The DeFi Sector Could Experience a Shakeout in 2022, Fueled by Liquidation

Since the summer of 2020, the decentralized finance (DeFi) sector has witnessed a strong run, with the total value locked (TVL) in all DeFi protocols peaking at above $290 billion in December 2021.

However, the recent crypto market crash, which marks the first crypto winter for the industry, has been tough on decentralized finance protocols across the board. While Bitcoin even is down more than 45% from its all-time high, DeFi protocols have seen even steeper corrections.

AAVE is down 77% from its ATH, while Compound has dropped by 85%, and MakerDAO by 71%. As a result of their declines, the TVL of the DeFi industry as a whole has dipped to $225 billion, with more than $30 billion lost since the start of the year. 

DeFi is Experiencing Strong Liquidations

According to Dune Analytics, in the week ending January 22, more than $300 million worth of assets was pulled out of DeFi protocols. 

The blockchain research firm further reports that between January 22nd and January 24th, more than 1,000 positions were liquidated across platforms like Compound, Aave, and MakerDAO.

Further compounding this, rates of activity on popular dApps has reportedly dropped by 20-30% in the last two weeks. In addition to the poor performance of their native tokens, DeFi protocols have experienced strong liquidations, developer departures, and user exodus. 

As a result of DeFi protocols often paying developers using their own tokens, their waning values have forced many developers to jump ship. 

According to Pedro Herrera, senior data analyst at DappRadar, 80% of the current dApps on the market could be flushed out if the downtrend persists throughout the year. 

On the Flipside

• Although the DeFi sector has reacted badly to its first crypto winter, many experts still believe it to be the future of finance.

Why You Should Care

Despite the strong liquidations, Jeff Dorman of Arca emphasizes that the lack of issues faced by users in getting money out of protocols is validation of the belief that DeFi is the future of finance.