broader crypto market.
- BNB Chain and Solana were particularly hard hit.
- In comparison, the total value locked on Terra today is at historic highs.
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The total value locked in decentralized finance across Solana and BNB Chain has declined sharply over the past year. DeFi on other Layer 1 chains like Terra and Fantom fared much better.
DeFi on alternative layer 1 networks
The overall total value locked in DeFi has fallen over the past few months.
According to Defi Llama datathere is currently $210 billion locked up in decentralized finance protocols, down from a peak of $255 billion in December 2021. The drop came as the cryptocurrency market experienced a widespread meltdown.
Ethereum, the largest smart contract blockchain in the world, holds approximately $115 billion of digital assets on hundreds of DeFi applications. This marks a 30% drop from November 2021, when ETH was trading at an all-time high, and Ethereum held $163 in locked value. The evolution of the total value locked on so-called “layer 1 alternatives” blockchains competing for Ethereum’s market share has seen huge variation.
While some networks have seen the total value locked in their DeFi ecosystems decline over the past few months, others have thrived. Amid tough market conditions, Ethereum remains the number one DeFi hub.
BNB Chain and Solana DeFi hit hard
BNB Chain, formerly known as Binance Smart Chain, was arguably the first alternative layer-1 network that offered fierce competition to Ethereum when it started gaining traction in late 2020. Throughout early 2021 , the Binance-run chain has grown in popularity as Ethereum’s skyrocketing gas fees have cost many DeFi enthusiasts dearly. From January to May 2021, the total value locked in the network increased from $124 million to $31 billion.
However, May 2021 saw a sharp decline in the crypto market. DeFi on BNB Chain also fell and has been falling ever since. The ecosystem has lost nearly 60% of its locked value and now holds around $12.5 billion, per Llama Challenge. Several factors could explain this decline, including the centralization of BNB Chain, its lack of innovation and the large number of hacks on the network. BNB Chain is an Ethereum clone, but it is much more centralized with only 21 validators. This is likely what has deterred Ethereum DeFi staples like Aave and Curve from rolling out to the network despite clear steps to embrace the multi-chain future. BNB Chain has also been plagued by countless hacks and rug pulls, which has tarnished its reputation as a credible DeFi ecosystem. Nevertheless, BNB Chain is still among the top three layer 1 blockchains in terms of total value locked, mainly thanks to the large sums of liquidity locked in applications such as PancakeSwap, Venus, Alpaca and Ellipsis Finance.
Solana has also been hit hard in recent months. Unlike many other Ethereum competitors, Solana is not compatible with the Ethereum virtual machine, which contributed to its breakout push in 2021. However, SOL is now 60% below its peak, and the amount of cash locked in Solana DeFi has also been declining for several months. The total value locked on Solana has fallen more than 50% from its peak of $14.9 billion in December 2021 at $6.9 billion today. Solana’s major DeFi protocols, such as Saber, Raydium, and Serum, have all seen steep declines in recent months.
The Solana ecosystem also suffered a major setback in February when Wormhole, a bridge that connects Solana DeFi to Ethereum and other Layer 1 networks, was hacked to $322 million. The Solana network also encountered its own problems caused by repeated spam issues, which caused the network to hang on several occasions. Solana says it works to solve the problem.
While Solana outperformed most other crypto assets in 2021, recent developments suggest its DeFi ecosystem is lagging behind.
Terra and Fantom Defy Dip
While some Layer 1 networks have struggled to keep full value locked into their DeFi ecosystems, others have held firm. The total value locked on Terra today is at all-time highs of over $23 billion, which is roughly 11% of the DeFi space. Terra’s DeFi ecosystem offers a range of products that differ from those found on Ethereum. Its flagship protocol, Anchor, holds the most value with over $11.5 billion locked in its lending and borrowing pools. Other major apps like Astroport and Mirror Protocol also attracted users even as the market fell.
While most major assets struggled early in the year, January was a good month for DeFi on Fantom. Even though the value of FTM has plummeted, the total funds locked on the Fantom network have increased from $4.9 billion to $12.8 billion. At the time, much of Fantom’s network value was locked up in Daniele Sestagalli’s Abracadabra Finance, an algorithmic stablecoin and lending protocol billed as an innovative “DeFi 2.0” project. Abracadabra suffered when Wonderland, another project built by Sestagalli, faced a major controversy after his cash manager was unmasked as a former convict. As liquidity drained from Abracadbra’s pools, Fantom saw a decline in its total locked value. It fell from $12.8 billion to $7 billion in February 2022.
However, February also saw the launch of Solidly, a highly anticipated project from highly respected DeFi builder Andre Cronje. The launch helped restore Fantom’s full value locked in part thanks to its innovative tokenomics. Solidly is a rebasing DeFi protocol that uses a blocked voting system similar to that pioneered by Curve. When Cronje announced that only Fantom protocols would be eligible for Solidly’s token airdrop, network usage skyrocketed. Solidly attracted $2.3 billion in funding to the network, with major native Fantom apps such as SpookySwap and Geist benefiting from the launch. The total value locked on Fantom is now $11.89 billion, about 7% below its all-time high.
The future of DeFi
Amid a market-wide meltdown and growing interest in other sectors like NFTs, active crypto users have long wondered what comes next for DeFi. Governance tokens for early DeFi projects like Synthetix and Uniswap hit yearly lows in recent weeks and trended lower against Ethereum throughout 2021. Yields also fell on many DeFi protocols as that the market fell. However, with the space still holding hundreds of billions of dollars in liquidity and the huge promise of the technology, there is good reason to believe that DeFi will thrive again. Whether it will thrive on all major Layer 1 networks or whether it will flock to just one or two ecosystems remains to be seen.
Disclosure: At the time of writing this article, the author of this feature owned ETH and other cryptocurrencies. Andre Cronje is a shareholder of Crypto Briefing.
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