A sum of $124 Billion and counting was being flushed out of the DeFi markets in six weeks.
Ethereum is facing another trilemma. Historical losses (realized), under-watered investors’ positions, and falling daily active users. The three problems are the effects of a more significant global economic play.
In 2022, performance has been bad for each type of asset class in the world. Inflationary policies, declining risk asset valuations, and the US dollar’s rising strength. They are triggering a wide array of margin calls, liquidations, and deleveraging events.
A few were spotting early signs of slowdown and weakening of demand in the last months of 2021. Since the Nov ATH, the gas fees charts and daily transaction volume are falling in the macro of 6 months.
These signs suggest the softening of the demand, use, and need of the Ethereum network.
Another logical reason for the decreasing demand is the crowding out of the Defi sector. An increase in the NFT activity was forwarding this impact: the clout shifted in the hunt for more returns.
Weighing the DeFi Cons
TVL is the most popular metric in Defi to measure the value of locked USD or ETH token deposits in Defi layers.
DeFi is famous for the re-pledging (or rehypothecation) activity. This involves using the USD worth of stablecoins borrowed against the crypto collateral. They are re-purposed into the same protocol with the expectation of higher margins.
Current distressing times cause deleveraging events that turn into a cascading domino effect. Moreover, the locked-up collateral token needs a minimum peg to avoid liquidations.
When the collateralized token’s value decreases, a thread of problems gets created. A resultant liquidation spark can turn into big a deleveraging fire in moments. The concept of trustless, secure systems takes a blow. In conclusion, projects fall into bank runs and development closures.
Ethereum Defi layers have been losing $124 Billion of TVL in the past six weeks. A great deal of impact comes from the collapse of LUNA. It snatched $94 billion off the market value, while the rest of the remaining $30 Billion were vanishing up untile.
DeFi’s Reality-Check Yardstick
One of the most powerful onchain abilities is to measure ‘Realized Price’.
Its use is to comprehend the realized price of different coins and the sectors. Its measured by monitoring the spent value of coins last moved between wallets.
The realized price helps in sizing the actual loss situation.
When the market price falls under the realized prices, the selling pressure mounts up.
With the ETH Spot price now trading at $1126, the cumulative market is now way below the Realized Price of $1730. This means the market is holding an average loss of unrealized 30% losses.