DeFi: Has Institutional Capital Started to Leave?

▲ DeFi (Decentralized Finance)/AI Generated Image ©

The DeFi market is reeling from the shock of large-scale hacks and liquidity collapses, with clear signs of institutional capital outflow emerging.

According to investment media FXStreet on April 24 (local time), JPMorgan diagnosed in a recent report that ongoing hacking incidents in DeFi and stagnant Total Value Locked (TVL) are significantly weakening its appeal for institutional investment.

In particular, an exploit related to KelpDAO led to the evaporation of approximately $20 billion in TVL in a short period, rapidly escalating concerns about systemic risk. Beyond just the affected protocols, funds also flowed out from unrelated liquidity pools, shaking overall market confidence.

A greater problem is the stagnation of growth. While DeFi TVL has somewhat recovered in USD terms, it remains virtually stagnant in Ethereum terms. This indicates a lack of real organic growth and has been identified as a key factor hindering the expansion of institutional investment.

Market participants quickly shifted to defense mode. There was a surge in fund movement towards stablecoins like Tether (USDT) and USD Coin (USDC), an analysis similar to the trend of increasing cash holdings during uncertainty in traditional finance. USDT, in particular, has strengthened its role as an 'on-chain escape route' due to its high liquidity and efficient fund mobility.

Indeed, borrowing rates for stablecoins surged on Aave V3. Following the rsETH exploit on April 19, borrowing rates for USDT and USDC skyrocketed from approximately 3.4% to 14%, reflecting a typical liquidity crunch situation where liquidity drastically decreased and borrowing demand simultaneously surged. Current rates still significantly exceed previous levels, indicating that market tension has not fully dissipated.

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