Crypto lending may not be down, but it’s certainly on the ropes.
Crypto lenders have exploded over the past two years, attracting tens of billions of dollars in bitcoin, ether and other coins which they in turn loaned or invested, often in decentralized finance (DeFi) projects with exorbitant returns.
But as crypto markets tumble, DeFi activity is particularly hard hit, depriving lenders of their most lucrative returns and threatening to squeeze the entire industry — reaching far beyond Celsius Network, which has made headlines last week by freezing withdrawals and transfers.
Total value locked (TVL) on Ethereum, a metric that attempts to track the value of tokens deposited in a variety of DeFi protocols, has declined by $124 billion or 60% in the past six weeks, according to the data provider. Glassnode.
The crash came in two big crypto slices, $94 billion lost in the collapse of Project LUNA — involving the failure of stablecoin TerraUSD — and another $30 billion in mid-June, Glassnode said. , who attributed the falls to diminishing risk appetite.
“Current market conditions have put enormous pressure on operators who interact with decentralized finance protocols to generate their returns,” said Mauricio Di Bartolomeo, co-founder and chief strategy officer of crypto lender Ledn.
Bitcoin against Ether against dollar
Similarly, an index tracking crypto tokens tied to DeFi lending/borrowing protocols and exchanges, from research firm Macrohive, plunged 35% last week as investors pulled cash from the once-high sector. flight.
Some DeFi protocols or projects are starting to offer lower yields, with average lending and borrowing rates on one platform, Compound, falling over the week for all but one cryptocurrency, the stablecoin Pax Dollar, found by macrohive.
In another sign of a slowdown, ether – the token that underpins the ethereum network on which many DeFi protocols run – fell last week to its lowest level against larger peer bitcoins in 14 months.
Against the dollar, bitcoin has fallen 34% so far in June, while ether has lost more than 40%.
The turmoil in this part of the high-yield crypto market raises questions about the sustainability of the high interest rates that crypto lenders offer their customers, often in the double digits.
Too good to be true?
Some market participants say that crypto lenders should inform customers about the risks of the projects their money is pumped into.
“I expect users to demand more transparency if their assets are managed in the DeFi space,” said Iakov Levin, CEO of crypto investment platform Midas Investments. “Crypto needs to come up with a more transparent model of retail returns.”
New Jersey-based Celsius, with more than $11 billion in assets on its platform, cited market volatility when it suspended redemptions last week. A data trawl shows that he has been invested in several DeFi projects that have encountered difficulties.
“The DeFi market will undoubtedly suffer from this development as it also deals with cryptocurrencies and people will be more reluctant than ever to invest their assets in what they perceive to be similar ecosystems,” said Yubo Ruan, Founder and CEO of Parallel Finance, a decentralized lending protocol.
Ruan said that if the projects “promise rewards that sound too good to be true, there’s always a chance they are.”