1. DeFi’s New Reality
Pre 2022’s crypto sector collapse, conditions allowed liquidity providers to maximise yields using DeFi models with unsustainable inflationary emission rewards. Such projects’ high yields attracted tens of billions in liquidity. Super-returns became the ‘new normal’, fuelling further boom market speculation. Ever-more projects exploited the trend, launching tokenomics propagating relentless token inflation. The poster child, Terra Network’s Anchor Protocol, had TVL which peaked at $17B 12 months from launch.
Only days later, Terra Network collapsed. The contagion of Terra’s disaster did what contagions do – it spread. Across the entire crypto sector, investor capital evaporated and DeFi TVL plummeted.
The market crash served as a wake-up call that the super-yield party was over. The resulting hangover from unsustainable, hyper-inflationary models caused liquidity providers to fundamentally reassess how they deployed capital.
In the aftermath, it has become apparent that a protocol’s underlying token value and model sustainability are now paramount, as is the foundation of what actually creates it - performance value.