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Cratering Yields Sends DeFi Niche into Death Spiral

The “Summer of DeFi” is finally cooling off as bleak returns on top DeFi platforms have halted the niche’s growth.

Cratering Yields Sends DeFi Niche into Death Spiral

Key Takeaways

  • Strong pullbacks in the price of governance tokens signal that the DeFi bubble has burst. 
  • The annual percentage return (APR) on DeFi platforms has dropped significantly since September. 
  • The total value locked (TVL) in DeFi has turned south, currently testing $10 billion as support. 

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Falling yields and demand for popular governance tokens are ushering in an exit from DeFi platforms, flagging the DeFi bubble.  Still, protocols are actively responding with upgraded features and attractive incentives.

The DeFi Bubble Bursts 

YFI, the governance token for yEarn Finance, gained 1,000% since the beginning of August to record values around $45,000. Currently, the token is down 68% from the peak.  

The price of governance tokens for top lending platforms Compound and MarkerDAO have dipped 60% and 30% from their respective peaks. Moreover, Aave has also corrected 50% from its top. 

COMP/USD Price Chart
Aave (red) vs. COMP (blue) vs. MKR (green) price comparison. Source: TradingView

The falling prices of these tokens have sent the DeFi ecosystem into a death spiral as the percentage return for liquidity providers (LPs) begins to fall alongside tokens. 

The LPs on DeFi platforms earn from the returns on the network (e.g., fees on Uniswap, lending rates on Compound) and selling their newly- mined governance tokens. 

Due to the boom in DeFi token prices, yield farming emerging tokens became the main incentive for LPs. Still, upward prices depend on buyers who are willing to purchase newly-farmed DeFi tokens continuously. 

Low Yields Causing a Decline in Total Locked Value

During September, the median APR on Curve pools was around 13% and rose as high as 410%. In the last week, however, those returns have nearly halved. 

The annual return from the WETH vault on yEarn in the past week is 0.68%. At the time of launch, the strategy boasted 75% APR. The return from stablecoin vaults on yEarn during the same period ranged from 25% to 60%; currently, it has dropped below 10%. 

Top yEarn Vaults
Top five yEarn Vault total holdings and returns Source: yEarn Finance

The size of the y-pool (in green below) on Curve declined by 22% in two days, with its USD value falling below $200 million. 

Curve's y-pool
Pool size on Curve. Source:

LP earnings on Uniswap from fees has also flatlined since September, indicating a pause in growth for decentralized swaps. 

Cumulative Fees on Uniswap
Uniswap cumulative fees in USD. Source: Dune Analytics

Data pulled from the leading categories within the DeFi niche further outline the breadth of the current exit. 

The TVL in the derivatives and payments categories of DeFi has dropped nearly 50% from their September peaks. Moreover, the TVL on lending platforms and DEXes appears to have reached a local top as well. 

TVL In Top DeFi Categories
Total value locked in various DeFi categories. Source: DeFi Pulse 

In response, some protocols are responding with upgrades and improved incentives to retain users. 

yEarn developers and YFI holders are banking their hopes on the launch of the v2 vault, an upgraded version of the current version. Curve is also adding new pools and implementing new strategies to revive the yields on its platform. 

Presently, falling yields and dips in the price of major governance tokens leave little economic incentives for new participants. 

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