Ethereum remains top dog, but woes persist in the DeFi sector

Key Takeaways

• DeFi has seen massive capital outflows in the last year as token prices have collapsed
• Trad-fi yields have also spiked while DeFi yields have fallen
• Ethereum has underperformed Bitcoin notably since the Merge

The third quarter of 2020 became known as “DeFi Summer” within crypto, such was the speed at which the nascent sector of decentralised finance took the industry by storm. 

Fast forward three summers and it is safe to say that the 2023 edition will not be given the same moniker. After a torrid year in 2022, crypto has rebounded strongly thus far this year; however, DeFi has been left out in the cold, the summer sunshine nowhere to be seen. 

The below chart shows the TVL across the space. From a peak of nearly $180 billion in November 2021, it currently sits at $40 billion, representing a drawdown of nearly 78%. 

Ethereum remains the home of DeFi

Let’s dig into Ethereum specifically. The network has undergone some important milestones in the last year. The most meaningful was the Merge in September, which transitioned Ethereum to proof-of-stake from proof-of-work. This was then followed up with the Shapella upgrade in April, finally allowing all staked ETH to be withdrawn and closing the book on the biggest (and highly successful) network event since its launch in 2015. 

Both before, during and after these changes, Ethereum has remained the king of DeFi with a chunky 57% of TVL in the space, Tron a distant second with 14%. 

However, Ethereum has not been immune to the outflows which have ravaged DeFi. While market share has remained high, TVL itself has fallen akin to what has been seen across the ecosystem. It is also important to note that the previous outflow of TVL was described in dollar terms. This is despite the fact that much of the TVL in DeFi is denominated in non-fiat currencies, such as ETH itself or myriad ERC-20 tokens.

Hence, even if no withdrawals took place, the TVL in dollar terms would have plummeted by virtue of crypto prices cascading downwards last year. Even after the bounceback in 2023, Ether is currently trading at $1,800, 63% off its all-time high. Yet displaying the withdrawals in terms of Ether below shows that the downward trend is visible regardless of denomination. 

This begs the question, why? Well, the obvious answers are plenty. Namely, crypto has been put…