By Lisa Pauline Mattackal and Medha Singh
(Reuters) – Crypto lending may not be dead, but it’s certainly on the ropes.
Crypto lenders have boomed over the past two years, attracting tens of billions of dollars in bitcoin, ether and other coins, which they in turn have lent or invested, often in decentralized finance (DeFi) projects with sky-high returns.
But as crypto markets plummet, DeFi activity is being hit particularly hard, depriving lenders of their most lucrative yields and threatening to squeeze the entire sector — well beyond the Celsius Network, which made headlines last week for its withdrawals and remittances frozen.
The Total Value Locked (TVL) on Ethereum, a metric that attempts to track the value of tokens deposited in a variety of DeFi protocols, has fallen by $124 billion, or 60%, over the past six weeks, according to data provider Glassnode declined.
The crash came in two major crypto slices, $94 billion lost during the collapse of the LUNA project — with failed stablecoin TerraUSD — and another $30 billion in mid-June, Glassnode said, attributing the falls to the slacking reduced willingness to take risks.
“Current market conditions have put tremendous pressure on operators who interact with decentralized finance protocols to generate their returns,” said Mauricio Di Bartolomeo, co-founder and chief strategy officer at crypto lender Ledn.
BITCOIN VS ETHER VS DOLLAR
Similarly, an index by research firm Macrohive, which tracks crypto tokens related to DeFi lending/borrowing protocols and exchanges, plunged 35% last week as investors pulled money out of the once-high-flying sector.
Some DeFi protocols or projects are beginning to offer lower yields, with average lending and borrowing rates on one platform, Compound, falling on the week across all but one cryptocurrency, stablecoin Pax Dollar, Macrohive found.
In another sign of the slowdown, Ether — the token underpinning the Ethereum network on which many DeFi protocols operate — fell to a 14-month low against major peer bitcoins last week
Against the dollar so far in June, bitcoin is down 34% while ether is down over 40%.
The turmoil in this higher yielding part of the crypto market is raising questions about the sustainability of the high interest rates that crypto lenders are offering their customers, often in the double digits.
TO BE TOO GOOD TO BE TRUE?
Some market participants say crypto lenders should make clients aware of the risks of projects their money is being pumped into.
“I expect users will demand more transparency when their assets are managed in the DeFi space,” said Iakov Levin, CEO of crypto investment platform Midas Investments. “Crypto needs to find a more transparent model for retail returns.”
New Jersey-based Celsius, with over $11 billion in assets on its platform, cited market volatility when it suspended redemptions last week. A data trawl shows it was invested in several DeFi projects that ran into trouble.
“The DeFi market will no doubt suffer from this development as it is also into cryptocurrencies and people will be more cautious than ever when it comes to investing their wealth in what they see as similar ecosystems,” said Yubo Ruan, Founder and CEO of Parallel Finance, a decentralized lending protocol.
Ruan said when projects “promise rewards that sound too good to be true — there’s always a chance they are.”
GRAPHIC: Crypto Lending Rates (https://graphics.reuters.com/FINTECH-CRYPTO/mopanrlwmva/)
(Reporting by Medha Singh and Lisa Mattackal in Bengaluru; Editing by Alun John and Pravin Char)