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DeFi TVL crashes as Terra collapse triggers investor fears

Terra LUNA 40% of eligible LUNA tokens now staked on Terra
Terra LUNA 40% of eligible LUNA tokens now staked on Terra

The cryptocurrency market performed poorly last week, with billions of dollars liquidated in a few weeks. Following the market crash, the decentralized finance (DeFi) sector has been affected, with the total value locked (TVL) witnessing a significant drop.

DeFi volumes dip amid market crash

DappRadar recently published a report saying that the DeFi total value locked (TVL) had dropped by over 40% in just one week. The company said that the drop was caused by investors changing tokens into stablecoins and converting their holdings into fiat. The dip was also caused by a decline in the prices of different tokens.

The collapse of the crypto market last week was largely attributed to the fall of the Terra USD stablecoin and the LUNA token. Traders were concerned about the effects of this collapse on the sector, leading to them draining funds out of protocols.

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The current correlation between the DeFi sector and the prices of cryptocurrencies is different from what happened during the 2018 bear market when DeFi protocols continued to perform well despite the rest of the market witnessing a drop.

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The DappRadar report also said that the UST collapse had also affected DeFi lending, which triggered concerns over whether DeFi staking platforms were reliable investments. UST is a stablecoin within the Terra ecosystem, and its value dipped from $1 to around $0.14.

Following the collapse of UST, Tether (USDT) showed signs of stress, dropping o around $0.98 before recovering shortly after. Circle’s USDC stablecoin showed strength, and its trading volumes hit highs of $25 billion on May 13.

“The future of stablecoins has been thrown into doubt, but it is well worth remembering that, unlike UST, which is backed by crypto assets, the majority of stablecoin assets are backed with more tangible support,” DappRadar added.

DeFi tokens dip

CoinGecko shows that tokens operating in the DeFi space have dropped by 47% over the past week. The entire market capitalization for DeFi tokens dipped to $52.7 billion from $100 billion last week.

The native tokens for leading DeFi protocols are also trading in the red zone after a massive decline last week. AAVE has dipped by 38% in a week, while KAVA has dipped by 45%. Compound (COMP) has declined by over 32% in a week, and double-digit losses have been witnessed across other tokens, including Chainlink (LINK) and Uniswap (UNI).

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