DeFi crypto market: TVL declining

In this article we look at the situation of the crypto market, particularly for the DeFi sector, whose TVL (Total Value Locked) has been declining over the past 6 months after a 2023 start that had raised hopes for an upward recovery.

As of April 2023, TVL locked in the various decentralized protocols had touched the $53 billion mark while now it shares a value of $38.2 billion for a retrenchment of about 28% .

Totally opposite trend, on the other hand, for Ethereum’s layer-2 niche (rollup and ZK), whose TVL has doubled since the beginning of 2023 thanks mainly to the success recorded by Arbitrum, Optimism, Base and ZkSync Era.

Let’s look at all the details below

Crypto DeFi: TVL touches 2023 lows after a sharp decline over the past 6 months

After a crackling start to 2023 for the crypto market with the DeFi sector seeing some of the TVL lost during the bear market of 2022 recouped, here comes the pessimism again.

In the past 6 months, the total value locked within decentralized finance protocols has in fact declined by about 28% , from $53 billion in mid-April to the current $38.2 billion, coming in at one of the lowest figures of the entire current year

If we calculate the trend on a yearly basis, hence taking October 2022 data as a reference, we notice that the decrease reaches the 30% mark.

This is a real shame because from January 2023 until April the TVL of the DeFi market had added about $15 billion, raising hopes for a recovery after more than $126 billion was lost in 2022.

No dice instead: investors, especially institutional investors, seem to be hesitant to pour capital into a niche market like crypto, where speculation reigns supreme.

Rather, much of the capital that until recently characterized the flourishing DeFi market has now been channeled into bonds and low-risk financial products, due in part to a rise in interest rates in the U.S. that has made these kinds of investments more attractive.

This trend is confirmed by the number of DeFi users, which from an all-time high of 7.51 million has plummeted 66%  to 2.56 million.

Despite the sharp decline in 2022 and the past 6 months, Ethereum remains the most dominant blockchain as well as smart contract platform in the crypto market, with a locked-in TVL within the various protocols orbiting within it of $20.6 billion for a market share exceeding 54%.

Even for the queen of the crypto market, however, we can observe a decline compared to April 2023, as at that time its ecosystem was worth 70% of all of DeFi’s TVL.

On the other hand, a separate discourse for Tron, which in the same period strengthened its position from 6.5% to 17.9% market share, confirming its position as the second most dominant blockchain data in this context.

Rounding out the podium is the Binance Smart Chain, which compared to its main competitors is the one that has lost the most in the past 6 months, coming to see more than 40% of the capital located within it evaporate. To date, the cryptographic network in the hands of the Binance exchange has a 7.3% market share.

Opposite trend for Ethereum layer-2s with Arbitrum, Optimism, Base and ZkSync gaining users and capital.

Within the DeFi landscape, there is one niche sector that stood out in 2023 for moving in the opposite direction from the rest of the crypto market, seeing its TVL double.

We are talking about Ethereum layer-2s, specifically cryptographic networks use zero-knowledge computational proofs in Optimistic rollup and Zk Rollup versions.

For these kinds of chains, since the beginning of the year we have seen an increase of $6.2 billion in crypto orbiting within them.

Compared to October 2022, the growth was $5.55 billion, a staggering figure when we consider that it represents double the TVL stored by the well-known Binance Smart Chain.

The real boom for this sector occurred between January and April, a period when Ethereum’s layer-2 narrative went viral gaining fame among the crypto community.

From the April top until now there has actually been a slight decline of just over $1 billion, but this could easily be recovered in the coming months with the development of successful protocols within Ethereum rollups.

Among the major players in this strong trend are the Arbitrum, Optimism, Base and ZkSync Era blockchains, which collectively encompass about 88.7%  of the market share of the entire Ethereum layer-2 market.

Arbitrum represents the spearhead of this niche sector and since January 2023 has seen its TVL more than double from $2.56 billion ( bridged assets are also counted and not just those locked in protocols) to the current $5.84 billion.

For Optimism we can observe the same results as the companion optimistic rollup, seeing its TVL rise from $1.14 billion to $2.71 billion.

On the Base front, layer-2 of the Coinbase crypto exchange, there has been staggering growth in just two months since its inception, crossing the $500 million TVL threshold in no time at all.

Finally, even for the 4th layer-2 of the ranking as well as the first zk-rollup in terms of fame and locked-in capital, namely ZkSync Era, we can see major progress since March 2023, the period related to the mainnet launch. To date, this network totals a countervalue of internally blocked funds of $435 million.

Most likely contributing to the growth of Ethereum’s layer-2s was the airdrop narrative that prompted many users to pour their capital inside these crypto networks in hopes of getting gift tokens.

Arbitrum and Optimism have already made their airdrops to their communities in March 2023 and May 2022, respectively. Base and ZkSync have not yet released dates regarding the distribution of their native tokens but important updates may be revealed soon.It is not certain that Base will launch its own crypto and that it will be distributed via airdrop but rumors suggest that this scenario is feasible. For ZkSync, on the other hand, more or less all airdrop hunters agree that Matter Labs will give them great satisfaction.