The total value locked (TVL) added in the cryptocurrency market measures the amount of funds deposited in smart contracts and this figure has dropped from $160 billion in mid-April to the current $70 billion, which is the lowest level since March 2021. While this 66% contraction is concerning, a wealth of data suggests that the decentralized finance (DeFi) sector is resilient.
The problem with using TVL as a broad metric is the lack of detail that is not shown. For example, the number of DeFi transactions, the growth of Layer 2 scaling solutions, and venture capital inflows into the ecosystem are not reflected in the metric.
In DappRadar’s cryptocurrency adoption report on July 29, data shows that the DeFi transaction count in Q2 was down 15% from the previous quarter. This figure is much less worrying than the devastating decline in the TVL and is corroborated by a 12% drop in the number of unique active portfolios in the same period.
Layer 2 solutions are the path to sustainable DeFi growth
Iakov Levin, CEO and founder of Midas Investments told Cointelegraph that:
“I strongly believe that the current bear market is not the ‘end’ of the DeFi industry. For example, there is growing competition among decentralized exchanges on Ethereum’s layer 2 scaling platform Optimism, as Velodrome reached over USD 130 million in TVL.”
Optimism is an Ethereum scalability solution that uses layer 2 to bundle off-chain transaction verifications, reducing transaction and processing cost for decentralized applications on the network.
Venture capital inflows further support the resilience of the DeFi thesis. On July 12, Multicoin Capital launched a $430 million crypto-focused fund. The investment management firm was founded in 2017 and aims to focus on the development of Web3 infrastructure, DeFi applications, and autonomous business models.
On July 28, Variant announced a successful $450 million capital increase to fund, among others, “financial empowerment through DeFi.” The strategy includes the financialization and productivity of NFTs, stablecoins, loan optimizers, DEX aggregators, and “products that bridge the legacy financial system with DeFi.”
These significant-sized fundraisers lead Levin to believe that scaling solutions will take decentralized finance applications to the next level in a way that was not possible during the so-called “DeFi 2.0 summer” in Q3 2021. The fee The average transaction value of the Ethereum network during that period hovered above $25, making it nearly impossible for apps to gain traction. Midas Investments CEO Levin said:
“Ultimately, I see layer 2 as a potential factor in reviving the growth of the sector. This will be driven by increased scalability due to the implementation of optimistic solutions and zk-Rollups. By offering users transaction fees With cheaper prices and near-instantaneous semi-confirmations, Layer 2 will dramatically improve the user experience and soon have the ability to incorporate a new wave of users.”
Metamask Swap and 1inch Network stand out
The number of active addresses using DeFi apps has been reasonably stable over the past 30 days, according to data from DappRadar.
The data shows an average 2% decline in active addresses, but four of the top five apps showed growth. Additionally, DEX aggregators 1inch Network and MetaMask posted sizable user gains, invalidating concerns of a “DeFi winter.”
In short, the decentralized finance sector continues to grow in number of active addresses, venture capital investments, and innovative solutions offering cheaper and faster processing capabilities compared to the last peak reached at the end of 2021.
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