What These Fast-Growing Ethereum DeFi Protocols All Have in Common – DL News

Cryptocurrencies deposited in decentralized financial protocols have reached their highest level in more than two years amid a broad cryptocurrency bull market.

Among them, one set of DeFi tools has outperformed the others: lending protocols.

These protocols allow users to post cryptocurrencies as collateral and take out loans automatically, provided the value of the borrowed assets is less than their collateral.

According to Paul Frambot, founder of lending protocol Morpho, one of the reasons lending protocols are booming is the demand for leveraged betting.

“The change in market prices has led to a sharp rise in borrowing demand as people want to increase their price exposure,” he said. DL News. “They do this on-chain by borrowing from protocols like Morpho to buy more assets that they expect to increase in value.”

This strategy is called looping. Here, users deposit an asset that they are optimistic about – they think the price will rise – as collateral to borrow stablecoins. The user then sells these stablecoins to buy more of their collateral asset, thereby increasing their exposure to it.

Since the start of the month, Morpho’s total value locked, including tokens borrowed from the protocol, has soared 56% to an all-time high of $3.8 billion.

Total value locked – or TVL – is a measure of the value of assets that a given DeFi protocol maintains for users.

“Lenders hungry for yield”

But Morpho is not alone.

Deposits jumped 42% during the same period at DeFi lending giant Aave, which has over $32 billion in TVL. Sky-affiliated Spark, a lending protocol with $5.6 billion in TVL, was up 62%.

Smaller protocols offering more niche lending options, like Euler, have seen even larger increases. Its deposits have jumped 576% since the start of the month.

“A major factor has been a more positive outlook for the broader crypto market, driven by growing institutional adoption and a more favorable regulatory environment on the horizon,” said Michael Bentley, founder of Euler. DL News.

Bentley says the rising tide has led to increased borrowing, as market participants speculate on rising prices. This in turn leads to higher interest rates, which attracts yield-hungry lenders.

Increased demand means the yield lenders can earn from depositing assets is now consistently the highest in years.

In March last year, an attacker exploited a bug in Euler’s code to steal nearly $200 million in user assets.

Although the funds were subsequently returned, the protocol was unable to recover and remained dormant until its relaunch in August.

Assets sought

The most in-demand asset on major lending protocol Aave is Ether, with almost $5 billion borrowed.

But this is not the case for Euler and Morpho, which allow users to borrow against a wider range of assets.

Derivative yield tokens issued by the DeFi Pendle protocol represent $450 million in borrowing on Morpho. On Euler, tokenized versions of US Treasuries issued by real-world asset protocol Midas are gaining popularity.

“The rapid growth in the creation of reinvestment assets and real-world assets, many of which provide yield, is leading to the creation of new lending and borrowing opportunities,” Bentley said.

Even other DeFi protocols are getting in on the action.

According to Frambot, Sky, formerly MakerDAO, recently deployed $650 million of its stablecoin DAI on Morpho to earn yield.

But the growing appetite for borrowing also means a potentially dangerous build-up of debt that could increase price volatility.

If the value of the assets a borrower provides as collateral declines, they risk being sold to prevent the protocol from accumulating bad debts, a process known as liquidation.

On Aave, more than $20 million in ETH tokens staked by Lido are at risk of liquidation if the Ethereum price falls below $3,292, according to data from DefiLlama.

Tim Craig is DL News’ DeFi correspondent based in Edinburgh. Contact us with advice at tim@dlnews.com.