In recent weeks, crypto TVL has started to rise again.
This is quite relevant, in the context of DeFi, as it has continued to fall practically since the end of April 2022.
TVL on the crypto market
In the crypto field, TVL stands for Total value lockedi.e. the total value measured in dollars of all tokens immobilized on decentralized financial protocols.
Apparently most of this TVL is immobilized within smart contracts on Ethereum, although to date almost 45% is on other chains. However, there are also Layer-2 Ethereums among them, such as Polygon, Abritrum, Optimis and Base, to which there is another 5% in total. Therefore, the combination of Ethereum and its layers 2 exceeds 60% of TVL.
Since it is measured in dollars, its value obviously fluctuates even if the market prices of the tokens immobilized in the protocols change DeFiand that’s probably why it fell so much in 2022 and has been climbing again in recent weeks.
For the same reason, the absolute peak was reached in November 2021, when the total TVL of DeFi reached almost $180 billion.
As soon as the speculative bubble began to deflate, TVL fell below 130 billion.
But with the implosion of the Earth/Moon ecosystem, whose protocols were among the protagonists of decentralized finance, a real collapse occurred between May and June last year, which apparently ended in the second half of June below $50 billion.
Although in July and August it seemed to recover somewhat, from the second half of the month it started to fall again, returning to 50 billion.
With the bankruptcy of FTX, there was a second collapse, which dropped TVL even below 40 billion dollars at the end of 2022.
Until a few weeks ago, 2023 saw an initial recovery through April, followed by a second long decline that culminated on October 13 at $35 billion. At that moment, compared to the highest values from 2021, the loss amounted to 80%.
Recovery in the last few weeks
As of October 21, there may have been a reversal of the trend.
In fact, DeFi’s TVL first rose to 40 billion on October 24th, and then to almost 44 billion on November 5th.
With the recent boom Ethereumwhich returned near annual highs, also returned above 46 billion.
Although the current level is similar to that of July, it is still significantly higher than the $38 billion from the beginning of the year.
So, not only did it recover all the losses accumulated in 2023, but it even returned to the levels of November 2022, shortly after the FTX bankruptcy.
These are still very low levels compared to those of the last three years, and because in reality it was back to almost 53 billion in April.
The current $46 billion is a far cry from the $53 billion in April, while the current price of ETH, for example, is perfectly in line with its peak in April.
But at least the downtrend that started at the end of April seems to have stopped on October 21st, which is already news considering how things have been going for the last year and a half. Furthermore, $49 billion in June 2022 is not far off.
What does crypto TVL consist of?
The TVL calculation includes all tokens that are immobilized in any DeFi protocol.
In general, mostly ETH and stablecoins such as USDT and USDC are immobilized on DeFi protocol smart contracts, but for example Polygon’s MATIC is also among the most immobilized tokens.
However, the ranking is literally dominated by ETH, also because the current main protocol for TVL, Lido Financeit is exactly the protocol that allows you to invest ETH.
The composition of DeFi TVL varies, but ETH always remains the undisputed leader in this sector. Major stablecoins are also widely used.
This makes it clear that as the market value of ETH in US Dollars fluctuates, the total TVL of DeFi fluctuates as well, and it’s probably for this reason in the first place that there has been a significant increase in recent weeks.
It should also be noted that smart contracts generally allow the withdrawal of locked funds by any user at any time, and this certainly had a significant impact on the 2022 collapse.
Certainly the single thing that had the biggest impact was the implosion of the market value of Luna and UST (now LUNC and USTC), but the loss of ETH value over the year also had a big impact.