DeFi Struggles in the Face of Traditional Finance

Discover the challenges faced by DeFi in the bearish crypto market as money market funds offer higher returns than Ethereum staking.

Oct 13, 2023 - 17:15
DeFi Struggles in the Face of Traditional Finance
Reading time - 1 min

On average, money market funds currently offer annual returns exceeding 5%, while Ethereum staking stands at 3.3%. This disparity underscores the challenges DeFi has faced in recent months, positioning it as one of the primary casualties in the ongoing bearish crypto market.

In the past few hours, the Total Value Locked (TVL) in DeFi protocols hit a negative record, reaching levels last seen in February 2021. Traders appear to be pivoting, reallocating their capital towards less risky assets.
Such a scenario was unexpected, especially considering the optimism in 2020. During the "summer of DeFi," there was a prevailing sentiment that decentralized finance could potentially replace traditional finance, offering businesses an alternative way to manage money.

However, with the recent bearish cycle, this narrative seems to be losing steam. Rising inflation has led to increased interest rates, and consequently, the money market funds sector has seen a surge in returns, surpassing what DeFi offers.

For comparison, returns for Ethereum staking on Lido are at 3.3%, while Vanguard's MMF offers a return of 5.28%. The risk-reward ratio heavily favors the latter. It's not surprising, then, that the TVL of the DeFi ecosystem plummeted from $163.5 billion in April 2022 to today's $36 billion.

Still, there's hope for the future, primarily due to the continuous development of new solutions, protocols, and opportunities. Innovations like liquid staking, tokenization of real-world assets (RWA), or the on-chain derivatives market, even if they haven't garnered interest at 2020-21 levels, show promise. While past returns, ranging between 18% and 35% on average, might be a distant memory, the sector still holds significant potential for the future.

Philip Bohmer Philip is a seasoned journalist that brings clarity to the complex world of cryptocurrencies through his articulate and insightful articles. His passion for blockchain technology fuels his writing, making him a trusted voice in the rapidly evolving digital currency landscape.