DeFi’s value holds up despite crypto sell-off as yield seekers stay put

Despite broad market weakness and waves of forced liquidations across crypto, decentralized finance’s total value locked (TVL) — or capital deposited on blockchains — has proven surprisingly resilient, a signal that traders are still seeking passive income through yields despite bearish sentiment flooding the crypto market.

Over the past week, crypto majors BTC, ETH, XRP and SOL fell to multi-year lows, with ETH now losing 21% of its value over the past seven days alone.

But that drop off didn’t translate into outflows from DeFi protocols. Total value locked fell from $120 billion to $105 billion, a 12% downturn as it outperformed the market. This means that while token traders are hurting, investors seeking lending, borrowing, staking, or liquidity pool funding haven’t panicked yet.

A reason for this steady stream of inflows into DeFi is that traders often look to seek safe returns in a down market. They are less likely to flip and rotate tokens and would rather hold an asset, collecting between 3% and 5% in passive income through yields each year.

There are also traders who simultaneously stake ETH for yield while shorting the derivatives market to reduce exposure. This can be a “delta-neutral” (making the portfolio insensitive to price moves) way of generating returns, although additional yield is dependent on the futures market funding rate.

Meanwhile, the 12% drop-off can be attributed to dwindling asset prices rather than yield farmers (investors who are constantly seeking passive income by putting their money into blockchain) rushing for the exits. The amount of ether deployed across the DeFi market has increased from 22.6 million ETH at the start of the year to 25.3 million, with 1.6 million ETH being added in the last week alone, according to DefiLlama.

Onchain liquidations muted

In February last year, the crypto market experienced a similar drop following Donald Trump’s election as U.S. president. Then, the DeFi market was far more fragile, with a mammoth set of $340 million in onchain liquidations on the cusp of being triggered.

This time around, the DeFi market is better collateralized with just $53 million in liquidatable positions within 20% of the current price. Positions on algorithmic interest rate protocol Compound only become at risk if ETH slides below $1,800, although the largest danger zone is between $1,200 and $1,400, which contains $1 billion worth of liquidatable positions, DefiLlama data shows.

A maturing sector

In previous cycles, the DeFi market was the first to implode. In 2022, investors succumbed to overly tempting yields on the Terra blockchain by staking the algorithmic UST stablecoin, only for the entire ecosystem to collapse months later during a market plunge that reduced the value of crypto assets backing the stablecoin.

This led to contagion across all DeFi markets, with TVL dropping from $142 billion to $52 billion between April and June of that year.

This time around, the downside risk is minimal, yields are steady, and inflows are quietly increasing — suggesting the sector has matured along a backdrop of institutional adoption and broader market volatility.