Notes 7/10: DeFi Total Value Locked Declines, Bitcoin Hash Rate Surges

Decentralized finance (DeFi) was supposed to be the savior and next iteration of modern finance. Investors don’t seem to think as much. The total value locked (TVL) in DeFi systems has slumped from a peak of $178 billion in November 2021, when bitcoin price set a record, to $44.5 billion, as of this writing. It touched a low of $40.9 billion on June 14.

TVL is an erroneous statistic to measure DeFi; however, those figures are still a big comedown if you believe the inflated assessments of worthless tokens. But declining valuations aren’t the biggest problem with its ecosystem right now.

DeFi TVL Problems

According to Decrypt, DeFi’s attraction lies in its yield generating capacity. A big percentage of that yield comes from Ethereum. And the biggest beneficiary of those yields is Lido, a liquid staking platform. The platform accounts for $14.32 billion of the total so-called value in DeFi.

No doubt, it has benefitted from the surge in yields at Ethereum after the blockchain’s latest upgrade that enabled withdrawals. But Lido’s future or, indeed, that of liquid staking derivatives tokens is not guaranteed or rosy. They are regulatory tinderboxes that rely on dubious tactics, like Maximal Extractable Value (MEV) – a sufficiently incomprehensible term to disguise its illegal front running practice – to pump out yields at the expense of users.

Other platforms that account for a substantial chunk of yields are hardly in the clear. Take MakerDAO, for example It accounts for $5.568 billion of the total figure. An attraction for investors to put money into its stablecoin DAI is its yield, which currently stands at more than 4%. After professing loyalty to Circle’s USDC after the stablecoin lost its peg this past March, the stablecoin has dumped it in favor of the more lucrative US treasuries option to boost DAI yields.

But DAI investors are at the mercy of a “global settlement” if they’d like to redeem their stablecoin for fiat. The decision to liquidate reserves to make investors whole has to go through the MakerDAO governance process. The governance process is dominated by wealthy venture capitalists and founders. Both parties often engage in battles to control the narrative and future direction for the protocol, meaning the DeFi protocol is very much a centralized entity.

DeFi tokens are a window dressing to mask investments into a protocol by venture capitalists. Therefore, the decline in DeFi’s TVL is concerning. It indicates that investors are increasingly cashing out and deserting DeFi protocols. Perhaps, that is a sign of things to come.

Bitcoin Price and Bitcoin Hash Rate

Bitcoin hash rate hit an all-time high of 465EH/s on Saturday even as bitcoin price continued to dawdle in the $30,000 range. On Sunday, the hash rate fell by 6% to 428 EH/s. Miners are piling into the network.

Why are they keen to get back into the cryptocurrency’s network? Reports attribute it to two factors. First, the halving event next year that is supposed to further reduce the amount of bitcoin in circulation. Previous halving events have produced price bumps for the cryptocurrency. The second reason is more immediate and lies in the cryptocurrency’s price increase this year. Till date, bitcoin price is up by roughly 85% from January.

Good for Security and Bad for Price

Increased hash rates are good for bitcoin’s security because it means there are more nodes on its network now and, therefore, it is more difficult to orchestrate a 51% on its network. But the geographical source of the increase is unclear. Texas miners are supposed to have switched their machines back on. Or, maybe miners in other parts of the world have also fueled the surge. This is important because a consolidated mining landscape does not bode for bitcoin’s security or its regulatory status.

The price of bitcoin, the crypto affixed onto the network, will suffer because of the hash rate increases. This is because the difficulty level of the algorithm that miners must solve to generate bitcoin rewards will also increase. “Wherever it’s coming from, the end result is the same: the next difficulty adjustment is going to be a f** whopper,” stated the authors of a recent report. In the past, a higher difficulty adjustment has corresponded with declining prices. The situation is worse in the current instance because bitcoin liquidity and trading volumes are already low, meaning there are fewer actors in its ecosystem.

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