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DeFi Tokens, Volume and TVL Heat Up Amid Bull Run

As ETH crosses $1k, DeFi is hitting its own set of milestones.

The last time the world’s second-largest cryptocurrency reached four digits was during the blockchain mania that was early January of 2018. Unlike the last bull run, however, Ethereum is buoyed not by ICOs but by DeFi. 

With dapps built on Ethereum enabling permissionless access to traditional financial services such as borrowing, lending, and derivatives trading, the current bull run has investors dreaming of prices much higher than $1k.

Graphs for some key DeFi metrics are fueling that optimism.

Total Value Locked Climbs to New Highs

Defi’s preeminent metric, Total Value Locked (TVL), is at an all-time high of $18.35B at the time of writing, according to DeFi Pulse.

As Ethereum is the platform that underpins these applications, while its cryptocurrency ETH is used as collateral, TVL’s growth serves as a positive feedback loop: increases in value locked suggest increased utility of Ethereum (the platform), which pushes the price of ETH (the currency) higher, which pushes TVL higher (as ETH constitutes roughly 40% of TVL), further suggesting utility.

ETH Locked Slides

But this time the increase in TVL has happened despite a drop in the total amount of ETH locked in DeFi. ETH in DeFi has slumped to 6.8M from almost 9.5M two months ago, near the lowest since September.

One explanation is that holders are freeing some of their ETH positions to trade the cryptocurrency amid its wild swings. With the value of their collateral increasing, that means they need to keep less ETH in DeFi protocols to maintain safe borrow ratios.

Traders may also be withdrawing ETH from decentralized exchanges to arbitrage prices on centralized exchanges, Andrew Kang of Mechanism Capital told The Defiant. The decline of ETH locked also reflects investors buying the token from AMMs, Kang said.

“The ETH people are buying needs to come from somewhere, and part of where it comes from is from LPs in AMMs DEXs like Sushiswap, Uniswap and Balancer,” he said.

This means that ether is moving from its locked positions in decentralized exchanges, to “unlocked” positions.

Total ETH locked has dropped by approximately 5% in the last week while the price has risen by nearly 50%, offsetting the decline and pushing TVL to new highs. 

Worth noting is that ETH is not the only cryptocurrency locked in DeFi. As stated above, the currency represents roughly 40%, about $7B, of TVL. DeFi’s flagship metric is also dictated by locked Bitcoin, which comprises about 5% of the total valued locked, and also stablecoins, which likely make up the majority of the remaining 55% of TVL.

DeFi Tokens Rally

DeFi tokens are rallying alongside ETH, with DeFi Pulse’s Index (DPI) hitting an all-time high of $155 at the time of writing, eclipsing its previous mark of $136.03 which occurred on September 12 within days of the index’s launch. 

Synthetix and Aave’s tokens, which comprise roughly 40% of the index, both climbed to record highs. Loopring too, which comprises a growing 6% of the DPI has seen a big runup of almost 50% in the past 24 hours, the second-highest among DeFi tokens on CoinGecko. Skyrocketing gas prices highlight the glaring need for the Layer 2 scaling solution used by the decentralized exchange.

DEX Volume Soars

Decentralized exchange (DEX) volume is also near an all-time high as traders move between currencies and try to ride the bullish wave as high as possible. Volume climbed to $2.6B on Jan. 3, the highest ever, except for a single day in October when $3.2B exchanged hands, with Uniswap, Sushiswap and Curve constituting more than 70% of the trades.

It remains to be seen what will happen to DEX volume in a down market. Still, the aftermath of this summer’s yield farming boom showed that, while volume declines after the market cycle peaks, a higher baseline remains.  

For now though, excitement is sky-high in the Ethereum ecosystem. And DeFi’s breakout success serves as proof – even if only temporary – to crypto proponents that real utility is being built this time.