Key Takeaways
The total value locked in DeFi has fallen along with the broader crypto market.
BNB Chain and Solana have been particularly hard hit.
In comparison, the total value locked on Terra is at all-time highs today.
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The total value locked in decentralized finance across Solana and BNB Chain has declined sharply over the course of last year. DeFi on other Layer 1 chains like Terra and Fantom has fared much better.
DeFi on Alternative Layer 1 Networks
The overall total value locked in DeFi has fallen over the last few months.
According to data from Defi Llama, there’s currently $210 billion locked in decentralized finance protocols, down from a peak of $255 billion in December 2021. The decline came as the cryptocurrency market experienced a slump across the board.
Ethereum, the world’s largest smart contract blockchain, holds about $115 billion worth of digital assets across hundreds of DeFi applications. That marks a 30% decline from November 2021 when ETH was trading at all-time high, and Ethereum held $163 in locked value. The change in total value locked across the so-called “alternative Layer 1” blockchains competing for Ethereum’s market share has seen huge variance.
While some networks have seen the total value locked in their DeFi ecosystems shrink over the last few months, others have thrived. Amid the rocky market conditions, Ethereum remains the number one DeFi hub.
BNB Chain and Solana DeFi Hit Hard
BNB Chain, previously known as Binance Smart Chain, was arguably the first alternative Layer 1 network that offered stiff competition to Ethereum when it started to gain traction in late 2020. Throughout the beginning of 2021, the Binance-run chain gained popularity as Ethereum’s soaring gas fees priced out many DeFi enthusiasts. From January to May 2021, the total value locked in the network soared from $124 million to $31 billion.
However, May 2021 saw a sharp drop in the crypto market. DeFi on BNB Chain also plummeted and has been on a decline since. The ecosystem has shed almost 60% of its locked value and now holds around $12.5 billion, per Defi Llama. There are several factors that could explain the drop, including BNB Chain’s centralization, its lack of innovation, and the vast number of hacks on the network. BNB Chain is an Ethereum clone, but it’s far more centralized with only 21 validators. That’s likely what’s dissuaded Ethereum DeFi staples like Aave and Curve from deploying on the network despite making clear moves to embrace the multi-chain future. BNB Chain has also been plagued by countless hacks and rug pulls, which has tarnished its reputation as a credible DeFi ecosystem. Nevertheless, BNB Chain is still among top three Layer 1 blockchains in terms of total value locked, thanks mainly to the large sums of liquidity locked in applications like PancakeSwap, Venus, Alpaca, and Ellipsis Finance.
Solana has also been hard hit in recent months. Unlike many other Ethereum competitors, Solana isn’t compatible with the Ethereum Virtual Machine, which contributed to its breakout surge in 2021. However, SOL is now 60% short of its high, and the amount of liquidity locked in Solana DeFi has also been on a decline for several months. The total value locked on Solana has plummeted over 50% from its high of $14.9 billion in December 2021 to $6.9 billion today. Solana’s top DeFi protocols—the likes of Saber, Raydium, and Serum—have all experienced sharp drawdowns in recent months.
The Solana ecosystem also suffered a major setback in February when Wormhole, a bridge that connects Solana DeFi to Ethereum and other Layer 1 networks, was hacked for $322 million. The Solana network has additionally faced problems of its own caused by repeated spamming issues, which have caused clogs on the network on multiple occasions. Solana says it’s working to fix the issue.
While Solana outperformed most other crypto assets in 2021, recent developments hint that its DeFi ecosystem is lagging.
Terra and Fantom Defy Dip
While some Layer 1 networks have struggled to maintain the total value locked in their DeFi ecosystems, others have held strong. The total value locked on Terra is at all-time highs above $23 billion today, accounting for about 11% of the DeFi space. Terra’s DeFi ecosystem features an array of products that differ from those found on Ethereum. Its flagship protocol, Anchor, holds the most value with over $11.5 billion locked in its lending and borrowing pools. Other major applications like Astroport and Mirror Protocol have also attracted users even as the market has dipped.
While most major assets struggled at the beginning of the year, January was a good month for DeFi on Fantom. Even as FTM tanked in value, the total funds locked on the Fantom network jumped from $4.9 billion to $12.8 billion. At the time, a big chunk of Fantom’s network value was locked in Daniele Sestagalli’s Abracadabra Finance, an algorithmic stablecoin and lending protocol that was touted as an innovative “DeFi 2.0” project. Abracadabra suffered when Wonderland, another project built by Sestagalli, faced a major controversy after its treasury manager was outed as a former convict. As liquidity ran from Abracadbra’s pools, Fantom experienced a dip in its total value locked. It fell from $12.8 billion to $7 billion in February 2022.
However, February also saw the launch of Solidly, a highly anticipated project from the highly respected DeFi builder Andre Cronje. The launch helped restore Fantom’s total value locked in part through its innovative tokenomics. Solidly is a rebasing DeFi protocol that employs a vote-escrowed system akin to the one pioneered by Curve. When Cronje announced that only Fantom protocols would be eligible for Solidly’s token airdrop, the network’s usage soared. Solidly has attracted $2.3 billion worth of funds on the network, with major Fantom-native applications like SpookySwap and Geist benefiting from the launch. The total value locked on Fantom is now $11.89 billion, around 7% short of its all-time high.
The Future for DeFi
Amid a market-wide slump, and growing interest in other sectors like NFTs, active crypto users have long been wondering what will come next for DeFi. The governance tokens for early DeFi projects like Synthetix and Uniswap have hit yearly lows in recent weeks and trended down against Ethereum throughout 2021. Yields have also fallen on many DeFi protocols as the market has dipped. However, with the space still holding hundreds of billions of dollars in liquidity, and the huge promise of the technology, there is good reason to believe that DeFi will thrive once again. Whether it will flourish on every major Layer 1 network or flock to only one or two ecosystems remains to be seen.
Disclosure: At the time of writing, the author of this feature owned ETH and other cryptocurrencies. Andre Cronje is an equity holder in Crypto Briefing.
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