Why are billions pouring out of DeFi and crypto? ‘The actual tech hasn’t caught up to the valuations yet’

May 9, 2022, 9:01 PM UTC

It’s been a tumultuous 2022 for investors, and crypto is no exception.

As of Monday afternoon, about $163.4 billion was tied up in DeFi applications that involve crypto loans, sending crypto, or investing crypto, a 35% decrease from more than $252 billion in December 2021, according to industry tracker DefiLlama. Over the past 24 hours alone, the amount of money in DeFi dropped about more than 12.5%, according to DefiLlama, which collects and aggregates data on decentralized finance apps.

Money is pouring out of DeFi, and some of the fault lies with the technology underlying the applications, said Wil Barnes, CEO and cofounder of DeFi lending and borrowing company Jet Protocol.

Barnes pointed to a series of January outages that plagued the Solana blockchain, on which many DeFi applications are built. The outages, which happened during crypto’s last major period of price declines, left traders unable to sell off their positions because the transactions would fail. The outages didn’t inspire confidence in investors, he said. 

“The actual tech hasn’t caught up to the valuations yet,” Barnes said. 

Such a large decline in the amount invested in DeFi applications is a sign of large players, such as institutional investors, pulling out of a space that can at times be risky, he said, especially as the markets generally take a downturn.

Widespread crypto slump in tandem with stock selloff

In early May, some of the biggest cryptocurrencies are hitting their lowest levels so far this year. On Monday, Bitcoin was trading below $31,000 for the first time since July 2021, extending losses from the prior week. Ether, the second most popular cryptocurrency, was trading at close to $2,300, its lowest level since late January, according to CoinMarketCap

Meanwhile, in the stock market, the tech-heavy Nasdaq had its worst month since 2008, as worries about geopolitical issues and the Federal Reserve hiking rates pushed down blue-chip stocks. With fears of an impending recession increasing, both the stock market and crypto space could be in for more losses in the next couple of months.

Although investors can get good returns from DeFi apps that offer staking, locking up your crypto for rewards or interest, or earning interest from lending their crypto to liquidity pools, putting money into DeFi comes with risk. Your money could get stolen by a hacker, or a borrower could fail to repay the loan. 

Yet Barnes, who has worked in crypto since 2017, said the downturn will allow engineers that really care about building good products for decentralized finance to focus on perfecting them, and give new players the chance to enter the space for less. That’s what happened in 2018, he said, when there was another broad market selloff and correction.

The current slump in the crypto space could give “everyone who wants to be around an opportunity to join projects they want to be a part of, to join communities they want to be a part of and get ready for the next round of innovation,” Barnes said.

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